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A panel led by Prime Minister Manmohan Singh has been set up to boost manufacturing and exports; taking capacity of steel production to 300 million tonnes happens to be one of the measures. It should have been music to an industry grappling with a muted demand, but it's anything but that. The reason is not hard to fathom when the target of 200 million tonnes annual steel production by 2020 set by the steel ministry at least five years back, is still a long way off.
It's another matter that Prime Minister Singh is not banking on the private sector to bring in the additional capacity, unlike the last time around. Central public sector units in alliance with the states have been entrusted to take the plan forward. He has his reasons.
In 2005, when the sector was at the threshold of a boom, 222 memoranda of understanding were signed by steel companies, which included the likes of ArcelorMittal, Posco, Tata Steel, JSW Steel, Bhushan Steel and many others, with the mineral-rich states of Jharkhand, Orissa and Chhattisgarh, involving an investment of Rs 630,000 crore. This capacity, if it had come up, would have taken total production to close to 200 million tonnes.
Failed hopes
But all that has panned out in the ensuing years is cancellation or postponement of 35-40 million tonnes of steel capacity, among them being the plants by Bhushan Steel, JSW Steel, Videocon, Tata Steel, Arcelor Mittal and others. The latest addition to the list is Posco's 6-million- tonne plant in Karnataka, though the Korean steel maker seems to have got a grip over the land puzzle in Orissa, albeit with some realignment. Meanwhile, ArcelorMittal too on Wednesday said it was pulling out of its Orissa venture owing to delay in getting mining contracts. Wrangles over land acquisition are one, but the bigger hurdles are slow-paced environmental go-aheads, and uncertainty over working and non-working mines. Add to it the high cost of finance, and the picture for greenfield capacity appears grim.
From 60 million tonnes in 2007-08, steel production capacity in India increased to just 91 million tonnes in 2012-13-that's the slowest pace in five years, with most of the additions coming from brownfield projects.
Forget greenfield, the lack of clarity in working mines and high cost of finance is a problem for existing plants as well. The impact: average capacity utilisation is 70-80 per cent today, and gas-based plants, facing the additional challenge of supply, have a lower utilisation level. Some have even shut shop.
To top it all, there is margin pressure on account of rupee depreciation, as bulk of the coking coal demand is met through imports. In short, there is negativity in the air. Unsurprisingly, therefore, the industry is not impressed with the new target set by the government. There was hope, extending to exuberance too, when the government had announced $1-trillion investment on infrastructure last year. But a year on, with no significant orders coming through, the hope seems to have evaporated. "Projects, private or public, are just not coming through" is a common complaint across the industry.
In this backdrop, on Wednesday, when India Ratings & Research, part of the Fitch group, revised its outlook on Indian steel producers to negative from stable for the second half of 2013, it was along expected lines.
"The negative outlook is in view of the higher-than-expected deterioration in the financial and liquidity profiles of rated issuers. The continuous weak macroeconomic environment in India has resulted in muted demand for steel products from the end-user industries," Ind-Ra said.
More trouble
Indeed, infrastructure projects apart, automobile numbers have been disappointing (the sector is a huge consumer of steel). India's car sales fell for the first time in a decade at the close of the last financial year, but it didn't stop there: month-on-month, there has been a further drop in sales.
"The inventory in the last quarter from dwindling car sales will reflect in this quarter," Uttam Galva Steels Deputy Managing Director Ankit Miglani says.
Typically, steel consumption growth is ahead of the GDP growth rate. But last year, it lagged. The real consumption of steel in India grew by 3.3 per cent in FY13 against 6.9 per cent in FY12 due to the slowdown in the end-user industries.
Ind-Ra expects domestic steel demand to remain muted in the second half of 2013, but it is likely to gain momentum in 2014 on the back of a recovery in economic growth and the expected infrastructure push by the government. The World Steel Association forecast corroborates this by saying that steel demand in India will grow 5.9 per cent and 7 per cent in 2013 and 2014, respectively.
The domestic steel industry, however, is optimistic that the cycle will turn earlier than that. "Some demand recovery is expected in October-December. The monsoons have been good and hopefully consumption will pick up in the second half of the year," JSW Steel Director (commercial & marketing) Jayant Acharya says.
Acharya is not particularly perturbed by the slowing automobile sales, though the industry has invested significantly in automobile grade steel. Total car sales in India is three million, compared to 19 million in China. "Given our population, there is immense scope for growth," Acharya says.
There is some consensus in the industry too that the India story is a lot better than the bigger global picture. Globally, there is an oversupply. Last year, steel production touched a new high at 1.55 billion tonnes. Moreover, Europe is still in a mess, Africa and West Asia are grappling with political issues, though there are early signs of recovery in the US. (According to a Morgan Stanley report, the sector is oversupplied by 334 million tonnes, China's steel market by 200 million tonnes and the European market by some 40 million tonnes)
In contrast, Indian steel producers believe that the gloom will not last forever. "We are not fly-by-night operators; in the medium to long-term greenfield projects will come up if there is clarity on mines," Miglani says. Of course, the recent lifting of the Supreme Court's ban on iron ore mining from category-B mines in Karnataka has eased some of the concerns, but it's limited.
All said, the industry is pinning its hopes on the government, be it to reduce high cost of funds or boost the demand through infrastructure projects.
