 "Kunal Bose: Steel world puts China in the dock for underpriced exports")
Economic forecasters are no soothsayers. Their projections are prone to go wrong if the government makes out-of-the-blue interventions such as the recent culling of high-denomination notes of Rs 500 and Rs 1,000 which constitute as much as 86 per cent of the country’s total currency in circulation.
Even while the media remains largely focused on inconveniences faced by the masses, the country’s steel industry, which only recently started seeing signs of a turnaround after four difficult years, is feeling the pinch of an already low demand withering further.
From construction to automobile to small and medium manufacturing enterprises, there is a fall in indenting of long and flat steel products. Rural India, where the per capita steel consumption is as low as 12 kg normally, the cash shortage is forcing farmers to postpone construction as well as repair of their dwellings.
Contrary to the October forecast by the World Steel Association that Indian steel demand will grow at 5.4 per cent in 2016, by far the highest among all countries, the actual consumption growth till October was around 3.5 per cent. According to industry officials, demonetisation is shaving steel demand growth, but it’s early to make an estimate of the damage.
“Mind you, this is happening when the country’s new steel capacity through greenfield and brownfield routes is to grow between 11 per cent and 12 per cent this financial year,” says an industry insider.
Till a few years ago, it was taken as normal that in emerging economies such as China and India, where stimulus is provided in more than one way for infrastructure and house construction on a massive scale, steel demand growth would be a few percentage points more than the growth rate of gross domestic product (GDP).
But last year, India’s steel use was up 6.6 per cent to 80.5 million tonnes, while GDP advanced 7.6 per cent, consolidating India’s position as the fastest growing major economy. The steel industry in China fared a lot worse where the demand for the grey metal shrank 5.4 per cent, despite GDP growing 6.9 per cent.
Sounding the alarm
From former Prime Minister Manmohan Singh to Moody’s Investors Service, everyone is in agreement that demonetisation will weigh on GDP growth for a few quarters. Moody’s observation that the move would “significantly disrupt economic activity, resulting in temporarily weaker consumption and GDP growth” is highly unnerving for steelmakers who are using only about 75 per cent of their 120 million tonnes capacity.
After providing for domestic consumption, the industry is still left with a surplus of over 10 million tonnes, which is to be exported in an increasingly difficult condition caused by the estimated global capacity surplus of 600 million tonnes.
As steelmakers come under the twin pressure of coking coal prices rising more than threefold to over $300 a tonne since January and steel demand taking a demonetisation knock, banks with big exposure to the industry are braced for further rises in steel related non-performing assets.
Banks have an exposure of Rs 3.13 lakh crore to the steel industry, of which Rs 1.15 lakh crore, or 36.94 per cent, turned into non-performing assets by March 2016.
Some relief has come the big defaulting groups’ way under the Reserve Bank of India’s flexible refinancing repayment option (5:25) scheme, sustainable structuring of stressed assets (S4A) scheme and strategic debt restructuring facility.
“Whatever is done on RBI’s behalf will give results, provided the industry becomes profitable on a sustainable basis. Except for a few, the second quarter working of steel groups was disappointing. Demonetisation will take its toll in the rest of this financial year, if not beyond,” says an industry official.
Flat steelmakers are looking at the grim prospect of their unsold stocks rising as producers of cars and two-wheelers will be compelled to “rationalise” production to ensure that their dealers are not burdened with “unmanageable inventories.” Footfalls at dealer showrooms have thinned. Conversion of showroom visits and inquiries to actual sale is down anything between 40 per cent and 60 per cent.
Working capital shortages and falling demand are forcing manufacturers of original equipment and also for the replacement market (for the automobile sector) to cut production and lay off workers.
Cascading effect
In India, steel is mostly used in making cars and its replacement by aluminium and plastic is yet to gain momentum. Therefore, steel more than aluminium or any other substitute materials will suffer the most from falling auto sales.
Aluminium will not go unscathed either: the demand for white goods such as refrigerators, air-conditioners and washing machines is down and dealer inventories are sharply up.
Arguably, no other sector is bearing the brunt of demonetisation as much as housing and construction, where steel is used in very large quantities. A big number of real estate projects executed by members of the Confederation of Real Estate Developers Association of India and promoters in the unorganised sector have come to a standstill across the country as currency shortage is not allowing them to pay labourers.
Industry officials are right in believing that a big market for steel is awaiting them in rural India where the use of the metal is low. Some industry constituents took upon themselves the task of promoting the use of the metal in the countryside by convincing people connected with farming that they stand to gain by constructing “steel-intensive dwelling houses and grain silos and using carts and all farm equipment made of steel.”
But this is going to be a lost season for steel in the country’s villages where farmers are finding it difficult to dispose of harvested crops at fair and remunerative prices and buy seed and fertiliser for the upcoming rabi season. They will think of house construction only when things settle down.
Hopefully, economic activity in urban and rural areas will crawl back to normal around the beginning of the next financial year.
