India steels itself for a super-cycle

ANALYSIS
India steels itself for a super-cycle
A worker grinds a steel pipe to be used in air ducts inside a workshop at an industrial area in Mumbai. As demand for metals is set to climb the Indian steel industry could be a beneficiary of this.Courtesy: Reuters

The country’s domestic steel industry may reap the rewards of a global commodity demand as metal prices firm up.

At the start of the year, American multinational investment bank Goldman Sachs took everybody by surprise when it predicted that the global commodity market is headed for a super cycle.

Through the second half of fiscal 2021, global metal prices have firmed up on the back of a stronger than expected recovery and as the world moves away from traditional to renewable sources of energy, the bank said the demand for metals would skyrocket.

India could be one of the biggest beneficiaries of this. Already, it has been the lone bright spot for much of last decade which was not really a great time for the global steel industry. After the strong growth in 2000’s which was led by China, world’s largest steel producing country, the 2010’s was a period of cool off as the world economy stuttered.

A view of reconstructed steel structure of the Gandhi Setu bridge connecting Patna to North Bihar. In the last 10 years, India’s crude steel production has grown 6 per cent on an average, the fastest among big steel producing nations and nearly double the world average of 3 per cent.
A view of reconstructed steel structure of the Gandhi Setu bridge connecting Patna to North Bihar. In the last 10 years, India’s crude steel production has grown 6 per cent on an average, the fastest among big steel producing nations and nearly double the world average of 3 per cent.Courtesy: ANI

Steel production keeps a steady momentum

It did not however, impact India’s growth story. In the last 10 years, its crude steel production has grown 6 per cent on an average, the fastest among big steel producing nations and nearly double the world average of 3 per cent. In absolute terms, production has grown from 58 million tonnes in 2008 to 110 million tonnes in 2019. In the process, India has overtaken Russia, the US and Japan to become the largest steel producing nation in the world after China.

India needs to quickly start investing in capacity augmentation else we will have to import 80 million tonnes by 2025 which can go up to 150 million tonnes by 2030.
- V R Sharma, MD, Jindal Steel and Power Ltd.

Due to the pandemic, 2020 was an exception when production declined by nearly 10 percent. That was largely due to Indian steel mills not being able to operate for nearly two months in April and May when a national lockdown was in place. Since then, the rebound in both production and demand has been strong.

In the second half of fiscal 2021, demand for steel grew by 10 per cent between October and January versus a 30 per cent year-on-year fall in the first half. In 2021, the revival is expected to accelerate further.

“India suffered severely from an extended period of severe lockdown, which brought most industrial and construction activities to a standstill. However, the economy has been recovering strongly since August, much sharper than expected, with the resumption of government projects and pent-up consumption demand,” global industry body World Steel Association said in its short-term outlook in last month. “India’s steel demand fell by 13.7% in 2020 but is expected to rebound by 19.8% to exceed the 2019 level in 2021. The growth-oriented government agenda will drive India’s steel demand up.”

The recovery in demand has coincided with a steep increase in prices which has in turn bolstered profitability of companies. Domestic hot-rolled coil (HRC) prices have rallied to a multi-year high of Rs 56,000 per tonne in February from Rs 39,200 per tonne in March 2020. According to Crisil, the domestic steel industry would be able to reduce its debt by Rs 35,000 crore by fiscal 2022.

A labourer stands in front of a steel pipe storage rack. If India’s growth rate climbs in 2022, then its capacity for consumption of commodities will match it. It needs to start investing in capscity augmentation or risk the option of imports.
A labourer stands in front of a steel pipe storage rack. If India’s growth rate climbs in 2022, then its capacity for consumption of commodities will match it. It needs to start investing in capscity augmentation or risk the option of imports.Courtesy: Reuters

Consumption set to climb

Experts believe India’s growth rate for consumption will only go up beyond 2022. In tandem with the commodity super-cycle that Goldman Sachs has predicted, India’s reform push under the Narendra Modi led government is expected to bear fruit this decade.

India’s steel demand fell by 13.7% in 2020 but is expected to rebound by 19.8% to exceed the 2019 level in 2021. The growth-oriented government agenda will drive India’s steel demand up.
- World Steel Association

“India needs to quickly start investing in capacity augmentation else we will have to import 80 million tonnes by 2025 which can go up to 150 million tonnes by 2030,” says V R Sharma, managing director, Jindal Steel and Power Ltd. “A number of projects were started in the last decade, but they are yet to be commissioned. They need to go onstream as soon as possible if we have to avoid a demand supply mismatch.”

Fortunately, the upcycle comes at a time when a long drawn-out sectoral restructuring is over. The downturn in the global markets in the middle of last decade saw excess capacity in China, which in turn was being dumped into India. This had hit profitability of the domestic industry and a huge rise in NPAs--in 2015/16 it amounted to Rs 1.15 lakh crore.

The sector accounted for four of the 12 big firms - Essar Steel, Electrosteel Steels, Monnet Ispat and Bhushan Steel - pushed by the RBI for NPA clean-up under the Insolvency and Bankruptcy Code (IBC). The IBC induced wave of consolidation saw ArcelorMittal buy Essar Steel, Vedanta takeover Electrosteel, TataSteel lapping up Bhushan Steel, while JSW grabbed Bhushan Power and Steel. At the same time Tata Steel's subsidiary Tata Sponge Iron acquired the steel assets of Usha Martin Ltd while JSW led a consortium that acquired Monnet Ispat and Energy Ltd.

With bad assets out of the way, improved profitability of companies and reduced debt levels, the sector is poised to witness a surge in investments in the days ahead. And unlike other industries, most of it will be from the private sector.

It may just be the beginning of the next bull run for investments in the Indian economy as a whole.

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