Supply-Side Restructuring The Way For Steel Firms
4 October 2016
Want to know precisely what is ailing the Indian steel industry, or for that matter steelmakers in the rest of the world? And also what is the prescription for putting the industry on the recovery path? For both refer to the annual statements of Cyrus Mistry and P K Singh delivered in their capacity as chairmen of Tata Steel and Steel Authority of India Limited (SAIL), respectively. Interestingly both are on the same wavelength on what is keeping steel down globally and what could create a turnaround.
For India, which nurses the ambition of becoming the next economic superpower, it is of strategic importance that health is restored to the "foundation industry." The target to become a "300 million tonne (mt)" steel producing nation by 2030 that will put us next only to China, but miles ahead of the European Union and Japan, will become a reality provided the sector holds out promise of decent returns on investments. This is certainly not the case now as the capital intensive industry has outstanding bank loans of around Rs 3 lakh crore, making it one of the largest contributors to the country's non-performing assets.
In the prevailing atmosphere, the future, however, holds promise. According to Indian Steel Association President Sajjan Jindal, domestic demand will grow 5.3 per cent in the current year to 85.8 mt. Demand will rise at a higher rate of 5.6 per cent to 90.6 mt in 2017-18. The projection has the stamp of authenticity as it is based on likely demand growth in all sub-sectors. Jindal, also the chairman of JSW Steel, is in agreement with Mistry and Singh that as the government is committing lots of funds for infrastructure development and re-launching projects stalled earlier, steel demand will get a boost.
A good monsoon after two years of drought, significant rises in areas under food crops, liberal revision in minimum support prices (MSPs) for kharif crops and multiple government initiatives to boost income of people living in non-urban centres will bring dividends for the industry in the form of incremental demand from rural India, where per capita use is a disappointingly low 12 kg. Steel demand should also get a shot from over 10 million central government employees getting a 2.57-time raise in basic pay with retrospective effect from January 2016. Many beneficiaries will use this to buy cars and white goods.
Who will not agree with Mistry and Singh that the crisis has sprung from significant over capacity, in some geographies in particular, when global demand growth is negative. Its resolution calls for supply-side restructuring. Unless this happens quickly with Beijing honestly redeeming its promise to shut 150 mt of its 1.2 billion tonne (bt) capacity, steelmakers elsewhere will remain victims of low prices caused by annual exports of over 100 mt by China.
In the West, particularly in the US, steel capacity has undergone truncation with big-ticket mergers inevitably leading to shutting down of inefficient mills. Mistry is a strong advocate of supply-side discipline for "sustenance and viability" of the industry. Consolidation creates the ideal condition for investments in "product innovation, technology and supply chain efficiencies." Singh says Indian steelmakers will have to benchmark production costs against the best global norms to fight off the falling spread between steel prices and raw materials.
Predatorily priced steel imports leading to reduction in domestic prices in the last two financial years did much harm to Indian industry. Mercifully, New Delhi took appropriate actions, which have proved effective in curbing such imports. Imposition of anti-dumping duty on imports of flat steel products originating from six countries, including China, is incontrovertible proof of the domestic industry being harmed by arrivals of unfairly priced foreign origin steel.
But, trade actions alone will not secure a level playing field for Indian industry, whose global competitiveness is compromised by logistics costs, which compare unfavourably with other major producers in Asia, and high energy and other cost components of doing business. Both SAIL and Tata Steel get their entire requirements of iron ore and limited quantities of coking coal from captive mines.
But mandatory contribution to district mineral foundation and national mineral exploration trust under the Mines and Minerals (Development and Regulation) Amendment Act since January 2015 has increased raw materials cost for steel groups that own mines. To that extent, they suffer erosion in competitiveness.
Source : business-standard.com