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Steel: Slacking demand melts prospects - Views on News from Equitymaster
 
 
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  • Mar 31, 2001

    Steel: Slacking demand melts prospects

    Over the past few years, sluggish demand, overcapacity and poor price realisations have plagued the growth of the steel industry. The sector has been facing problems of higher borrowing cost and dwindling operating margins. Domestic consumption and production, which grew by double digit in financial year 1995 and 1996, has since slowed down dramatically.

    The industry is however, showing some signs of recovery with a growth of 7.8 percent during the first 11 months of the current fiscal. This is encouraging considering the slowdown in the auto segment, which is a major consumer of steel.

    Global steel demand is also picking up as indicated by the reports of the OECD (Organisation for Economic Cooperation and Development). Accordingly, global demand for steel is likely to remain high during 2001 and may grow by about 0.5%. Consumption is likely to increase in Latin America, India, West Asia and China, while there may be a decline in the consumption of steel in some Asian countries.

    The production and consumption of steel is also expected to witness a fall of 3% in the US due to a slowdown in economic growth, high cost of production and stringent environmental regulations. This could impact the bottomline growth of companies like SAIL, Tisco and Essar Steel, which export mainly to the American markets. Plethora of anti dumping duties imposed by the US, the European Union and Canada will dent the growth of steel exports. This is evident from a marginal rise of 0.8% to 2.8 million tonnes in the exports of finished steel and semis during the period April-February, 2001. The industry, which was showing some signs of recovery from a severe setback, will be forced to look for other markets. Softening of international steel prices could also have a detrimental effect on the realizations of companies and it remains an area of concern. There are doubts over the long-term growth sustainability of the Indian steel sector looking at the problems faced by the steel producers.

    Production overview (in Ď000 tons)
    Particulars April-
    Jan '00
    April-
    Jan '01
    Change Growth in
    Jan '01
    Steel structurals 2,108 1,882 -10.7% -16.8%
    Bars & rods 7,485 7,181 -4.1% 4.5%
    HR coils 5,737 6,993 21.9% -0.9%
    HR sheets 454 414 -8.8% 14.7%
    CR sheets/coils 2,927 3,334 13.9% 11.1%
    GP/GC sheets 1,152 1,265 9.8% 12.4%
    Finished steel 22,050 23,547 6.8% 2.8%

    Demand for steel products also depends to an extent on the growth of auto industry. Sale of commercial vehicles during the period April-February 2001 dropped by 12% to 129,000 compared to 146,000 in the corresponding previous period. This further added to the pile of negative news for the sector.

    Also, in the current budget no major announcements were made for the ailing steel industry. Custom duty on seconds and defective hot rolled coils has been increased from 25% to 35% to reduce the inflow of these products into the country. However, this will bring only marginal protection to the steel industry, as these products accounts for approximately 28% of the total imports of steel products.

    The only encouraging sign for the Indian steel industry is its low cost of operations. India has abundant high quality iron ore, limestone and coal, which are the main raw material in the manufacture of steel. The cheap labour available in India provides a major cost advantage to the domestic steel industry. As a result leading steel producers of developed countries may shift their steel plants or construct new steel plants in India, looking at the cost benefits. Not surprisingly, these benefits are not reflected in the bottomline of Indian steel companies due to high interest and power costs. To provide assistance to their ongoing projects, banks and financial institutions are asked to extend financial support to steel manufacturers.

    In order to fuel the ailing steel industry, it is very necessary to increase the consumption of steel in the country. Although, per capita consumption of steel in India is very low (compared to developed countries), the industry has to find out innovative ways to increase the steel consumption. It is an indisputable fact that India is lagging behind in terms of infrastructure. If the Indian economy has to maintain its growth rate it has definitely got to improve the infrastructure. The benefits given by the budget during the current year to housing and infrastructure sectors would be reflected positively in the demand for steel in the country. The industry also needs to tie up with international companies to market their products globally. After the removal of quantitative restrictions, effective from April 2001, cheap steel products will flood the Indian markets and inefficient steel producers will be forced to shut shops.

    Steel manufacturers worldwide are not behind in leveraging on technology. Online trading of steel (B2C and B2B) enables large number of suppliers and buyers to meet at one place and to carry out the transaction at cost effective way in the minimum time period. In India metaljunction.com is one such joint venture by the three leading steel companies Tisco, SAIL and the Kalyani Group. Another is Essar Steelís promoted clickforsteel. The initiatives take by the steel manufacturers would certainly improve demand for the steel products in time to come.

    Although, there are positive indicators for the growth of the steel sector, challenges in the sector are mounting. It remains to be seen whether the sector is able to come out of the difficulties and continue to record an encouraging growth in the coming years.

     

     

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