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Specialty Steel PLI Scheme - 4 Big Takeaways

May 27, 2022

Steel is integral to India's growth. It contributes nearly 2% to India's GDP and provides 2 m jobs.

India is also the second largest producer and consumer of steel globally.

It produces both steel and value-added steel used as a raw material in all major sectors, including automobile, construction, manufacturing, railways, and defence.

Speciality steel is a variety of steel made by adding different elements to make it hard as well as heat and corrosion resistant.

However, out of the total steel produced in India, speciality steel is less than 20%.

Hence, a chunk of the speciality steel requirements of the country are fulfilled through imports.

In the financial year 2020-2021, India produced only 18 million tonnes of speciality steel and imported 4 million tonnes which led to overburdening of forex reserves to the tune of Rs 300 bn.

To address this issue and to make India self-sufficient, the government has included this sector in the product linked incentive (PLI) scheme.

What is the PLI Scheme?

The PLI scheme is part of the government's plan to become self-reliant or 'Atmanirbhar'.

The benefits of the PLI scheme are multifold. And for now, they cover fourteen key sectors including automobile, steel, electronics and pharmaceuticals.

Through the PLI scheme, the government aims to boost the production of speciality steel in the country, generate employment, reduce imports, boost exports, encourage technological innovations, and make India a globally competitive nation.

With increased production of speciality steel, India will move up the steel value chain and increase exports. As a result, India will save forex reserves up to Rs 330 bn.

Here are the five big key takeaways of the PLI scheme for the speciality steel sector.

#1 Higher steel production in the country

The PLI scheme aims at increasing the production capacity of speciality steel in the country to 42 million tonnes (MT) by 2026-2027 from the baseline of 17 MT.

In 2021, India produced a total of 118 MT of steel, an 18% increase from the previous year. However, there was hardly an increase in the speciality steel production despite high demand.

The demand for speciality steel was driven by several infrastructure projects announced by the government and growth across sectors that use steel, such as defence, capital goods, automobiles, and railways.

The existing players in the steel industry have already planned to increase their production capacity to meet the growing demand for speciality steel. This will add 28-30 MT by 2024-2025.

However, to meet the rising demand for speciality steel, an additional 25-30 MT would be required by 2024-2025.

This is where the PLI scheme comes into the picture. The scheme will provide incentives to eligible players who expand their production capacities.

The scheme will also give additional incentives to companies that will manufacture speciality grades of steel that are either not currently produced in India or are produced in small quantities, resulting in heavy imports.

#2 Higher exports and lower imports

India is the second largest consumer of steel globally. We import different grades of steel to cater to various needs.

However, due to government initiatives to increase domestic production over the years, the value of imports has come down.

But the government aims to bring this number down further, to reduce the burden on forex reserves.

With the PLI scheme, India desires to become self-reliant. By increasing speciality steel production, the government aims to reduce import volume to 0.9 MT from a baseline of 3.7 MT by the financial year 2027.

It also aims to boost speciality steel exports by three times, from a baseline of 1.6 MT in 2019-2020 to 5.5 MT in 2026-27.

This is good for India's exports prospects.

#3 Economic growth

The PLI scheme is integral to India's economic growth.

By expanding production capacities and reducing the dependence on imports, the scheme aims to boost domestic manufacturing of speciality steel.

Besides this, it also improves India's participation in the global value chain (GVC) and gives access to advanced technology, making India's exports more competitive.

Additionally, it also generates employment in the country. The scheme aims to create 5.25 lakh new jobs in the steel sector in the next five years.

Higher employment increases the per capita income in the country, which increases domestic demand for goods and services which ultimately stimulates the overall growth of the economy.

#4 Stability in steel prices

The price of steel has been going up in the last few months. Although the prices have come down lately from their highs.

The rising cost of raw materials such as coking coal, ferro alloys, and geopolitical tensions causing supply constraints are contributing to the rise.

This is reducing the margins for steel companies and increasing the cost of production for sectors that use speciality steel.

However, with higher production of speciality steel in the country, steel companies can achieve economies of scale, leading to cost competitiveness, thus keeping the speciality steel prices in check.

This will also make Indian speciality steel products competitive globally and boost exports.

To conclude....

Despite being the second largest producer and consumer of steel, the per capita consumption of steel in India is lower than the global average.

India's per capita consumption of steel in 2018 stood at 73.3 kg, whereas the world average was 224.5 kg.

This shows that the scope for growth for the Indian steel industry is very high.

Rapid urbanisation, government's initiatives to boost growth in the country, and the need for housing, transportation, and infrastructure led by a growing population contribute to the rising demand for speciality steel.

With demand for speciality steel rapidly increasing, the PLI scheme has come at the right time.

The scheme will make India self-sufficient in meeting its speciality steel needs and boost exports and open up an opportunity to join the league of advanced steel-making countries such as Japan and South Korea.

The Union Cabinet has approved an outlay of Rs 63.2 bn to add a capacity of 25 MT in the next five years. Currently, the scheme is accepting applications from eligible steel companies in the country.

Watch out this space for more where we'll talk about steel stocks and the top beneficiaries of the PLI scheme for specialty steel sector.

In the meantime, check out the top 5 steel companies in India and other developments happening in the sector.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

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