The domestic steel industry is passing through a challenging time, saddled with increased cost of production due to the relentless fall in rupee amid a sluggish demand; the industry could witness more pressure as the worst doesn't seem to have ended. Rather, the road ahead for the industry looks tougher with thin hopes of steel demand revival coupled with unpredictable trend in rupee amid stressed balance sheets due to high debt and poor investment climate.
Apart from the slowing economic growth in the country and abroad that is weakening steel demand, high debt levels are keeping the balance sheets of most steel companies under stress prompting them to lower expansion and focus more on repayment of loans.
To beat the impact of the depreciating rupee on their margins, top domestic primary steel producers are contemplating to focus on increasing exports and lowering the inventory build-up period of coking coal. Further, focusing on higher penetration in the rural areas of the country is another area where steel companies are looking at to improve sales. The current per capita consumption of steel in rural areas of India stands at 13-14 kg, far lower from the 47-50 kg per capita consumption in urban regions. It is this gap producers could tap in the coming quarters to improve their top-lines.
According to Mint, JSW Steel is planning to open nearly 5,000 shops in the next five years to sell custom-made steel to tap demand in rural and semi-urban India, where rising incomes have boosted construction of homes and non-food spending. In-fact JSW is planning to create a unique experience. Apart from the traditional steel grey, customers can choose bright colours and vibrant patterns of steel. In addition, the shops will have consultants to help shoppers buy products in the right size and shape.
Given that the near-term outlook for the steel industry seems grim due to the factors mentioned above, and the urban demand not picking up in the past few years, there seem to be increased expectations from rural India. Especially given the good monsoons this year! Thus focusing on rural India could be the right strategy to increase profits for steel companies.