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Steel Sector Analysis Report 

[Key Points | Financial Year '20 | Prospects | Sector Do's and dont's]

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  • The Indian steel industry accounts for about 2% to the country's GDP with an output multiplier of 1.4x and an employment multiplier of 6.8x. It is largely iron-based through the blast furnace (BF) or the direct reduced iron (DRI) route.
  • The growth in the steel sector has been driven by domestic availability of raw materials such as iron ore and cost-effective labour. Consequently, the steel sector has been a major contributor to India's manufacturing output.
  • Being a core sector, it also tracks the overall economic growth in the long term. As steel demand is derived from other sectors like automobiles, consumer durables and infrastructure, its fortune is dependent on the growth of these user industries. This provides major cost advantage to the domestic steel industry.
  • Domestic steel prices are increasingly aligning to global export prices as markets strike a balance between imports and domestic demand. China's waning demand and resultant rise in exports poses a risk to improving demand for Indian steel in South Asia and Europe. Further, movement of currencies against the US dollar have a significant impact on the movement of global steel and raw material prices.
  • The steel industry has seen major investment in the recent years. 100% FDI is allowed through the automatic route in the steel sector. According to data released by Department for Promotion of Industry and Internal Trade (DPIIT), the Indian metallurgical industries attracted Foreign Direct Investment (FDI) to the tune of US$ 13.4 billion in the period April 2000-March 2020.
  • The Government has launched the National Steel Policy that aims to increase the per capita steel consumption from 61 kgs to 160 kgs by 2030-31. The government has also promoted policy which provides a minimum value addition of 15% in notified steel products which are covered under preferential procurement.

How to Research the Steel Sector (Key Points)

  • Supply
  • Low, especially for value-added steel in the auto sector and high-end electrical steel.
  • Demand
  • The Indian steel industry still has significant potential for demand growth as per capita steel consumption in India at 61 kg (incl. rural consumption at 10 kg) is much lower than the global average of 208 kg.
  • Barriers to entry
  • High, due to capital costs, technology requirements, economies of scale, and government regulations.
  • Bargaining power of suppliers
  • High, mainly due to the fact that supply of the main raw material used in the steel industry – iron ore is controlled by the government. Strict rules, regulations and costs increase the power of suppliers.
  • Bargaining power of customers
  • Moderate, as there are few suppliers of steel as compared to buyers.
  • Competition
  • High, due to the presence of a large number of players in the unorganized sector, imports from China, Russia and FTA Countries such as Japan and South Korea.
  • Threat of Substitutes
  • High, due to increased use of aluminum. Consumers have also switched to plastic because of the weight.

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Financial Year '20

  • Steel demand remained subdued in FY20, largely due to lower consumption from construction, auto, infrastructure, real estate, and manufacturing industries. Further, the slowdown in the government's infrastructure investments and credit tightness impacted demand and consequently weighed on pricing.
  • According to the Joint Plant Committee, crude steel production declined by 1.5% YoY to 109.2 MnT (Million Tonnes) in FY20, with a sharp contraction of 20% in March 2020 due to Covid-19 containment measures.
  • Finished steel production grew 0.8% YoY to 102.1 MnT; non-alloy steel accounted for 96% (up from 93%), or 97.7 MnT, while alloy steel contributed the balance 4.4 MnT. In the non-alloy, non-flat finished steel segment, bars and rods grew by 3.6% YoY to 40.5 MnT, whereas in non-alloy flats, hot rolled coil steel (HRC) grew by 2.6% YoY to 43.3 MnT.
  • India remained a net exporter of finished steel during FY20, with exports of 8.4 MnT, up 31.4% YoY. Non-alloy HRC was the most exported product at 4.8 MnT, while bars and rods led the non-alloy, non-flat segment exports with 0.5 MnT.
  • Meanwhile, India imported 6.7 MnT of finished steel, down 13.6% YoY, with non-alloy HRC accounting for 34% of the total imports. Imports from Korea accounted for 40% of the total imports.
  • Finished steel consumption grew by 1.4% YoY to 100 MnT during FY20, non-alloy steel accounting for 94% (94.1 MnT) and the rest being alloy steel (6 MnT). Within the non-alloy, non-flat segment, bars and rods consumption was up 9.6% YoY to 39.7 MnT, while the non-alloy flats were led by HRCs which was 40.6 MnT, down by 2.7% during FY20.
  • FY20 also witnessed the successful auction of 20 iron ore blocks in India, with combined reserves of 583.1 MnT. Further, the Odisha government auctioned 22 (from about 25) iron ore merchant mines where leases were due to expire on 31 March 2020. Of these, 19 were auctioned at a premium of 91-154%.
  • Odisha, which accounts for over half of India's iron ore production, produced 120 MnT during FY20, up from 118 MnT in FY19. While the availability of iron ore remained a concern in the State of Karnataka due to closure of Donimalai mines, there were a few hiccups at a global level such as the Vale dam disruption which led to a sudden spike in global iron ore prices.
  • Companies in the steel industry also invested heavily in expanding their capacity. In April 2019, JSW Steel announced plans to expand the capacity of its Vijayanagar plant from 13 million tonnes per annum (MTPA) to 18 MTPA with an investment of Rs 75 billion.
  • Attracted by the growth potential of the Indian steel industry, several global steel players entered the market. In December 2019, Arcelor Mittal completed the acquisition of Essar Steel at Rs 420 billion and formed a joint venture with Nippon Steel Corporation. In February 2020, GFG Alliance acquired Adhunik Metaliks and its arm, Zion Steel for Rs 4.2 billion, marking its entry into the Indian steel market.
  • The Government implemented the Steel Import Monitoring System (SIMS), which aids in monitoring real-time import data on quantity, quality and value of steel; the system helps detect misclassification and mis-declaration regarding over/ under-invoicing, preventing import of defective steel.
  • It also imposed anti-dumping duty on galvalume products, ranging from US$ 28-200/ton; imports from China, South Korea and Vietnam are subject to duties and to ensure iron ore availability for domestic manufacturing, the government introduced a 30% export duty on export of high grade iron ore (lumps and fines).

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Prospects:

  • India is looking to modernize, expand and accommodate the aspirations of a growing population through urbanization and industrialization. Thus, steel consumption growth is expected to rise on account of government expenditure on infrastructure and manufacturing in the long run.
  • The infrastructure industry accounts for 9% of total steel consumption in India and is expected to increase to 11% in 2025-26. Since the construction industry is a major consumer of steel, expansion across the industry will translate into growth of the steel sector.
  • The automobile industry accounts for around 10% of the total demand for steel in India. With increasing capacity addition in the automotive sector, demand for steel from this sector is expected to be robust.
  • The capital goods sector accounts for 11% of the total steel consumption and is expected to increase to 14-15% by 2025-26. It also has the potential to increase tonnage and market share. Corporate India's capital expenditure is also expected to generate greater demand for steel.
  • The Dedicated Rail Freight Corridor (DRFC) network expansion will enhance the demand for steel. Gauge conversion, setting up of new lines and electrification along with the introduction of high-speed bullet trains will increase steel usage.
  • The Oil and Gas sector is one of the largest end users of steel. The steel demand is set to rise with the expansion of city gas distribution network for covering 70% of India's population, refining capacity augmentation, roadmap to setup 10,000 CNG stations, and exploration and production activities.
  • With the 'Aatmanirbhar Bharat Abhiyan', the government has urged all the stakeholders in the steel industry to come together and utilize only domestically produced steel. Additionally, the global tendering of government purchases up to Rs 2 billion were waived off, hence widening the protection shield for MSMEs from the competition.
  • Procuring steel from domestic manufacturers and minimizing steel imports will generate employment opportunities in the sector and spur MSME's growth, encouraging them to produce more value-added products.
  • The opening of coal blocks for commercial mining aimed at achieving self-sufficiency in energy demand will further benefit the overall steel industry.
  • The Ministry of Steel is facilitating setting up of an industry driven Steel Research and Technology Mission of India (SRTMI) in association with the public and private sector steel companies to spearhead research and development activities in the iron and steel industry at an initial corpus of US$ 30 million.
  • The Ministry of Steel has suggested three models for states to implement setting up a greenfield unit for steel with a capacity of over 4 MnT. The greenfield investments will enable the Ministry of Steel to achieve its 160 MnT domestic steel consumption target by 2024-25.
  • The Steel Scrap Recycling Policy aims to minimize imports, preserve resources and save energy and is compliant with 6Rs principles of Reduce, Reuse, Recycle, Recover, Redesign and Remanufacture. The domestic steel scrap industry is pegged at 25 MnT. With steel production rising to 250 MnT, the industry's steel scrap requirement is expected to rise to 70-80 MnT leading to an additional requirement of 700 scrap processing centres and 2800-3000 collections and dismantling centres across India.
  • Iron ore is one of the basic raw materials used in steel production. National Mineral Development Corporation (NMDC) is expected to invest US$1 billion on infrastructure in next three years to boost iron production.
  • Industry consolidation through the Insolvency and Bankruptcy Code, is expected to lead to improved discipline in the marketplace and encourage stable pricing. Change of ownership will also lead to improved capacity utilisation levels over the next 1-2 years.

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FAQs on the Steel Sector

    How has the steel sector performed in the past decade and when is a good time to invest in the sector?

    The steel (metals) sector has provided investors healthy returns in certain time periods during the past decade but overall, the performance of the sector has been underwhelming.

    Steel stocks are usually risker as their fortunes are prone to economic booms and busts and for this reason, they are often called cyclical stocks. Generally considered an offensive tactic in investing, cyclical stocks can be used to generate high returns when the economy is doing well.

    Therefore, the best time to buy such stocks is at the start of an economic expansion and the best time to sell them is just before the economy begins to slow down. However, before selecting a stock, one must check whether the industry is due for revival or not.

    To know more about the sector's past and ongoing performance, have a look at the performance of the NIFTY Metal Index and BSE Metal Index

    Where can I find a list of steel stocks?

    The details of listed steel companies can be found on the NSE and BSE website. However, the overload of financial information on these websites can be overwhelming.

    For a more direct and concise view of this information, you can check out our list of steel stocks.

    Which steel stocks were the top performers over the last 5 years?

    Tata Steel, JSW Steel and Kalyani Steel were the top performers over the last 5 years in terms of sales and profit growth.

    Tata Steel's performance can be attributed to its status as India's leading producer of high-quality steel with significant vertical integration and raw material linkages for its Indian operations, whereas JSW Steel's performance can be attributed to its diversified product mix with a large share of higher value added products in the sales mix and the company's opportunistic shift between export and domestic markets.

    Kalyani Steel has also done well on the back of its long and established track record of over four decades in the manufacturing of forging and engineering quality carbon & alloy steel.

    To know which other companies performed well over the last 5 years, check out our entire list of top performers.

    What kind of dividend yields do steel stocks offer?

    There is no consistent trend of dividends across the industry, with different companies having different dividend policies.

    For more details, check out our list of top steel stocks offering high dividend yields.

    Which are the steel stocks with the highest return on capital employed (RoCE)?

    Return on capital employed (ROCE) is a financial ratio that can be used in assessing a company's profitability and capital efficiency by determining how well the management is able to allocate capital for future growth. An RoCE of above 15% is considered decent for companies that are in an expansionary phase.

    Kalyani Steel, Tata Steel, and JSW Steel are the top steel stocks right now on the Return on Capital Employed (RoCE) parameter.

    To know which other steel stocks offer great return on capital employed, you can check out the top steel stocks offering the best RoCE here.

    Which are the best steel stocks to invest in currently?

    Investing in stocks requires careful analysis of financial data to find out a company's true worth. However, an easier way to find out about a company's performance is to look at its financial ratios.

    Two commonly used financial ratios used in the valuation of stocks are -

    • Price to Earnings Ratio (P/E) – It compares the company’s stock price with its earnings per share. The higher the P/E ratio, the more expensive the stock.

      To find stocks with favorable P/E Ratios, check out our list of steel stocks according to their P/E Ratios.

    • Price to Book Value Ratio (P/BV) - It compares a firm's market capitalization to its book value. A high P/BV indicates markets believe the company's assets to be undervalued and vice versa.

      To find stocks with favorable P/BV Ratios, check out our list of steel stocks according to their P/BV Ratios

    Resources on the Steel sector

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