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Steel Industry: Problem of plenty?
Fri, 10 Jan Pre-Open

In 2013, the steel industry suffered largely due to weak demand, with the normally strong emerging markets failing to prop up demand. A weak rupee was perhaps the only major consolation for Indian metal producers in 2013 as it protected them from falling prices. But that comfort may not last as the rupee has strengthened. But there would be more trouble ahead for the steel industry if domestic demand fails to pick up.

According to an article in the Mint, between April-December 2013, the steel industry's output rose by 5.2% YoY over the corresponding period last year. At the same time consumption is estimated to have increased by just 0.5%. This has caused demand-supply mismatch.

As such, it is expected that the profitability of the Indian steel industry will come under pressure. This is because of deterioration in the demand-supply equation on the back of macroeconomic challenges being faced by the country (which has led to a steady inventory build-up for Indian steel players) on one hand, and a rapidly increasing supply base on the other. This is likely to keep steel prices under check.

The end users of steel show no sign of revival. Due to execution delays owing to environment clearances, many construction and infrastructure projects have not taken off as expected. Slowing economic growth has also put the brakes on consumption-driven sectors such as automobiles and consumer durables.

For the steel industry to revive, it needs global growth to recover, international prices to perk up, a healthier domestic economy with a pick-up in investment demand, and domestic interest rates to decline for its debt costs to lower. That's a long wish list indeed! But even if some of them are fulfilled in 2014, they should bring some cheer.

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