Bailout Package for Steel Producers?

Wed, 23 Mar Pre-Open

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The steel industry has been depressed for a while. Weak global demand, cheap imports and falling prices have dented the financials of the domestic steel producers.

Cheap imports from China for instance have been flooding the Indian markets, thereby impacting domestic production. This was evident from the figures published in FY15. During the year, steel imports surged by more than 70%. On the other hand, domestic consumption grew by 3.1% only.

Not to mention that the poor state of steel producers has also impacted the banking industry. As stated in the RBI Financial Stability Report released in December 2015:

Clearly, this data is alarming. And needs to be addressed.

Some steps in this regard have been taken...

The flood of imports prompted the government to impose safeguard taxes in September 2015 and set a minimum import price (MIP) in February 2016. On February 5, 2016, the directorate general of foreign trade imposed a MIP on 173 steel products. The prices range from $352 per tonne to $752 per tonne of steel. This move has been labeled as a 'gamechanger’ for steel companies. Reportedly, MIP has led to improvement in the prices of steel and improvement in the financials of the industry players.

However, there is a flip side to this as well. Steel is an input into many different sectors from automobiles, real estate, engineering, construction and infrastructure. Hence, if the price of steel goes up, companies operating in these sectors need to pay up. And this in turn will impact the prices of the final products - including the physical infrastructure that is built.

Now it seems that the government is preparing a bailout package to revive the steel sector. The finance and steel ministries are working together on this. The package is expected to be finalised in the next two months.

Few of the options being considered include bringing in fresh equity into these companies by external or international investors. Reportedly, there is a fair degree of interest from international investors to invest in this sector. The capital brought in could ideally be used to repay the debt of these over-leveraged companies and trim finance expenses in the process. In addition, steel producers have sought a moratorium on loan repayments.

Given the cyclical nature of the sector, we believe bailouts may not be the best solution as it could be a situation of kicking the can down a very long road - with no dead end in sight. Nevertheless, we will be closely keeping a watch on the developments that come up on the bailout package front.

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