Steel Yourself: Opportunities Lie Ahead

Steel Yourself: Opportunities Lie Ahead

01 Aug 2016 Long Read
With the consumption of steel in construction and infrastructure growing, opportunities exist for buyers to enter into contracts with steel companies to cope better through the price rise.

Investments worth $87 billion in infrastructure and manufacturing projects over the next five years, 75 per cent in roads, power and railways alone (see box 1), are expected to benefit India´s steel mills and their raw materials suppliers, according to a June 2016 S&P Global Platts report titled Make in India Investment Offers Enormous Potential for Steelmakers.

By 2026, steel consumption in India is expected to grow to 210 million tonne (mt) from 90 mt last year.

Industry sources affirm seeing an increase in demand for steel. ¨We´re seeing double-digit growth in the overall off-take of steel, with high levels of activity in housing down south and road construction in various parts of the country, although June to September is always a slower period,¨ says Anuj Singhal, CEO, Shri Lakshmi Steel Suppliers.

As for the growth drivers, Niladri Sarkar, Chief Executive-Construction Materials & Solutions Business, Jindal Steel & Power Ltd (JSPL), says, ¨High-rise steel buildings, multilevel car parks, airports, stadiums, railway and metro station development, bridges and flyovers, highways, etc, will drive structural steel and TMT rebar demand. Extension of railway infrastructure will push demand for long rails (JSPL can supply 121-m-long track rails) and structural steel (plates as well as hot rolled sections).¨

Road, rail: key growth drivers
Road building has already got off to a great start with the government targeting the construction of 10,000 km of highways in FY17. Steelmakers are said to be benefiting from higher road construction activity with consumption of rebar and wire rod increasing by 8.5 per cent to 30.14 mt between April 2015 and February 2016, as per Joint Plant Committee data.

However, according to Ravi Singh, CEO, Hypermart, Essar Steel India, ¨Greater demand for rebars cannot be correlated solely with an increase in road construction activity because many tar roads continue to be made that do not use rebars in the ballast. If the government were to push RCC cement roads, at a daily average of 27 km of road construction, demand for rebars would increase.¨

JSPL sees immense opportunities in the Government´s plans for roads and highways. ¨We can offer the entire range of products including steel for concrete roads,¨ says Sarkar, including Jindal Panther TM TMT Rebar (strength up to Fe500D, 500D, 600CRS), Jindal Panther Cement (Portland slag cement), fly-ash, lightweight aggregate, slag aggregate, Jindal high-strength fly-ash bricks, concrete pavers, ground granulated blast furnace slag (for filling) and Jindal Global Road Stabiliser (for increasing the CBR of local soil). Additionally, JSPL can supply high-grade structural steel of up to E550 grade plates and up to E450 grade hot-rolled UB, NPB, WPB and IPE sections for the construction of road over-bridges and river crossings, as well as fabricated plate built-up sections and girders.

Investments worth $128 billion in the rail network in the next five years - including $17.6 billion in the current financial year - will help to practically double the rate of construction of new rail lines from 7 km per day in FY17 to 13 km per day in FY18. Steel Authority of India has estimated an additional 118,000 tonne of rail will be required during FY17 and 644,000 tonne over the next three years, according to S&P Global Platts.

Cheaper rebars boost source consciousness
Rebars made from scrap are less strong for having undesirable impurities like phosphorous and sulphur. As rebars made of iron ore by superior technology and controlled manufacturing process have minimal impurities and are stronger, they can lower the consumption of steel in civil constructions.

¨Now with competitive steel manufacturing by leaders like JSW, SAIL and VIZAG helping to narrow the price gap between TMT bars from primary and secondary sources to Rs 1,500 per tonne, customers are becoming more source-conscious, preferring primary manufacturers over those utilising secondary products,¨ said Singhal.

JSW offers Neosteel bars, toughened high-strength, high-yield, quenched and self-tempered TMT bars with barely 0.035 per cent sulphur and phosphorous impurities. JSW Neosteel has been used for the Mumbai, Delhi and Bengaluru international airports; Hyderabad, Jaipur, Chennai and Bengaluru metros; Mumbai monorail, etc.

Primary manufacturers step into the PEB segment
Pre-engineered steel buildings have long been synonymous with warehouses. However, nowadays even developers of residential and commercial buildings are opting for pre-engineered steel building technology as it offers the opportunity of creating lighter and more economical structures, says Singhal. ¨Pre-engineered building technology can help cut up to 15 per cent of the cost by using high tensile steel. A pre-engineered building, such as a warehouse of 25,000 sq ft, can demand about 90 tonne of steel as against about 105 tonne for a conventional building.¨ Demand for pre-engineered structural steel has also increased of late, affirms Gautam Suri, CTO & Founder Director, Interarch Building Products. ¨2016 has been a good year; so far, we have bagged orders worth over Rs 350 crore.¨

¨Demand for steel for pre-engineered buildings has been increasing at 25-30 per cent owing to increasing demand for commercial use structures,¨ says Viren Mehta, Director, VK Industrial Corporation, a steel stockist and trader.

Suri is confident of seeing more opportunities for steel institutional buildings for schools, colleges, hospitals, power plants, flyovers, metro stations and airport terminals. Recent projects bagged by Interarch include one from the Delhi government for the expansion of 17 government schools in steel-framed structures. ¨We are about to finish a ground plus two-storey hostel building of over 5,000 sq m for Thapar University in Punjab and a ground plus seven hospital building for Fortis Healthcare in Bengaluru,¨ he adds.

Steel buildings have tremendous potential to boost steel demand. ¨Demand for steel will increase when cement is substituted with steel in bove-the-ground construction,¨ says Singh. This substitution depends on costing. ¨At present, cement construction is cheaper than steel by about 10-15 per cent; hence, cement is the preferred choice of construction companies aiming at meeting the end user´s expectations of low cost of asset acquisition,¨ he explains. ¨However, steel construction is preferred for speed, aesthetics, structural longevity, convenience, and for being futuristic. If we can supply cheaper steel, construction companies will shift to steel faster as steel construction can be easily mechanised.¨

Contracts to hedge against price rise
Steel prices have seen a 20-25 per cent correction in the past two years, according to Singhal. ¨We welcome long-term bulk procurement contracts in such times.¨ Of late, however, the imposition of floor prices and safeguard taxes on imports to protect domestic steel makers has raised domestic prices of imported steel. At such times, distributors operating on thin margins hesitate to enter long-term fixed price agreements. But buyers can turn to manufacturers for relief.

While Indian steel prices are driven by global prices, long-term fixed quantity contracts can help construction companies retain profitability in long-running projects, suggests Singh. ¨We also offer the option of placing an entire order for us to roll and additionally charge inventory carrying cost as the construction company lifts the steel as per its schedule.¨

Some Indian companies are entering into favourable contractual arrangements. ¨We enter into quarterly contracts with major manufacturers for most of our requirements as per our construction schedule,¨ says Rajendra Varma, Director, Omkar Relators & Developers.

¨Over and above this, we spot buy steel from local suppliers.¨

¨In the building trade, any long-term contracts are quite rare; besides, steel contributes only about 2 per cent to the overall cost of construction,¨ says Neetal Narang, Addl. Vice President-Corporate Communications, Parsvnath Developers.

Other means to hedge high steel costs
To help construction companies meet their working capital requirements overseas, steel companies buy a certain percentage of the project at its final selling price while providing the steel free of cost. This benefits both. ¨The steel company gets upside on the project price improvement as it achieves maturity while the construction company benefits from lower working capital needs at the time when they are cash-starved,¨ observes Singh. ¨But this model has not found favour with construction companies in India.¨

¨Another supportive measure by steel companies for construction contracts is to push for indexing their costs to certain fair indices,¨ said Singh.

¨JSPL has introduced high-technology products for construction companies to optimise their steel consumption and reduce project completion time, thus minimising the effects of price volatility,¨ says Sarkar. For example, the Weld Mesh TMT Rebar is a unique solution to fasten rigid pavement road construction, which reduces dependency on labour at site by eliminating the need to cut and weld TMT rebars; Speedfloor, a unique flooring solution replaces the prevailing prop system, thus reducing time in making a floor to as low as three days; and many others.

  • Steel consumption expected to grow to 210 mt by 2026.
  • Roads and highways, rail, metro, high-rise steel buildings, multilevel car parks, airports, stadiums, etc, to drive structural steel and TMT rebar demand.
  • Increase in demand for pre-engineered structural steel.

Infrastructure opportunities that will boost construction, steel demand
The big question is: When can construction companies and steelmakers expect to bag these opportunities? ¨New road infrastructure projects have still not translated into demand for steel,¨ says Viren Mehta, Director, VK Industrial Corporation. ¨We don´t expect new railways projects to impact demand for steel much as most of it will be directly purchased from domestic mills, giving no benefit to suppliers.¨ To quote S&P Global Platts: ¨A glance at the current investment status and probable timeframes for all the projects that fall under Make in India shows that any significant impact on steel demand may be at least 18 months away.¨

What does the government say? ¨The Indian Government estimates that around 60 per cent of investment opportunities will be ready for funding in the next 12 months,¨ according to S&P Global Platts. ¨Some 35 per cent of the total investment will go into Odisha, Maharashtra and Bihar, and most of the projects will be funded under PPP arrangements.¨

Opportunities to make in India, imported steel used in infrastructure, construction

  • Steel plates for tanks: ¨While rebars and structural steel are readily available in India, indigenous capability for commercial carbon steel plates exists from 6 mm up to 40 mm in thickness (recent addition up to 45 mm also) and width going up to about 4,500 mm, in different width/thickness combinations,¨ says Rajendra Khandalkar, President - Procurement, Punj Lloyd. ¨But plates of special metallurgy/size/grade for specific service in storage tank/sphere applications need to be imported. Various European, Korean, Japanese and Chinese mills (eg Bao Steel) are regular suppliers of such plates.¨
  • Plates for steel pipes: ¨Steel pipes of various configurations (seamless, ERW/HFW welded, longitudinal/spiral welded) depending upon service application, eg water, crude, gas, etc, with low diameter of +¨ (seamless) to large 56¨ (LSAW) and higher (HSAW), are available in India. However, plates of special metallurgy like duplex, super duplex, NACE-compliant, non-ferrous, etc, need to be imported, though pipe manufacturing capability is available in India,¨ adds Khandalkar.
  • Stainless steel rebars: ¨Stainless steel rebars are available in limited supply in India,¨ observes Ravi Singh, CEO, Hypermart, Essar Steel India Ltd.
  • Specialised TMT bars: ¨We import some specialised TMT bars (modified chemistry steel from Arcelor Mittal) used for underground construction, areas where the soil is contaminated and for special structures,¨ says Rajendra Varma, Director, Omkar Realtors & Developers. ¨Such bars are popular overseas but not commonly used in India. It would also help for more bars of intermediary grades to the commonly bought grades to be made in India, especially at higher grades of steel. We also import some steel plates and steel sections.¨
  • Others: ¨Steel fabrications for specific applications like tall buildings are also partly limited, though they are catching up,¨ says Singh. ¨Cement-filled tubes, ultra high-strength sections and composites are other areas of development.¨
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