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What does the Indian steel sector need to revive?

What does the Indian steel sector need to revive?

01 Feb 2020 Long Read
CW speaks to industry leaders to identify ways to ease the ongoing crisis in steel.

Steel in India has been facing numerous challenges of late. 

“Liquidity issues and slowing investments followed by weaker consumption have impacted the domestic steel industry, leading to a significant drop in steel prices and making India a net exporter of steel in the second half of the year,” observes TV Narendran, CEO & Managing Director, Tata Steel.
However, some early signs of revival have been witnessed since October 2019, notes Narendran, supported by back-to-back rate cuts by the Reserve Bank of India, new government measures, demand pull in the festive season and the governments’ decision on corporate tax. 
“In the past one month, steel demand has picked up and so have the prices,” agrees VR Sharma, Managing Director, Jindal Steel and Power. “There is likely to be a growth of 5-6 per cent on a year-on-year basis.”
Narendran is confident about the prospects of the Indian economy and the steel sector in 2020 because of structural reforms by the government in the past year and recent announcements on infrastructure. With the expected revival of the economy, he also expects consumption-driven sectors such as automotive and consumer durables to revive in FY2021. However, he sees a need for more investment, reform and confidence-building measures. 
Here, industry leaders outline measures to reform the steel sector and ease the ongoing crisis.

Address high cost of business

The government is already working on the ease of doing business, says Sharma. “I think something more can be done.”
Focusing on the ‘cost of business’ will make industries, particularly the manufacturing sector, more competitive, adds Narendran.
“We would like the government’s support in reducing the cost of doing business,” affirms Alakesh Roy, Managing Director, Zamil Steel India. “It is not enough to focus on the ease of doing business.”
Roy cites high land prices as prohibitive to industry and the high electricity tariffs levied on the industry as adversely impacting the viability of projects. Unclear policies around alternative energy are also not helpful. He questions why companies generating solar power should be subjected to levies.

Ease finance crisis

The banking sector crisis has severely impeded the high capex steel industry, observes Natasha Singh Sinha, Director-Finance, Mesco Steel. 
“It costs about Rs.70 billion to establish a million-tonne capacity greenfield plant, and that kind of money has become very hard to come by. Banks don’t want to expose themselves to the steel industry irrespective of the size of the unit, making it extremely difficult to grow, let alone sustain existing capacity, especially for those at the base of the pyramid, units of 0.5 mt to 2 mt capacity. Working capital for steel has all but dried up.”
“Of late, the bank sector has been stressed, which has contributed to muted growth,” agrees Roy. “Another outcome is that the credit worthiness of companies has come into the spotlight, which is a good thing, but money is still hard to come by.”
Sinha observes that asset resolution in the banking sector has infused some liquidity into the system but the mindset of bankers has not changed. “They still want to wait,” she says. “They would still rather be conservative. They are still fearful. I expect it will take another 12-18 months for this to blow over.”
To ease working capital issues and spur growth, Sinha would like the government to focus on getting more and cheaper financing to the sector. Until this happens, she suggests GST filing be permissible within six months as was the situation earlier instead of bimonthly. “Blocking e-way bills and stopping production is only worsening the situation and exacerbating unemployment, in turn widening the gap between targeted and actual GST collections and adversely impacting the GDP.”

Restore raw mining supply

The government should support the industry by providing iron ore and coal, says Sharma.
The steel and the mining industry are deeply interrelated, notes Sinha. “The mining sector crisis occurring as a result of the Supreme Court order has led to a raw material crisis.”
Sinha says the government will need to take a holistic view of the sector to usher in a turnaround. “There has been some talk of a policy or ordinance to undo the mining crisis,” she says.
Sinha proposes allowing mines that were asked to pay compensation retrospectively to function so that they can pay the compensation and keep production levels intact. If need be, they may 
be given a five-year extension to make good the compensation. “Simplifying the multiple approval levels prior to the submission of mining environment plans would also help; then, mines may be asked to submit their environment plans in one year or maximum 18 months,” she says. “Submitted plans should be approved within the prescribed 90 days.”

Develop a long-term vision

In recent years, growing demand for stainless steel in India vis-à-vis static demand in developed markets like the US and EU had made the country a dumping ground for overseas producers with excess installed capacities. Rampant imports, including substandard products, caused financial losses to the domestic industry. Now, with the Steel Import Monitoring System (SIMS) applicable to all steel products under chapters 72, 73 and 86 from FTA countries, decision-makers in the government and other stakeholders will be able to track steel entering India.
“SIMS is a progressive step,” opines Vijay Sharma, Director, Jindal Stainless, “as the government will suo moto monitor and act with policy interventions if it observes any significant patterns in the import quantum of steel products, similar to what is already being practiced in the US. Earlier, the industry had to reach out to the government and submit proof of imports that were damaging the domestic industry. We expect quick decision-making by the authorities.”
“SIMS is against those who want to dump material in the country; so, it is a good move,” adds VR Sharma. “Each country has to protect its own borders so India is well within its rights on this.”
Sinha, however, considers SIMS a reactive initiative of the government to the high cost of mining in India vis-à-vis other countries. “Ideally, policies should be based on a 15-20 year vision, which encapsulates growth and sustainability of the mining business, and is then drilled down into a five-year plan and a one-year plan.”

Impact of Arcel or Mittal-Nippon Steel’s acquisition of Essar Steel

If 2018 saw Tata Steel acquire Bhushan Steel, the big takeover of 2019 was ArcelorMittal and Nippon Steel’s investment in Essar Steel, which will hence be called AM-NS India.
On the surface, the takeover happened because of Essar Steel’s financial difficulties. However, “behind this move is ArcelorMittal’s strategy to foray into the structural steel sector,” believes Alakesh Roy, Managing Director, Zamil Steel India. “Negative growth in the automobile and mobility segment has necessitated steel majors to look for new ways to support growth. Construction is a happening industry, and it is attracting a lot of the big producers such as Tata Steel as well.”

Will ArcelorMittal’s move be a good thing for India; in particular, for the construction industry?

VR Sharma, Managing Director, Jindal Steel and Power, believes so. “ArcelorMittal is a large company and their presence in the country will benefit the industry,” he says. “They bring in a lot of multinational experience to India. They will also export from India because of their sales network worldwide. We do not treat them as a threat to us; rather, they are a support to the industry.”
“Consolidation and structural changes augur well for the domestic industry,” adds T V Narendran, CEO & MD, Tata Steel, “for the recovery of loans by financial and operational creditors of steel companies and for saving a sizeable chunk of India’s steel-making capacity, including world-class facilities.”

Roy agrees. “ArcelorMittal never had a big presence in India until now. As they offer the grade of steel we use for pre-engineered buildings, we expect the market to become more competitive. We expect suppliers to pass on the price competitiveness to users like us.”

It has also been said that ArcelorMittal and Nippon Steel’s combined strengths and technology will bode well for India to expand its steelmaking capacity to 300 mt per annum by 2030. 

All said and done, “the industry’s focus on innovation and technology will help India inch closer to becoming the hub for high-grade, low-cost steel,” opines Narendran. “At Tata Steel, our focus is currently on scaling up Indian operations. We intend to leverage capabilities in R&D for new products, advanced materials, process improvements and digitalisation across the value chain. We have set a goal to further strengthen our branded retail franchise, expand our downstream products capacity and increase revenue from our services and solutions vertical and new materials business.” 


Future Demand Drivers

For its part, the government has launched a campaign, ‘Ispati Irada’, to boost demand for steel. How effective are such initiatives in pushing demand?
“These slogans are meant to bring attention,” explains VR Sharma, Managing Director, Jindal Steel and Power. However, “demand is driven by the construction and infrastructure projects, and overall growth. Most important is how much money the government is going to spend on new infrastructure projects and how fast it can restore the confidence of home-buyers. Builders should come forward and push construction projects.”
“Demand for steel is likely to be driven by infrastructure expansion, which is on a sound growth trajectory judging by government investment plans,” says Alakesh Roy, Managing Director, Zamil Steel India. 
“Demand for steel from tertiary segments like warehousing and logistics has also started looking upwards.”
With Indian real estate seeing vertical growth owing to additional FSIs being made available by the planning authorities, Jatin Shah, National Director, Managing Director & Chairman Office, Colliers International India, sees composite steel structure construction as an effective option for developers. “Skilled manpower availability constraints and increasing labour costs will accentuate this need. Additionally, GST policies and increasing investments in warehouse and logistics parks, and the UDAN scheme for the regional connectivity of Tier-II and Tier-III cities will increasingly open up opportunities for the consumption of structural steel.”

Stainless steel touches a new high

India’s per-capita consumption of stainless steel touched a new peak of 2.5 kg in 2019, according to the ISSDA. 
“Stainless steel is the fastest growing metal in India,” says Vijay Sharma, Director, Jindal Stainless. He attributes this milestone to the wide use of stainless steel in construction, automobiles, railways, kitchenware, architecture, white goods, etc.
“In the construction segment, apart from rolling stock, railway infrastructure including foot-over-bridges (FOBs), road-over-bridges (ROBs), toilets, station furniture, etc, is coming up in stainless steel,” says Sharma. Jindal Stainless has recently signed an agreement with Braithwaite & Co to develop stainless steel FOBs and ROBs.
“Pan-India metro projects are also boosting the use of stainless steel in the form of coaches, interiors, escalators and vending machines. Sustainable and eco-friendly stainless steel overhead tanks are picking up in the market as is the use of stainless steel modular kitchens,” adds Sharma.
 
- Charu Bahri
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