I dedicate this post
to my father - Janmejay Pathak, who dedicated his entire professional life of
35 years to the steel industry and who was recognized in Essar Steel India Ltd.
(where he served for 19 years before moving to Sohar Steel LLC, Oman) by many
as Steel Man - I knew this because of my 2 month internship at Essar. Unfortunately,
due to medical reasons, my father unexpectedly suffered a heart attack and left
us a couple of months ago.
This blog page was
not updated since a long time. Realized this was the best way to rejuvenate!
Happy reading!
Recent Trends seen in Indian Steel Makers
The steel industry around the globe has seen turbulent times in the years gone by – mainly because of the oversupply coming from Chinese steel manufacturers. Let us see have a look at the recent performance of the steel industry, particularly in India.
Stock price movements of the listed steel companies would be perfect to get the first idea on the performance of the companies as seen by the investors and their perception on the companies’ past and future performance. Let us see the stock price movements in the past 7 years.
Large Manufacturers
JSW Steel
Source: Moneycontrol.com
Source: Company Annual Reports
Note: The figures indicate Gross Operating Revenues
Medium & Small Manufacturers
Source: Moneycontrol.com
Sponge Iron
Source: Moneycontrol.com
Tubes & Pipes
Source: Moneycontrol.com
Steel Rolling
Source: Moneycontrol.com; Finance Club
Most of the stocks in the steel industry have shown a good performance after July 2015. However, companies like SAIL have consistently eroded investors' wealth. Clearly, investors seem bullish on steel industry. Positive reports on complementary companies like Graphite India, HEG etc. by various broking institutions in India also reflect positive sentiment for the steel sector.
Current Scenario of the Indian Steel Industry
The past two years have proven good for the steel industry as far as the market performance is concerned. Also, sentiments and demand growth have hinted for a promising revival of the steel industry in India.
Recently, the Indian government imposed an anti-dumping duty on imports of certain flat steel products from China and European Union for five years to guard the interest of domestic players from cheap in-bound shipments. The colour coated/pre-painted flat products of alloy or non-alloy steel have been exported to India from these regions at below the normal value from a few years. Such a move shall be able to protect the interests of domestic manufacturers. The duty will be the difference between the landed value of the steel products and $ 822 per tonne.
Robust policies in the infrastructure segment and major boost by making investments shall prove to be positive news for the steel sector. Also, as now more and more concrete roads are being constructed, it shall be a major boost to the steel industry. During FY17-18, Government of India allocated US$ 10.13 billion for development of national highways across the country. The Government of India plans to increase the length of National Highways from 103,933 kms to 200,000 kms. As of February 2017, national highways of 6604 kms in length were constructed, against a target of 15,000 kms, under various road transport and highway projects.
Source: IBEF report on Roads
As it can be seen from the figure, since the BJP-led NDA government has come in power, infrastructure project execution has taken a major boost, rising at a CAGR of 20% in the past 3 years and a CAGR of 13.6% in the past 10 years.
These figures indicate rise in sales of construction equipment, rise in the use of structural steel etc. All these factors, coupled with policies to support domestic steel makers, are indicative of good future for the steel industry in India.
Indian Government’s Push for Electric Vehicles
As per a recent Bloomberg report, stainless steel makers around the globe are bullish on the push towards clean energy. One of the biggest gainers from this policy push, apart from the clean energy generators, will be the manufacturers of Electric Vehicles (EVs). A complementory winner will be the manufacturers of batteries. Stainless steel casings are needed to store the batteries in the EVs. While this is good news for nickel and chromium suppliers (as these metals are largely used to manufacture stainless steel), it gives the steel manufacturers a reason to cheer as this will add to the volumes of steel manufactured, and will result in their top line growth.
Bank of America Merrill Lynch (BoAML) has projected global electric vehicle sales of 13.6 million units in 2025.
The Government and the Society of Indian Automobile Manufacturers developed the Automotive Mission Plan 2016-2026, a road map for the industry development in the following decade. This cooperation aims for the sector to reach $300 billions in revenues, to create 65 million further jobs and to generate 12% of India’s GDP by 2016. The achievement of this goal will require further investment of INR 4.5-5.5 trillion by companies and the continued institutional support to fiscal incentives on R&D expenditures and initiatives such as “Make in India” (launched in 2014 to encourage multinationals to move their production in India) and “Skill India” (launched in 2015 to train 400 million workers in different skills).
Consolidation in the Indian Steel Industry
With Essar Steel Ltd. (Rs. 45,000 crores debt) and Bhushan Steel Ltd. (Rs. 42,000 crores debt) coming under the government scanner and these companies being subject to the Insolvency and Bankruptcy Code because of highly stressed assets, global players such as ArcelorMittal and POSCO are actively considering investment in these companies to assume ownership of stressed assets. Also, domestic steelmakers like JSW Steel and TATA Steel are actively considering making investments.
POSCO, the company that had almost begun setting up its steel manufacturing plant in Odisha state of India, wrote to the government to take back the 2,700-odd acres of allocated land as the company withdrew its plans. Also, ArcelorMittal has been in active talks with Steel Authority India Limited (SAIL) for a joint venture since 2015. However, these talks have barely been moving ahead since 2 years. With Essar and Bhushan, these international companies have a chance to convert their ‘distant dream’.
In case JSW Steel and/or TATA Steel acquire the stressed assets, it shall prove to be a major capacity addition for either or both the companies, which shall translate to a substantial increase in the increase in market share in a highly price-competitive industry. This shall lead to a considerable consolidation in the Indian steel industry as well.
India Expected Steel Capacity Addition Problem
It was recently reported by Bloomberg in October 2017 that the Indian steel manufacturing capacity will double backed by the demand boom as companies will invest for expansion purposes.
Because of demand pick up and a positive outlook on the Indian steel industry, the stocks of major Indian steel makers i.e. TATA Steel and JSW Steel have beat the benchmark SENSEX in terms of performance since January 2017. India’s finished steel consumption rose 4.3 percent to 43 million tons in the six months to September, while output climbed 5 percent to 52 million tons, according to the steel ministry. In the financial year ended March 31, usage grew 3 percent to 84 million tons, the slowest pace in three years, even as production gained 11 percent to record 101 million tons.
However, doubling the capacity may only add problems to these companies. If they undertake a project of setting up a new plant, it will take not less than 3 years to the plants to get commissioned. The anti-dumping policies rolled out by several governments, including India, which are supporting domestic steel manufacturers against the ‘China steel’, may not be effective as market may reach a new normal. China has faced a huge steel production overcapacity since the country flooded the global markets with its cheap steel. India may face the same problem 3-4 years down the line if plans to double the steel output are materialized.
World Steel Association Report
India is set to displace Japan as the world’s second-largest steel producer, and by 2022 will churn out 146 million tons compared with 118 million tons from Japan, according to an April report from Australia’s Department of Industry, Innovation and Science. Even a recent report by World Steel Association said the same.
Table 1: Demand Growth in the Top 10 Steel using countries
Source: World Steel Association Report; Finance Club, MISB Bocconi
Table 2: Top 10 country-wise crude steel production (in million tonnes)
Source: World Steel Association Report; Finance Club, MISB Bocconi
From Table 1, it can be seen how the Indian steel industry has outperformed its global peers in terms of crude steel production. With this pace of growth, India is clearly set to overtake Japan for the crude steel production. Also, it can be observed from Table 2 that only India has an outstanding demand growth in the coming year. China, India and Russia are the BRICS countries that have made it to the above list. However, it is only India that has promising growth statistics.
Comments
While the demand growth is robust, it is the policy measures which can support the Indian steel industry, which has been the case for the good performance of the major steel producers – TATA Steel and JSW Steel on the stock markets. If the projections by World Steel Association are to be believed, Indian steel sector will outperform its global peers in the next financial year for the robust demand and robust production growth ahead.
Investors will reward for future outlook of an industry. With price support and technological advancement for which steel sector shall be one of the biggest contributor, the steel sector poses itself to be showing a good performance in the near future.
- Harsh Pathak
President - Finance Club, MISB Bocconi - Bocconi India
E-mail:harsh.pathak@misbbocconi.com; harsh.pathak0509@gmail.com
Contact: +91 9820976480, +39 3333291847
