The Red Sea crisis is likely to emerge as a grave concern for Indian steel manufacturers, with potentially impacting exports if the issue persists. The crisis also comes at a time when steel companies are facing lower demand and stiff competition from other countries.
Between fiscals 2020 and 2022, Indian steel makers exported about 10-15% of their annual output (11 million tonnes in fiscal 2020 and 18 million tonnes in fiscal 2022), with flat steel comprising around 70%. This declined to 6.5% in fiscal 2023 (total exports were 8.3 million tonnes) after the government imposed export duties, as per Crisil Ratings’ data.
India’s steel exports are expected to decrease to 5-7 million tonnes in this fiscal year, influenced by subdued global demand and prices, the data stated.
“The freight operators are hesitant to commute through the channel, even if we offer to double the shipping charges. Most of our order wins would possibly take another six more months to come into execution mode. So, if the crisis lingers or becomes a more permanent problem, we will have to find alternate solutions including taking longer routes,” L&T CFO R Shankar Raman said.
The Red Sea crisis, initiated in November, with Iran-backed Houthis in Yemen attacking vessels on this route. This has led to a nearly 60% reduction in daily container vessel traffic within the Red Sea since mid-December. The additional costs of diverting a tanker from Asia to Northern and Western Europe via the Cape of Good Hope would result in an extra $932,905 per voyage, extending transit time to 32 days from 16 days, according to a report by LSEG Shipping Research.
JSW Steel Joint MD & CEO Jayant Acharya said, “There have been some concerns on the container vessel front plying that route. However, on the break bulk side, we have not seen much impact. So, we are re-strategising our shipments for exports to more of break bulks. We are watching the situation.”
While the Red Sea crisis is anticipated to raise freight costs and present challenges in container availability, the expected impact on the earnings and credit profiles of steel makers is considered limited.
“There are two reasons for this. One, domestic steel demand and prices continue to be healthy and has been offsetting the impact of lower exports this fiscal. Exports are expected to be only about 4.5% of production this fiscal, so manufacturers will not see any major impact. On the other hand, domestic demand growth has been buoyant and is expected at 11-13% this fiscal,” Crisil Ratings director Ankit Hakhu said.
“Secondly, steel makers are expected to pass on a large part of the freight cost increase. Such cost accounted for just 5-6% of steel prices prior to the Red Sea situation and could increase to 10-12% now. Also, relatively lower increase in freight cost via the break bulk mode compared with containers could lead to exporters using more of the former in the short-term,” he added.
Earlier, Jindal Stainless had revised down its export forecast for this fiscal to 10-12% of its overall sales of about 2.1 million metric tonnes, down from its previous forecast of 15%, citing freight disruptions in the Red Sea and weakening demand in Europe and the US.