Steel makers look to add investment with rising prices

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Published: September 12, 2017 5:35:29 AM

Last week we briefly discussed about the challenging economic scenario for Indian steel industry in terms of fresh investment, especially the declining private corporate investment.

Steel, Steel makers, add investment, investment with rising prices, add investment with rising prices, Steel makers look to add investmentLast week we briefly discussed the challenging economic scenario for Indian steel industry in terms of fresh investment, especially the declining private corporate investment.

Last week we briefly discussed the challenging economic scenario for Indian steel industry in terms of fresh investment, especially the declining private corporate investment. The ratio of private investment (including household) as a percentage of GDP has been consistently coming down from 29.2% in FY12 to 23.9% in FY16, while GCF as a percentage of GDP has also been moving southwards from 39.0% to 33.3% in the last4 years. WSD assesses that the comparable figures for USA for FAI as a percentage of GDP is way behind at 20%, but as US GDP at $18 trillion is the largest economy, a 20% share of FAI comes to $3.6 trillion which accounts for 65 million tonne of steel consumption. China’s FAI is much higher at nearly 42% of GDP (or $4.9 trillion) and as per the current estimates it is tantamount to 650 million tonne of steel consumption indicating a much higher steel intensity. Compared to these, in FY 16, the GCF as 33.3% of GDP in India comes to $0.7 trillion and accounts for nearly 50.4 million tonne of steel.

Thus a 2% increase in GDP with 5% increase in GCF component and corresponding rise in steel intensity in GCF as a fallout of all the recent initiatives being undertaken by MOS, GOI, steel producers and other stakeholders, may generate demand for additional 20 MT of steel taking into account the multiplier impact from other end using industries and assuming the current pattern of consumption. However, if the incremental rise in GDP is consumption-led, the steel intensity in investment at the current level would not be able to result in a proportional increase in steel demand. Keeping in view the lower steel intensity in consumption expenditures (government, private and household), the declining share of GCF needs to be arrested by higher level of investment-public, private corporate supplemented by FDI.

It is also imperative that a major component of GCF is spent on building physical infrastructure which is nearly 7 times more (as per some estimates) steel-intensive as compared to investment in social infrastructure. While investment announcements by the government in mega projects like Bharatmala, Sagarmala, industrial corridors, metro rails, ports, airports, road and rail network, smart cities, affordable housing, urban and rural infrastructure and others are indeed laudable, private corporate sectors’ participation has to be ensured by making the investment space attractive including restructuring the PPP framework in order to make these investment reach their final goal in creating real capital base.

One critical factor for attracting private corporate investment is to create an enabling environment in which the entrepreneur is assured of the return on investment for which the project received financial closure. There are enormous efforts on the part of the government, both central and state, to take appropriate measures to improve doing the business framework and make sincere endeavours to remove various constraints causing delays and frequent interventions by unproductive agencies and thereby improve the business environment. It is well appreciated that the transparency in awarding the contracts is to encompass the whole gamut of project execution with objective assessments getting priority over subjective interference.

The PMI for manufacturing for the month of August at 52.6 has to improve significantly in order to encourage the demand for non-food credit which has been on the decline in the recent period. It is a fact that banks and other financial institutions have become sceptical of the credit worthiness of the steel producers as these units have emerged as big defaulters of loans extended to them thus enhancing the NPAs reaching nearly 10% of the total advances made by the banks. There is one silver lining in this otherwise depressing scenario. The global steel prices are on the rise and this should reassure the lending agencies on adherence of the repayment schedule by the borrowers and help the steel producers to garner more resources for investment.

For HRC, the global prices have moved up from $470/tonne in April’17 to 580/tonne in August’17. The driving force at the back of this phenomenon is the Chinese steel production, consumption that rose by 5.1% and 10.9% respectively during the first 7 months of the current fiscal. The PMI for manufacturing in Japan and USA for August’17 at 49.6 and at 52.8 respectively is better compared to previous months. The robust demand and rising employment in the Euro zone has led to PMI rising from 56.6 in July to 57.4 in August’17. The PMI readings for Germany, Austria and Netherland for August’17 are the six and half year highs. This is a good news for India’s steel exports that at 3.3 MT during April-August’17 had grown by 54%. These are positive signals for corporate sectors in India to invest in infra, construction and manufacturing sectors.

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