In the first seven months of the current fiscal, the finished steel consumption as per JPC data has gone up by 4.2% as compared to last year.
Last week we discussed the World Bank forecasts on prices of raw materials of steel and found that in 2020, almost all commodities including crude oil are likely to follow a downward trend. This would not only widen the spread between input and output prices of steel, but lead to lowering the CAD of India. Almost similar trend has been projected by Citi Research Group. According to them, iron ore (Fe 62%) is likely to fall from the current level of $/MT landed at China to $80/MT ($81.3/T: World Bank forecasts) and further to $60/MT in 2021 and 2022. The price differentials between 65%/62%/58% Fe content are also likely to come down. The average prices of hard coking coal is to drop down to $170/T FoB Australia in 2020, $160/T in 2021 and to 150/T in 2022. The current price of premium low volatile coking coal is $133.5 FoB Australia. In all likelihood the prices of coking coal may drop down by a higher amount due to slower demand by China for coking coal as evidenced by the thrusts on EAF route by the country to achieve lower carbon emission. However a firm roadmap in this regard is yet to emerge in China since BF route continues to be favoured by all SOEs. In effect the prices of non-coking coal are likely to be lower than the current level in 2020. The above two observations of the declining prices for two major inputs would imply a higher EBITDA for steel producers in 2020.
In the first seven months of the current fiscal, the finished steel consumption as per JPC data has gone up by 4.2% as compared to last year. Although it is a significant fall from 8.8% growth achieved by Indian steel consumption in FY19, the same may be considered as reasonably good. While core industries (crude oil, natural gas, refinery products, coal, cement, electricity, steel, fertiliser with a combined weights of 40.27% in IIP) growing by 1.3% during H1 of FY20 and IIP and Manufacturing growth in first five months reaching a mere 2.4% and 2.1% growth, the growth in steel consumption exceeding 4% needs a special mention. This is particularly so in view of a declining trend in PMI in EU, USA, Brazil and Japan thereby adversely hitting the global steel industry.
The total crude steel production in the country during April-October’19 at 64.1 MT exceeds last year’s production by 1.2%. However the finished steel production (net of IPT and double counting) at 60.0 MT is 3.7% more than last year. It is to be noted that India has once again retrieved its status as a net steel exporter. Finished steel imports in first seven months at 4.65 MT are lower than finished steel exports at 4.88 MT. The total opening stocks (with major steel producers) at the beginning of the year at 12.8MT have gone up by 0.54 MT by the end of October. It must be noted at this stage that non-alloy steel stocks at the major steel plants has risen by 0.77 MT during the period and those for alloy/SS category has come down by 0.23 MT. With the current system of data reporting at JPC by steel industry which is purely optional, it is not feasible to assess the total steel stocks in the system (including stocks held by SMEs and merchant traders) and therefore it is assumed that opening and closing stocks at these production/stocking points are same. Further it is fairly logical to assume that much greater flexibility exists in the production processes in SME sector than the same at the major integrated steel plants so that market fluctuations in one product can be immediately taken care of by switching to other product categories by the small and medium enterprises resulting in much lower stock accretion. This also largely explains a 9.5% growth in finished steel production (2.7% growth in crude steel production) achieved by SME sector during the period. As long products’ production is higher due to stable growth in national highways, Bharatmala and other infrastructure projects, the predominant share of SMEs in long products would strategically position them for supplying higher tonnages.
Accordingly, the apparent steel consumption (net finished steel production plus finished steel imports minus finished steel exports minus stock accretion (+)/deceleration (-)) in April-October’19 is more compared to last year’s level by 2.4 MT (4.2%). It may be mentioned here that import substitution for the products which is getting imported due to price considerations (including those under duty-free imports for further exports) would replace imports with higher market share by the domestic players and is a laudable production strategy. It does not change the ASC. However, imports of engineering goods containing steel (average annual level > 2 MT) if substituted by supplies from the capital goods manufacturers, would add to higher steel consumption in the country (more ASC) as the domestic capital goods players would procure steel preferably from indigenous sources only.
The 4.2% growth in steel consumption has been achieved by 6.0% growth in non-alloy steel consumption and a substantial (-) 15.5% de-growth in alloy/SS segment primarily due to downturn in automobile sector including auto component segment. It is seen that finished steel production in alloy/SS segment is lower by 26.7% compared to last year as against 5.9% growth in finished steel production in non-alloy category.
(The author is DG, Institute of Steel Growth and Development)