A perception is gaining ground that the current rate of industrial growth and especially the growth witnessed in manufacturing sector as shown by the IIP indices may pose a stiff challenge to Indian steel industry to fulfil the various growth perspectives indicated in NSP 2017. IIP has grown by 1.7% in the first 4 months of the current fiscal with manufacturing growing at 1.3%, capital goods, consumer durable and infrastructure and construction sectors witnessing a growth of (-) 3.5%, 2.1% and (-) 0.9%, respectively during the period. The manufacturing of other transport equipments (railway, shipping and civil aviation etc) indicated a high positive growth as evidenced by more orders for rails, structurals and plates in the country. Higher production of HRC/S and Plates, two wheelers and mining sectors also contributed IIP positively. However, manufacturing of electrical equipments that went down by more than 16% during this period has affected the consumption of electrical steel sheets which has grown only marginally during the first 4 months of FY18.
According to the GVA reports for Q1 of FY18, the manufacturing sector has moved up by 1.2%, construction by 2.0% and electricity, gas and water supply segments by 7.0% in Q1, thereby taking the industry to grow by 1.6% in the first quarter which is almost similar to IIP growth.
The second issue relates to stressed assets in steel and its impact on future credit worthiness of the steel sector. According to RBI estimates, the stressed assets of the steel sector at Rs 3.66 lakh crore account a major portion of the total NPAs of the banks. This has made the banks wary of extending further credits to the sector. The five major defaulters, Essar steel, Monnet Ispat, Bhusan steel and Power, JSPL, Electrotherm together accounts for around 40.4% share of steel sectoral NPAs and have been referred to NCLT for examining measures as per the Liquidity and Bankruptcy Act. The RBI estimates of non-food credit indicate that it has grown by only 5.8% in FY17 as compared to 10.9% growth in FY16. The silver lining in this otherwise depressing scenario is the definite improvement observed in the movement of steel prices in the last 10 months, which may substantially reduce the haircut to be taken up by the banks on debt resolution by 40-45% and may positively improve their willingness to lend credit to steel sector. Chinese prices which primarily influence the global steel prices have been on the rise. The Chinese offer of HRC SS 400 ex-Tianjin port has moved up from $443/t fob in November’16 to $593/t in September ’17, by 34%, Chinese export offer of CRC fob Shanghai has gone up from $555/tonne in November ’16 to $617/t in Sept ’17, while export offer of HDG ex-Shanghai fob has increased from $613/tonne in November ’16 to $658/t in Sept ’17. Similarly, the export price of Rebar ex-China has notched up from $398/tonne fob Shanghai to $560/t in the last 10 months. The stimulus investment in infrastructure building especially in the interior regions and changes in the household property market has enabled China to consume a higher volume of steel reflecting in higher production level ( 5.1% rise in crude steel production in January-July ’17) and rise in domestic prices.
This has helped Indian steel industry in two ways. Steel exports from India at 4.1mt in April-August’17 exhibit 45% rise compared to last year. The average steel prices obtained by Indian steel exporters for HR coils, CRC and coated products exceed the past year’s level significantly. Secondly, the domestic steel prices are on the rise. HRC at Mumbai at Rs 43,660/tonne (inclusive of all taxes and levies) in Sept 2017 exceeds the level in Nov 2016 by more than 21%, while for CRC and Coated products, the rise in domestic prices are also at similar levels. The growth in margin should, therefore, provide a level of comfort to the perception and understanding of the lending banks and financial institutions in the ability of Indian producers to repay the loans. The SME sector’s exposure to the bank loans is much lower compared to the leading steel producers who would be contributing more towards capacity augmentation. Against the backdrop of rising margins, the finished steel consumption in the country has grown by 4.4% during April-August ’17. It is likely that in the next 7 months the country would consume more steel in various segments led by infrastructure and construction, housing and commercial complexes, automobile and rural areas so that FY18 ends with an annual growth rate of 6-7%.