More infrastructure investment needed to sustain steel prices

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Published: May 3, 2016 5:16:45 AM

Steel consumption in the country at 80.5 million tonne in FY16 at an annual rate of 4.5% over the previous year appears to be reasonably good in the context of a negative growth in global steel consumption as well as in China.

Steel consumption in the country at 80.5 million tonne in FY16 at an annual rate of 4.5% over the previous year appears to be reasonably good in the context of a negative growth in global steel consumption as well as in China. While the latter is deliberately trying to curtail steel consumption by opting for more consumption-led growth away from investment led, the major global steel producing markets in US, Europe, Japan, South Korea, Russia are exhibiting demand recession. This pull-down impact has been marginally reversed by the positives indicated in Southeast Asia, West Asia and South Africa.

Steel prices have risen much more than expected and increase in Chinese export offers of HRC from $270/t cfr Tianjin to $464/t and price of Rebars fob Turkey from $ 285/t to $ 445/t in the past five months have boosted the sagging morale in the industry by improving financials for the beleaguered steel industry in Q1 of 2016. The associated risk factors are two. The sustainability of the rising trend in prices, even by a lower scale, depends on a whole set of enabling factors that may vary country to country. Second, the upward tick in Scrap prices (HMS 80:20) cfr Madras from $172/t to $ 295/t in last 5 months, Iron Ore prices with 62% Fe cfr China from $35/t to $ 64/t and Coking Coal from $72/t to $99/t in the same period have the potential to reduce the gain substantially in the finished product prices.

China continues to play a significant role in the sustainability of rising prices. The property prices in China have begun to move northward, the rise in investment in infrastructure building is acting as a stimulus, while demand for restocking is gaining momentum, the stocks at the ports having been depleted. The spate of trade defence instruments faced by China in the form of AD, CVD, increase in import duties and floor prices imposed by various countries are adequate to warn Chinese exporters not to sell below the marginal costs and instead earn surplus over variable costs to pay for the outstanding debts much to the relief of the banks. As domestic prices in the major markets are ruling higher than export offers, the pressure on selling abroad at whatever prices available, is diminishing.

In FY16, the import of finished steel by India has gone up by 26%. Of the total finished non-alloy steel imports, HR and CR comprise 40% and 26% share, respectively, and along with rebar/wire rod, these three categories accounted for almost 73% share in the total imports of non-alloy steel.

HR coils/sheets consumption has dropped by around 3% compared to FY15 primarily due to lower demand of pipes and tubes which was nearly stagnant at last year’s level, however, the availability from the secondary mills have also dropped by 3% and the exports of pipes were hit by as high as 27%. A 68% rise in imports of HR led to 19% fall in HR production from SAIL. Tata, JSW and Essar steel also suffered as 30% increase in imports of CR as well as 32% rise in imports of coated sheets led to less HR demand for production of CR and lower demand of CR for Coated sheets, all ultimately affecting the production of HR. These developments resulted in much lower capacity utilisation in HR, CR and Coated products and severe loss of realisation for the indigenous industries and curtailed their capabilities either to invest or to clear the outstanding debts. Similar scenario emerged in the countries adversely impacted by flow of cheap imports from China.

With import booking slowing down steeply following the various trade measures by the government, the existing market share by domestic producers in the months ahead is bound to increase. However the sustainability of this golden phase must await the demand push in various end-using segments boldened by fresh investment by the government and private sector in infrastructure (urban and rural), railways, roads, power and irrigation.

The author is DG, Institute of Steel Growth and Development. Views expressed are personal.

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