1. Steel sector: Time has come to harness the potential

Steel sector: Time has come to harness the potential

The steel industry anywhere in the world, it appears, has to learn to live with a little amount of trepidation all the time.

By: | Published: November 8, 2016 6:14 AM

The steel industry anywhere in the world, it appears, has to learn to live with a little amount of trepidation all the time. Days of passive growth or unbound miseries for the industry are over. The 21st century second decadal mantra of living with an uncertain future calls for a significant change in attitude, planning, strategic thrusts, game plans, and capacity building exercise to take care of the emerging market dynamics, influencing policy planners to chalk out supportive roles and many others.

Is the Indian steel industry prepared to take these challenges head-on or just submit to the inevitable? Traditionally, we are not used to take precautionary steps to delay the occurrence and rather devise ways and means to navigate in the troubled waters and most of our managers thrive in crisis. To be able to act like a seasoned strategist, we need to first assemble the facts coherently, analyse their interdependence and formulate suitable measures either at the firm level or in a macro framework. This is the modern art and we need to learn it as fast as possible.

Global prices of hard coking coal have touched the roof and threaten to move further up. There is already a 196% hike in prices (from $92.5/t FOB Australia in Q3 of 2016 to a spot level of $ 273/t in Q4). By itself the coking coal price rise would imply average cost addition exceeding R7,000/t (0.8xprice differential) assuming 90% dependence on imports and marginal increase in domestic coal prices.

Iron ore trade prices are still holding with supply matching the demand. It is not sure if the rising prices of coking coal are likely to sustain through Q4 2016 & Q1 2017, it may prompt another increase in iron ore prices as standalone producers may not like to be deprived of reaping higher realisation. Scrap after showing rising trend is a little subdued ($236/t for HMS 1/2 80:20 CFR Asian port in Sept ’16 to $ 233/t currently).

Finished product prices are climbing. It is not immediately known if these are demand-driven or merely reflecting year-end activities. Chinese offers of HRC at $ 418/t FOB in Sept ’16 now stand at $437/t, a 4.5% rise in two months. The spread between Chinese HRC and iron ore has gone up in the last three months. There is a falling trend for cold-rolled sheet and coated sheet prices that had come down from $513/t/fob( China exports) in Sept ’16 to $490/t in Nov ’16 and from $578/t in Sept ’16, reaching $534/t in Nov ’16, respectively.

The drop in Chinese production in crude steel following its shift from investment to consumption is not exactly happening. Chinese exports at more than 86 MT in first 10 months of 2016 are likely to exceed last year’s level.

The spate of trade measures by a host of countries against Chinese low price offers have helped boosting up export prices not only from China, but from other cheaper sources like CIS and Turkey. The pertinent question relates to sharp drop in Chinese domestic consumption that was being predicted by many, which may lead to low priced exports from China once again and poor demand for iron ore and coking coal and therefore sliding prices. The latter phenomenon would surely benefit the large importers of raw materials like India.

Talking of Indian market, the domestic growth potential is still strong. The massive infrastructural deficit in the country in energy, irrigation, transportation networking, housing, industrial complexes, urban and rural infrastructure is already attracting foreign investment from global institutions like World Bank, ADB, JICA to supplement public investment.

Private corporate investment seems to be waiting for a secured environment for speedy project implementation to earn a reasonably good rate of return. Making a firm assurance on that is going to be a litmus test for the various reform measures that the government is implementing. It is heartening to note that GST will become a reality from April 2017. On a medium-term basis, it would immensely benefit the industry by easing the taxation matters to concentrate on production and marketing seamlessly.

A 2.8% rise in steel consumption in the first seven months of the current fiscal appears much below than the potential. Unleashing the potential amid conflicting signals in global market seems to be our only alternative.

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

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Go to Top