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Finally, Indian Steel Demand Set For Revival

2016-08-23

  With excess supply and sluggish demand continuing across the major steel consuming markets of China, Europe, the US and Japan, India is set to spearhead revival in both demand and output, outperforming regional peers.

  According to international credit rating agency Moody’s, steel demand in India will outpace its regional peers in the next two years, with the country’s GDP projected to grow over 7.5 per cent in 2016 and 2017, among the highest in Asia.

  India’s reform and policy support for infrastructure and manufacturing, as well as increasing urbanisation, will drive consumption, Moody’s said in a report, “Steel — Asia: Lower Earnings Keep Outlook Negative.”

  While the rating agency remains bullish about the prospect, domestic manufacturers feel that it is early days, yet. A stable recovery is still far off and much would depend how government policies encourage both demand and production.

  “Growth in demand has slipped to only about 1 per cent between April and July against 4.5 per cent in FY16. Like global markets, India too remains oversupplied and much would depend on how demand conditions responds to good monsoon,” Seshagiri Rao, joint managing director and group CFO, JSW Steel, the country’s biggest private sector producer, told Financial Chronicle.

  Thankfully for him, Moody’s also said that profitability of companies such as JSW Steel and Tata Steel will outperform their regional peers, as combined with their expansion plans, the government’s protectionist measures in the form of minimum import price (MIP) and anti dumping duties would help in expand demand for local steel.

  “The Moody's outlook matches the earlier forecast of World Steel Association (WSA) on India being a bright spot in consumption. The government has been supportive in introducing trade protective measures in the form of MIP, anti-dumping and safeguard duties for providing a level playing field to the local manufacturers and shielding them from predatory priced imports. The industry will benefit in this supportive environment and opportunities,” Prakash Kumar Singh, chairman of the country’s largest producer, state-owned SAIL, told FC.

  The government imposed MIP on 173 steel products in February, as part of a series of measures to protect the domestic industry against dumping from China, Japan, Korea and Russia. MIP had positive impact, with imports shrinking by over 29 per cent in the April-June quarter of FY17. Though the MIP list has now been pruned to only 66 items, domestic steel makers feel that it would go a long way in providing them fresh business opportunities.

  “The steel sector could see some growth on account of good monsoons, but the real change could happen if high lending rate of 12-13 per cent falls. Only this would make further investments viable and reduce debt burden from the industry,” said Ravi Uppal, managing director and group CEO, Jindal Steel and Power.

  While projecting Indian growth, Moody’s said Asian steel demand will continue to decline by a low-single-digit percentage in the next 12 months owing mainly to slowing demand from China’s manufacturing and property sectors.

  India, which accounts for 8 per cent of Asian production, will increase output to meet rising domestic consumption, but this increase would not be enough to prevent the decline in aggregate regional production.

  Indian and Southeast Asian demand will rise, but not offset the decline in China, which accounts for about 70 per cent of Asian steel consumption, the report said.

  While the India growth story would support local demand and production, the domestic market will also get a boost from lower exports from countries such as China, Japan, Korea and Taiwan. Moody’s said that the steel exported from China will grow by a low-single-digit percentage in the next 12 months and flatten out towards the end of 2017, down from 20 per cent year-on-year growth in 2015. Similarly, lower output in other major Asian steel-producing countries will also result in reduced exports. Japan, Korea and Taiwan export around 40-50 per cent of their output.

  The Indian steel sector, which contributes 2 per cent to India's GDP and is the world’s third largest after China and Japan, produced 91.46 million tonnes (mt) in 2014-15. After reporting stellar performance in the 2003-07 period, the going has not been good for the sector for the past few years in the absence of local demand and dumping of cheap steel from abroad. This has already put country’s largest steel maker SAIL in losses, with the company reporting net loss of Rs 4,137.25 crore in FY16 against a net profit of Rs 2,092.68 crore in FY15.