Steel companies all over the globe went through a rough patch and are recovering now, thanks to a recovery in demand and prices.
In India, Essar Steel, Bhushan Steel and Electro Steel are under insolvency proceedings. Other companies, too, have not been doing well in the last few years due to poor demand recovery and over-supply of steel from various parts of the world. However, over the last year, favourable market conditions and government measures have given a boost to the financially distressed sector.
Global scenario
Globally, there is excess capacity in steel. The surplus output from countries such as China, Japan and South Korea is dumped in markets across the world. This has taken a toll on steel producers, especially in South Asia and Europe. In India, the Free Trade Agreement (FTA) with Japan and South Korea, which minimised the duty for importers, hit the domestic manufacturers. Cheap steel imports dragged prices lower in the domestic markets of importing countries, thus shrinking profit margins for domestic steel-makers from mid-2014 to mid-2016.
However, there seems to be a reprieve now as China plans to reduce its steel production capacity by 10-20 per cent by 2020, to be in line with demand requirements and also to tackle the pollution problem in the country. This, coupled with protectionism and anti-dumping duties on steel imports in many countries, will aid domestic steel-makers.
Indian steel sector in FY 2017
In terms of production of crude and finished steel, the market is dominated by SAIL, followed by Tata and RINL. While SAIL carries 14.8 and 11.47 per cent market share for crude and finished steel production respectively, Tata’s shares are 11.72 and 10.84 per cent, as per a report by the India Brand Equity Foundation.
Fiscal 2016-17 was a turnaround year for Indian steel companies. Though demonetisation impacted the growth of the sector in the second half, the positives compensated for it.
Due to implementation of import restrictions, rise in raw material prices of coking coal and iron ore, and demand recovery along with higher prices, domestic steel-makers did well. They ramped up production and achieved better margins. Steel prices scaled higher tracking price movements in the global markets. India became a net exporter of steel in 2016-17 after a gap of three years with capacity utilisation of the big steel companies reaching around 80 per cent. The major players in 2016-17 — namely Tata Steel, JSW Steel and SAIL — saw a revenue growth of 39 per cent, 55 per cent and 27 per cent respectively, year-on-year. EBITDA margins, too, expanded — from 18.25 per cent and 17.4 per cent in 2015-16 for Tata Steel and JSW to about 22 per cent in 2016-17 for both.
SAIL had reported a loss at the PBDT (profit before depreciation and tax) level both in 2015-16 and 2016-17, though losses reduced in 2016-17. It was able to contain losses because of improved operating margins following the decline in consumption of coking coal — a key input — and higher net realisation on steel. A turnaround in profits was not possible for the company as finance costs increased on additional borrowings and there was little reprieve on raw material costs.
In the previous decade, many Indian steel-makers expanded their capacity using long-term loans when demand for steel was healthy. Thereafter, due to the slump in demand, companies couldn’t recover their investment and have been stuck with piles of debt. Essar Steel and Bhushan Steel were dragged to the National Company Law Tribunal for insolvency proceedings for debts of ₹37,000 crore and ₹44,000 crore respectively at the end of 2015-16.
Outlook
As per the Draft National Steel Policy 2017, at the current rate of GDP growth, the demand for steel in India will grow to reach 230-240 million tonnes by 2030-31. It also envisions a rise in the per capita steel consumption to 160 kg by 2030-31, which is currently at 61 kg, a third of the world’s average of 208 kg. The jump in estimated consumption figures indicates the potential for the country’s steel sector.
Introduction of the National Steel Policy 2017, restricting imports through Minimum Import Pricing, encouraging the use of steel made in India for major infrastructure projects, promotion of research and development, 100 per cent FDI allowance through automatic route in the iron and steel sector, may also help rev up steel consumption and production in the country, which means good tidings for the industry.