Can imports alone be blamed for India's steel sector woes?
Furquan Moharkan, November 29, 2015, DHNS
During the recent G-20 summit in Turkey, there was immense pressure on world leaders from steel producers back home. There were calls from the British steel industry for premier David Cameron to confront Chinese president Xi Jinping to stop the dumping of cheap steel.
They came in the wake of a spate of steel plant closures across the world, for which many blame China for flooding the markets with subsidised steel. US Steel, that country’s second-largest steel company, has seen its shares fall 69 per cent in the past 12 months and 3,000 jobs disappear in 2014.
British steel plants shed 4,000 jobs in October. In late September, Britain's second-largest steelmaker SSI UK went into liquidation. EU ministers met on November 9 to discuss the steel crisis, but failed to agree on urgent measures.
The stress in the steel sector is not a mere North American or European phenomenon. The highly leveraged Indian steel industry’s outstanding debt stands at Rs 2.8 trillion as of FY 2014-15. India went from a net exporter of steel to net importer of steel, despite a production surplus.
The capacity utilisation of steel production, including both alloy and non-alloy, has been just 81 per cent during 2014-15.
The stress is precipitated by muted domestic demand, imports, capacity expansion, decline in prices, negative operating leverage, and high exit barriers.
Imports are a worry
Since dumping by China, Korea, and Japan are cited as a major cause of worry by steelmakers here, let’s look at the factual canvas. Last financial year, India imported 9.32 million tonnes of steel. This was 10.2 per cent of the domestic production of 91.46 million tonnes. Imports from Japan and Korea were estimated at 3.5 million tonnes in FY15. According to the Steel Minister’s reply in the Rajya Sabha, during April 2014 to January 2015, about 2.9 million tonnes of steel came in from China.
“We do want the government to talk to their Chinese counterparts, and arrive at a particular amount of exports that can come to India, to save the industry in the long run,” says Shridhar Krishnamoorthy, MD, Gerdau Steel India. “The volume at which the imports are coming, combined with their price, is very alarming,” he said.
Chinese mills have an installed capacity of 1.25 billion tonnes of metal per year, with more than 300 million tonnes of spare capacity. India’s installed capacity of 120 million tonnes, reportedly the world’s second-largest, is only a tenth of China’s.
Needless to say, China enjoys the advantages of scale, which gives it the edge in pricing. China saw a year-on-year growth of 50.5 per cent in its steel exports in 2014. From 93 million tonnes in 2014, Chinese exports are expected to rise to 110 million tonnes this year. This is what puts steelmakers in EU and around the world on the edge.
But China has its own worries, apart from the slowdown in the economy. Some 40 per cent of its output is from government-owned steel mills which employ thousands of workers. Bankruptcy is too strong a medicine for local governments, and Chinese banks are known to roll over steel industry debt.
Not very pretty numbers
The picture doesn’t look any glossy in the current year also. India continues to be the net importer of steel despite having overcapacity for the first half of 2015-16, according to a recent Fitch report.
The profit and loss (P&L) numbers of steel majors doesn’t capture the stress fully since they are heavily leveraged. It is estimated that nearly 37 per cent of India’s corporate borrowings are held by steel firms, which are not generating enough revenues to service their interest expenses. Gross outstanding bank debt has grown 17.3 per cent since March 2010. The steel capacity expansions underway, both brownfield and greenfield, are going to further strain the finances of steel majors.
Smaller players involved in cold rolling and annealing of hot rolled coils (HRC) have a totally different perspective. They are not happy with the protective measures by the government, and are sceptical about steel majors crying hoarse about imports. Mohan Gurnani, President of the Federation of Associations of Maharashtra (FAM), points fingers at the debt-load of steel majors.
“The debt of the Indian steel industry is equivalent to the turnover of the industry. This debt excludes the cost of debt (interest). So the debt to be serviced is higher than the turnover. Reduce the turnover to EBITDA, how do you expect the steel companies to service this debt?”
The protective measures FAM objects to include increase in basic customs duty (hiked twice this year from 7.5 per cent to 12.5 per cent), anti-dumping duty (imposed up to $316 per tonne in July on certain steel products for five years), and safeguards duty (20 per cent on hot-rolled flat products in coils of width 600 mm or more), etc.
For the domestic steel industry to revive, demand should pick up. For this, infrastructure and real estate projects are central. Since the cycle hasn’t yet turned for private investment, perhaps government policy measures hold the key.
They came in the wake of a spate of steel plant closures across the world, for which many blame China for flooding the markets with subsidised steel. US Steel, that country’s second-largest steel company, has seen its shares fall 69 per cent in the past 12 months and 3,000 jobs disappear in 2014.
British steel plants shed 4,000 jobs in October. In late September, Britain's second-largest steelmaker SSI UK went into liquidation. EU ministers met on November 9 to discuss the steel crisis, but failed to agree on urgent measures.
The stress in the steel sector is not a mere North American or European phenomenon. The highly leveraged Indian steel industry’s outstanding debt stands at Rs 2.8 trillion as of FY 2014-15. India went from a net exporter of steel to net importer of steel, despite a production surplus.
The capacity utilisation of steel production, including both alloy and non-alloy, has been just 81 per cent during 2014-15.
The stress is precipitated by muted domestic demand, imports, capacity expansion, decline in prices, negative operating leverage, and high exit barriers.
Imports are a worry
Since dumping by China, Korea, and Japan are cited as a major cause of worry by steelmakers here, let’s look at the factual canvas. Last financial year, India imported 9.32 million tonnes of steel. This was 10.2 per cent of the domestic production of 91.46 million tonnes. Imports from Japan and Korea were estimated at 3.5 million tonnes in FY15. According to the Steel Minister’s reply in the Rajya Sabha, during April 2014 to January 2015, about 2.9 million tonnes of steel came in from China.
“We do want the government to talk to their Chinese counterparts, and arrive at a particular amount of exports that can come to India, to save the industry in the long run,” says Shridhar Krishnamoorthy, MD, Gerdau Steel India. “The volume at which the imports are coming, combined with their price, is very alarming,” he said.
Chinese mills have an installed capacity of 1.25 billion tonnes of metal per year, with more than 300 million tonnes of spare capacity. India’s installed capacity of 120 million tonnes, reportedly the world’s second-largest, is only a tenth of China’s.
Needless to say, China enjoys the advantages of scale, which gives it the edge in pricing. China saw a year-on-year growth of 50.5 per cent in its steel exports in 2014. From 93 million tonnes in 2014, Chinese exports are expected to rise to 110 million tonnes this year. This is what puts steelmakers in EU and around the world on the edge.
But China has its own worries, apart from the slowdown in the economy. Some 40 per cent of its output is from government-owned steel mills which employ thousands of workers. Bankruptcy is too strong a medicine for local governments, and Chinese banks are known to roll over steel industry debt.
Not very pretty numbers
The picture doesn’t look any glossy in the current year also. India continues to be the net importer of steel despite having overcapacity for the first half of 2015-16, according to a recent Fitch report.
The profit and loss (P&L) numbers of steel majors doesn’t capture the stress fully since they are heavily leveraged. It is estimated that nearly 37 per cent of India’s corporate borrowings are held by steel firms, which are not generating enough revenues to service their interest expenses. Gross outstanding bank debt has grown 17.3 per cent since March 2010. The steel capacity expansions underway, both brownfield and greenfield, are going to further strain the finances of steel majors.
Smaller players involved in cold rolling and annealing of hot rolled coils (HRC) have a totally different perspective. They are not happy with the protective measures by the government, and are sceptical about steel majors crying hoarse about imports. Mohan Gurnani, President of the Federation of Associations of Maharashtra (FAM), points fingers at the debt-load of steel majors.
“The debt of the Indian steel industry is equivalent to the turnover of the industry. This debt excludes the cost of debt (interest). So the debt to be serviced is higher than the turnover. Reduce the turnover to EBITDA, how do you expect the steel companies to service this debt?”
The protective measures FAM objects to include increase in basic customs duty (hiked twice this year from 7.5 per cent to 12.5 per cent), anti-dumping duty (imposed up to $316 per tonne in July on certain steel products for five years), and safeguards duty (20 per cent on hot-rolled flat products in coils of width 600 mm or more), etc.
For the domestic steel industry to revive, demand should pick up. For this, infrastructure and real estate projects are central. Since the cycle hasn’t yet turned for private investment, perhaps government policy measures hold the key.
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