The National Steel Policy 2017 announced by the steel ministry is betting on higher spending on infrastructure and construction through government initiatives to push steel demand and increase utilisation, India Ratings and Research (Ind-Ra) has said in its latest report.
While accelerated spending by government on defence, infrastructure, construction and railways will be the key, the agency felt the expected rate of growth in steel demand looks ambitious and faces a number of hurdles namely, political instability, budget constraint and timely execution of projects.
To achieve expected demand of 230 million tonne (mt) in 2030-31, steel demand will need to grow at a CAGR of around 7-7.5 per cent during the period against a CAGR of 3.5 per cent-4 per cent over the last 5 years.
Further in order to protect the domestic industry from imports to meet the accelerated demand growth, the government has announced another policy which provides preference to domestically manufactured iron & steel products for government procurement with immediate effect.
The aforesaid policy excludes procurement of grades of steel not manufactured in India or where demand cannot be met through domestic sources. Ind-Ra believes the policy is likely to boost demand and realisations of domestic producers as they will not have to compete with imported material and is likely to increase capacity utilisation though it will be marginal. The steel producers with a higher proportion of value-added products in their baskets will benefit the most from the preference policy.
The agency believes NSP 2017 is a comprehensive policy, with a focus on targets and means to achieve them. While the policy will give a boost to the struggling Indian steel industry, the execution of provisions in the policy will remain a key challenge for the government, Ind-Ra noted.
The policy sets guideline to address key issues facing the industry like muted demand, over capacity, raw material price volatility and technology inefficiency, which if adhered to diligently will enable the industry to be better placed to absorb any external shocks, the report added.
The government plans to increase the steel capacity to 300 mt by 2030-31(from 122 mt in 2015-16), an effort that would require extensive efforts toward increasing the availability of resources namely, infrastructure, raw material and finance.
Ind-Ra expects central public sector enterprises to be under pressure to build capacity for catering to any demand-supply gap after considering the capex by the private sector.
Capex undertaken by public sector enterprises may further stretch the metrics of public undertaking unless the government infuses funds to support capex instead of adding debt.
Ind-Ra also said it expected the steel policy’s focus on increasing domestic availability of coking coal to beat import dependence through acquisition of overseas assets, auction of domestic coking coal blocks and installing coal washeries if implemented successfully could lead to input cost stability.
Indian steel industry lacks technological efficiency compared to global standard, thus making us uncompetitive against countries like China, Japan and Korea as well as poses a threat from import substitution.
The policy focuses on improvement in the efficiency parameters so as to reduce the cost of production and develop advanced steel products to reduce the dependence on imports.
However in order to achieve efficiency levels in most plants a significant amount of capex will be required to be undertaken by steel companies, which looks tough considering their financial health, baring for few large producers.
Source: Economic Times