The Indian steel industry is headed for a period of overcapacity with additional supply coming onstream in the next fiscal likely to exceed any improvement in demand.
The result may be continuing price and margin pressures for Indian steelmakers who are already under pressure due to slowing domestic demand and cheaper imports.
Fiscal 2016 will see nearly 9 million tonnes (mt) in fresh capacity added to the existing capacity of about 95 mt, estimates rating agency Crisil Ltd.
While supply of steel will grow at roughly 10%, demand is expected to grow 5-6% led by a pick-up in sectors such as construction and automobiles, noted the rating agency.
This mismatch could lead to continued under-utilization of steel capacities, which are currently running at a utilization level of about 78%.
“To avoid a demand-supply mismatch, demand in the next fiscal will have to grow at 7-8%, which is unlikely. In the absence of that and if global steel prices remain at the current level, we expect further stress on domestic steel prices, by 3-4%,” said Goutam Chakraborty, research analyst, Emkay Global Financial Services Ltd, adding that if global prices move higher, companies could chose to offload this capacity in the overseas market.
“That at best could help them improve price realization to some extent,” he said.
Much of this capacity was planned three to four years ago when the economy was growing at a faster clip. However, gross domestic product (GDP) growth (according to the old GDP series) slowed to under 5% in fiscals 2013 and 2014, which brought down demand for core materials such as steel.
The slack demand has reflected in steel prices.
Since the beginning of the fiscal, the price of long steel—used for construction purposes—has fallen from Rs.34,600 per tonne as on 1 April 2014 to Rs.30,050 per tonne as on 9 February, a fall of 13%. The current price is the lowest in the year so far, according to the benchmark prices at Mandi Gobindgarh, Punjab, as reported by NCDEX, India’s second biggest commodity exchange.
Mandi Gobindgarh is the main hub of secondary steel market in India.
Most of the additional capacity will come from two of the country’s largest private steel producers.
The first phase of Tata Steel Ltd’s Kalinganagar facility will be operational in the next fiscal, with a total capacity of 3 mt.
However, Koushik Chatterjee, group executive director (finance and corporate), Tata Steel, says capacity will be added in phases, keeping market dynamics in mind.
“I do not expect much stress there,” said Chatterjee, while declining to say the additional volumes that the company will generate from this facility at the start.
For the quarter to December 2014, Tata Steel reported a stand-alone net profit of Rs.881 crore for its domestic operations, a decline of 42% from the Rs.1,519 crore reported in the same quarter last year.
At JSW Steel Ltd, total capacity will increase from the current 14.3 mt to 18 mt by September 2015. Most of this addition would be in the long steel segment.
“While we could see new investments planned in the next fiscal, by the time it translates to steel demand, it would will be fiscal 2017,” said Jayant Acharya, director, commercial and marketing, executive director of JSW Steel.
Acharya, however, added he does not see in stress of overcapacity in the medium term.
“We do not see any stress or issue with the new capacity in the medium- to long-term. Demand is surely to pick up driven by infrastructure and construction needs, the only question is the timing,” he said.
For the December 2014 ended quarter, JSW Steel reported a stand-alone net profit of Rs.414.69 crore for the quarter to December 2014 as compared with Rs.652.15 crore for the quarter to December 2013, a drop of 36%
Essar Steel, which is also looking to ramp up production at its existing facilities, says demand will pick up along with the economy.
“If GDP grows at 6.5%, steel consumption can move up 8-9% since the elasticity is 1:1.20,” a spokesperson for Essar Steel said.
Domestic steel companies have also faced pressure of cheaper steel imports coming from markets like China and Russia, which have further dented sales. During the December 2014 quarter, steel imports to India increased 142.3% on a year-on-year basis. The global slump in iron ore prices and thus steel prices have led to a significant increase in steel imports. Iron ore prices in India have been trading high due to supply constraints.
“The sentiments in the economy are showing signs of improvement and as such any fresh capacity addition can address the demand appropriately subject to unfair imports being curbed,” the Essar Steel spokesperson said.
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