Issues

Consumption, Steel-GDP Elasticity, Imports and Exports

FY 2016-17 is likely to be the fifth consecutive year with a steel consumption growth of less than 5% and steel-GDP elasticity of less than 0.7, as can be seen from table-1 (Source: JPC/CSO). Figures for 2016-17 have been projected based on the growth rates achieved during April-November, 2016. GDP growth indicated for 2016-17 is based on estimates by various agencies. Table-2 shows the trend of exports and imports (Source: JPC).

While estimating future demand for steel, steel-GDP elasticity is normally considered as 1.1. This was nearly so during the period 2006-07 to 2011-12. Subsequently however, this has been much lower. It can be observed that growth in finished steel production was above 7% in the first two years of this period, but has subsequently declined in tune with the low growth in consumption. Consequently, capacity utilisation, which was 87% during 2006-07 to 2011-12, has declined to 76% in 2015-16 and in spite of higher growth in production; capacity utilisation may only marginally improve in 2016-17 due to addition of capacity. Except in 2013-14, India has always been a net importer of steel. This is because; we still do not manufacture certain grades and shapes of steel and our international competitiveness in terms of quality and price is a notch lower. However, the surge in imports in 2014-15 and 2015-16 was due to excess global capacity in steel (estimated at about 700 MT, half of which is in China) and subdued economic activity across the globe. Main exporters were China, Japan, South Korea, Russia and Ukraine. Certain inter-governmental agreements also helped some countries. To push their products, these countries reduced prices to unheard of levels and Indian producers were forced to reduce the domestic prices. Even then, there was no growth in consumption of domestically produced steel between 2012-13 and 2014-15, due to low demand from steel consuming sectors. Exports drastically reduced both due to global reasons and issues related to competitiveness. In 2016-17, both imports and exports are expected to come back to their normal proportion of consumption and production.

Raw Material Availability and Prices

Imports (in MT) & landed costs of iron ore and coking coal (in Rs/T) for select companies and NMDC sale price of iron ore during the last nine years are shown in table-3.

he Indian Steel industry has been moving from one crisis to Tanother during the last few years resulting in erosion of profitability and accumulation of huge debt. This paper looks

at various issues that have impacted industry performance, various measures taken by the Government to help the industry and the possible way forward.

Way Forward for Indian Steel Industry Way Forward for Indian Steel Industry

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During the per iod 2011 to 2014, international prices of iron ore and coking coal shot up and availability of iron ore became a constraint. There was Supreme Court ordered ban on iron ore mining in the states of Karnataka & Goa and severe restrictions in the state of Odisha.

Iron ore production nosedived from 218

MT in 2009-10 to 129 MT in 2014-15. This brought down the availability and producers like JSW Steel and Tata Steel had to resort to imports. Increase in prices was due to high demand from China and problems in Australia. 2015 saw fall in prices of both the materials as Chinese demand came down. However, prices are again on the upswing. Coking coal price tripled from $85/t in January, 2016 to $255/t in October, 2016 and that of iron ore from below

$50/t in January, 2016 to $63/t in October, 2016 (Source: www.mining.com).

Domestic iron ore availability has improved. Production increased to 156 MT in 2015-16 and to 84 MT in H1 Fy17 (Source : www.moneycontrol.com).

I n d i a ’s c o k i n g c o a l i m p o r t s a r e continuously on the upswing in tune with the increase in production of blast furnace hot metal. Australia accounts for over 80% of imports. About 3 to 3.5 MTPA of metallurgical coke is also imported (mostly from China) due to shortfall in domestic production. Iron ore landed cost in case of RINL, which has no captive mine, was around Rs 5000/t during the period 2010-11 to 2014-15. Earlier, it was around Rs 3000/t. Iron ore cost in case of JSPL has doubled in 2014-15 & 2015-16 compared to the earlier period due to procurement from market. SMS grade limestone is also imported since that grade is available only in far off places like Rajasthan and Sikkim. It is imported from Middle East to the tune of about 1.4 MTPA. India also imports melting scrap to meet the demand of EAF and IF segments. Import in 2015-16 was 6.63 MT. Prices fluctuate as per international trend. Manganese ore to the tune of about 3 MTPA is imported for Ferro alloy industry.

Profitability, Finance Cost and Debt

Profitability (in %) and interest burden (in Rs Crores), in case of select companies during the last nine years is shown in table-4.

Global recession in 2008 & 2009 followed by high raw material prices and surge in imports at very low prices coupled with sluggish domestic demand for steel has left the steel industry in India gasping for breath. Sales realisations remained virtually flat between 2011-12 and 2014-15 and then declined steeply in 2015-16; by 17.35% in case of SAIL, 16.13% in case of Tata Steel, 18.08% in case of JSW Steel, 27.2% in case of JSPL and 24% in case of RINL. This led to sharp decline in profitability and all companies except Tata Steel incurred net loss. SAIL has made loss at EBITDA stage. EBITDA was not sufficient to cover interest due in case of JSPL in 2015-16, Bhushan Steel in 2014-15 & 2015-16 and Essar Steel since 2011-12. Essar Steel has been making losses since 2009-10. Loan repayment has become difficult for all companies. The companies have taken loans to finance expansions. The debt-equity ratio increased beyond 5 in case of Essar Steel and Bhushan Steel and beyond 2 in case of JSPL. D-E ratio increased for o ther companies a l so .

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Outstanding debt in case of six major steel companies is: Rs 42,635.16 crores in case of Essar Steel, Rs 42,353.53 crores in case of Bhushan Steel, Rs 31,511.03 crores in case of SAIL, Rs 30,993.79 crores in case of Tata Steel, Rs 27,941.06 crores in case of JSW Steel and Rs 23,915.03 crores in case of JSPL (Source: www.moneycontrol.com). Total debt of these six companies adds up to almost Rs 200,000 crores. Several other companies like Monnet Ispat, Jindal Stainless Steel, Electrosteel steel, Visa Steel, Ram Sarup Industries etc. also owe huge debts. Some of them have become NPAs. As per a RBI study, there are 43 vulnerable steel companies with ‘debt at risk’ of Rs 118,200 crores. This is 58.7% of 283 manufacturing companies with ‘debt at risk’ (16.5% in 2011-12) and is considered ‘alarming’ (Source: Indian Express/12-10-2016).

Operational Performance and Product Development

All major steel plants have undergone modernisation and expansion in the last decade and have adopted latest technologies with a view to improve productivity & quality and reduce cost. However, actual performance still falls short of international levels. More remains to be done particularly in the iron making area, where maximum energy is consumed and considerable greenhouse gases are emitted. Performance in these two areas is shown in tables 5 and 6 (source: respective web sites).

Indian plants have in the recent past developed several high end grades for various

applications. However, several end users still prefer to import CRGO Steel, API grade steel, Coated steel for appliances, high strength light weight steels for automotive purposes, micro alloy steel grades for auto parts, high strength reinforcement bars and structural for construction, heavy structural including universal beams & columns, superior quality rails for high speed and metro tracks, tire cord & tire bead quality wire rods, wire rods for high tensile fasteners and creep resistant, fatigue resistant & crack resistant steels for Nuclear power, Space, Aviation, Defence, Oil & Gas etc. R&D expenditure by Indian industry for improvement of raw material quality, techno-e c o n o m i c p a r a m e t e r s a n d p r o d u c t development is low, as can be seen from table-7

Project Implementation and Capacity Ramp Up

Implementation of projects in India takes unduly long time. Expansion of SAIL plants and RINL, Tata Steel’s Kalinga Nagar project, JSPL’s Anugul plant and several other projects

in large, medium and small scale sectors have suffered time over runs and cost overruns. Some of the reasons for this are:

l D e l a y s i n l a n d a c q u i s i t i o n , environmental clearance, forest clearance (if needed) and various other local clearances

l Delays in financial closure & release of funds and high finance cost. Steel industry is highly capital intensive

l Dependence on imports for technological process and equipment

l Absence of reputed erectors and lack of proper coordination among various agencies working in the site

l Managerial and manpower issues

Most of the project reports assume that the

project will attain 90-100% capacity utilisation in third year or even second year of commercial operations.

However, in actual practice, they take up to five years. This may be due to non-availability of raw material linkages, shortage of experienced & skilled manpower, working capital availability issues, possible deficiencies in design and construction and logistics problems. Higher project implementation time and higher time for capacity ramp up increase cost of production.

Secondary Sector and Demonetisation

Around 50% of s tee l in Ind ia i s manufactured by medium and small scale sector. They are not up to date with respect to adoption of latest technology and therefore have inferior performance indices and product quality is not up to the international levels. The recent decision of Government of India to ban Rs 1000 and Rs 500 notes may impact the medium and small scale units in the following ways. (Source: The Economic Times: 13-11-2016)

l Most of the Induction furnace units, small sponge iron plants, small MBFs, standalone rolling mills etc. conduct their business through cash. There will be slow down in their business due to cash shortage.

l Steel consumption in rural India will take

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a hit at least temporarily, as the business is mostly cash based

l Road transportation of raw materials and finished products may be adversely affected due to cash shortage

l Long products market is likely to be affected as housing prices are expected to drop up to 30% over the next 6 to 12 months.

Government InitiativesGovernment of India has taken a number of

initiatives in terms of duty protection, restructuring of debts, demand generation and in other areas to help the industry.

Protection From Imports and Restructuring of Debts

Government has taken following measures for protection against cheap imports and debt restructuring. (Source: www.livemint.com, Business Standard, www.jpcindiansteel.nic.in)

(a) Increase in customs duty on flat products to 12.5% and on long products to 10%

(b) Imposition of 20% safeguards duty on HR Coils in September, 2015. This was initially valid up to March, 2016. It has been extended up to March, 2018, though the duty will be reduced to 10% in steps.

(c) Imposition of anti-dumping duty on stainless steel CR products

(d) BIS licence made mandatory for trading steel products in India.

(e) Fixing of minimum import price- 173 steel products were brought under this scheme with effect from 05-02-2016. The scheme was originally valid up to six months, i.e., up to 04-08-2016. Number of products has been pruned to 66 and the scheme has been extended first up to 04-10-2016 and then up to 04-12-2016. Number of products has been further pruned to 19 and the scheme extended up to 04-02-2017.

After minimum import price came into effect, steel companies were able to increase the selling prices. Performance in H1 FY17 compared to H1 FY16 improved considerably in case of JSW Steel and marginally in case of Tata Steel & SAIL, while in case of JSPL and

Bhushan Steel, there was deterioration.

(f) Anti-dumping duty ranging between $474/T and $557/T on HR Coils, sheets and plates imported from China, Japan, Russia, South Korea and Ukraine. Thickness range is 25mm to 150mm and width range is 2.1m to 4.95m

(g) Anti-dumping duty on cold rolled flat steel products from above countries and Brazil: difference between landed value and $594/T.

(h) Anti-dumping duty on wire rods from China: difference between landed value and $499/T or $538/T depending on the producer.

(I) Reserve Bank of India introduced 5/25 scheme which made loan repayment and refinancing easier. Strategic debt restructuring (SDR) was also introduced, as per which debt may be converted to majority equity holding with takeover of managements and find a suitable buyer for the assets in 18 months. Another scheme was S4A (scheme for sustainable structuring of stressed assets). Under this, loans will be split into sustainable and unsustainable parts. The unsustainable part is converted to long dated securities which can be redeemed later. Promoters have to dilute their shareholding.

Demand Generation

(Source: Times of India: 19-08-2016): Government plans to invest heavily in infrastructure which will boost demand for steel products. Details are:

(1) Infrastructure projects in pipe line:

(a) 432 projects worth Rs 6.5 trillion for roads

(b) 400 projects worth Rs 6 trillion for Railways

(c) 70 projects worth Rs 670 billion for Air Ports

(d) 75 projects worth Rs 551 billion for Sea Ports

(d) Power generation and transmission projects

(2) Several large programmes like Smart cities, AMRUT, HRIDAY etc. with policy support

(3) Passing of Real estate act, GST, REIT etc.

(4) Urbanisation - India’s urban population is forecast to increase to 580 million in 2030 from 420 million in 2015. 110 million houses are proposed to be built by 2022.

Private investments are low since most of the infrastructure companies are saddled with huge debt.

Other Initiatives

Following initiatives in other areas will also help the steel industry

l A transparent system of allocation of mines through auction has been introduced. As per this system, JSW Steel has won three iron ore mines in Karnataka and Essar Steel one mine in Odisha. JSW Steel has won one coking coal mine in Jharkhand and JSPL one steam coal mine in Odisha. More such auctions will take place in all mineral bearing states.

l Government has set up ‘Steel Research and Technology Mission of India’ with an initial corpus of Rs 200 crores, in collaboration with steel companies, to promote research activities in steel sector.

l Government proposes to set up a Rs 40,000 crores ‘National Investment and Infrastructure fund’. This will be mostly useful for stalled projects.

The Way Forward

Steel Industry

(1) There is considerable scope for improving the performance of Indian steel Industry in the areas of specific consumption of raw materials, energy, water etc., manpower productivity and pollution control. The industry has to also spend more money on research & development. Current performance levels and the desirable performance in these areas are shown in table-9.

Performance of Indian steel industry in respect of productivity of major processes like BF, BOF, EAF, Rolling Mills etc. is below the international standards. Product quality in respect of cleanliness, surface finish, and other mechanical & metallurgical properties has to

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match world standards. Now that most of the producers have adopted latest technologies, grades mentioned in section 1.4 should be made regularly to be able to compete in i n t e rna t i ona l ma rke t . Resea rch and Development effort has to be intensified for improving product quality, reducing cost of production and improving productivity.

(2) An export drive has to be undertaken to increase exports to 10% of production. MENA, Rest of Africa and ASEAN regions imported about 130 MTPA of steel in the last two years. Projection for 2025 is 220 MT.

(3) Companies should undertake a vigorous awareness campaign among designers, architects, construction companies, house builders and other stake holders to improve steel to cement ratio in construction to international levels (around 1)

(4) Companies have to strengthen their project wings to cut delays in project implementation in the areas of financial closure & drawal of funds, procurement of equipment & machinery and actual erection at site.

(5) All companies should ramp up production from commissioned units and quickly reach 90% utilisation of commissioned capacity. All other plans, both Greenfield and brownfield, should be kept on hold till the industry stabilises.

(6) Major steel companies may jointly consider setting up of a Steel University at a suitable location and prepare course material for the graduation course, in consultation with the experts in the line, so that the graduates are job ready.

(7) Acquisition of coking coal as well as iron ore assets abroad should be speeded up so

that continuous availability of raw materials at reasonable price is ensured.

(8) Wherever necessary, companies should restructure their businesses and operations to cut costs and divest non-core assets

(9) Small and medium sized units have to suitably upgrade their technological base to become internationally competitive. They should resort to cash less transactions.

The Government

Help is needed from the Government in the following areas, primarily to reduce cost of production of steel and to improve the competitiveness of the industry.

l Import duty on raw materials like iron ore, coking coal, limestone and scrap should be completely withdrawn.

l A national scrap recycling policy should be formulated and suitable incentives given to improve domestic availability of scrap. An agreement recently reached between MSTC and Mahindra Inter Trade (part of Mahindra group) for setting up an auto shredding and recycling plant is a positive development.

l Iron ore requirement of big steel companies is huge and they may find it difficult to participate in auctions in several states for iron ore mines. Allocation in far flung areas will increase transportation cost. Government may therefore consider transparent policy based on sealed bids and reserve price (fixed by independent credible third party evaluations) for allotment of captive iron ore mines to companies like JSW Steel, Essar Steel, RINL etc. (who presently do not have captive mines) in the states where the plants are located or in the neighbouring state.

l Excise duty (future GST) on non-

modvatable steel products should be reduced.

l Coking coal should be exempt from clean energy cess of Rs 400/T.

l Tax incidence on iron ore at around 55% is one of the highest in the world. This should be reduced to 35% in tune with the practice in other countries.

l To conserve iron ore reserves, lump iron ore should continue to attract 30% export tax. Export tax on iron ore fines should be progressively reduced depending on quality. It may be fixed at 30% for 62% & above Fe and Nil for Fe 55% or below. Iron ore pellets should attract an export duty of 5%.

l Experience has shown that mere budget provision for infrastructure projects is not sufficient. Project implementation has to pick up significantly. Then only there will be demand for steel. Since private sector investment in infrastructure has remained weak due to stretched balance sheets, Government departments have to significantly increase spending to generate steel demand.

l Governments should put on hold new major steel projects announced in public sector. They are: Paradip project (Government of Odisha), KIOCL (Anantapur & Karnataka), NMDC Ltd (Bellary and UMSPs in Jharkhand & Karnataka), RINL (UMSP in Odisha), SAIL (Sindri project and UMSP in Chhattisgarh) etc.

l Central/State Governments should develop transparent and time bound systems for land acquisition and various clearances.