Steel market may remain volatile -min
An interesting development on domestic steel front is the poor financial condition of some of the domestic steel manufacturers. Bank loans to Essar Steel, Bhushan Steel, Monnet Ispat, etc. have turned bad and the lenders are rigorously pursuing the borrowers to recover the loans. Leading steel manufacturers like Tata Steel, JSW, Arcelor Mittal, etc. have shown interest in buying the NPAs
Calendar Years 2016 and 2017 were excellent years for the steel manufacturers as steel price went up too sharply much to chagrin of steel users. The closure of induction furnaces that primarily produced long products in China lowered the long steel exports by 58% yoy in 2017 which in turn had its impact on global steel price.
There are various estimates as to how much capacity was shutdown in Chna last year. According to one estimate 120mt capacity worth of plants were shutdown, effectively cutting down production by 40mt-50mt. This was replaced by mainstream facilities, leaving little surplus for exports. Additionally, during 2017, construction activities increased materially, raising the demand for long steel products in China. As a result, China’s long product exports fell 58% yoy in 2017 which helped the steel prices to remain firm throughout the year.
In short, during 2016 and 2017, global steel sector was helped significantly by 1) regulatory actions supporting local steel sectors, 2) aggressive capacity cuts in China, and 3) continuing demand growth in China.
However, there are divergent views as to how steel price will behave during current year, though voice of those who believe that steel price will be softer are getting louder. However, till now in 2018, steel prices have remained firm though the undercurrent is cautious.
One of the major events that has happened in 2018, is the suggestion by the US President of a blanket import tariff of 25% on steel imports on all countries. The US was the largest steel importer with 34.5mt of imports in 2017. Eventually, when the US implements this measure it would replace 12mt-13mt imports away from the US shores. Indian steel exporters would face significant competition for steel exports which may potentially increase supply in the domestic market and thus lowering prices which may be a good news for the construction industry.
There are reports which indicate that there would be exemptions for Canada and Mexico as part of the broader NAFTA trade deal. This would make the deal harsher for the rest of the world. Assuming both Canada and Mexico export the same quantity, the entire 12mt-13mt import displacement would have to be borne by countries outside North America, most notably in Asia and Europe. This may further impact the steel price in the region.
It is also expected that China is not yet done with its steel capacity cuts and the exercise may continue in 2018 too. According to some reports, China is expected to cut capacity further by 30 mt in 2018. In addition, it may also put some restriction on capacity utilization during Mar-Nov 2018. However, US action of imposing additional duty on steel imports and China’s production cuts may not happen simultaneously leading to supply imbalance in global market. Resultant excess supply may find its way into Indian market which may put pressure on domestic price, again bringing cheer to consumers.
An interesting development on domestic steel front is the poor financial condition of some of the domestic steel manufacturers. Bank loans to Essar Steel, Bhushan Steel, Monnet Ispat, etc. have turned bad and the lenders are rigorously pursuing the borrowers to recover the loans. Leading steel manufacturers like Tata Steel, JSW, Arcelor Mittal, etc. have shown interest in buying the NPAs. This development will impact Indian steel industry in two ways. Firstly, taking over of NPAs by financially strong players will help these plants to turn out better capacity utilisation in the coming days which in turn should improve the steel supply in the country. And lastly, this may also impact the fresh investment in the steel sector in the medium to term as the major steel producers are getting steel plants which are in running condition. When one gets steel plants which are operational or almost nearing the completion stage, investors would prefer such plants than engage themselves in setting up Greenfield projects and put themselves into a phase of uncertainty associated with project implementation. “This phenomenon may lead to sluggishness in investment in Greenfield projects in the medium term with attendant risks of tighter supply of steel in the medium term,” says an analyst with a foreign brokerage firm. However, in the shorter term, 1-2 years time span, this move (of selling steel NPAs) should result in improved steel supply in the domestic market.
Thus, 2018 may not be repeat of 2017 with multiple factors working at opposite ends. These factors may keep the steel price volatile during the year.