India steels itself for expansion

Above, workers at the assembly line of Toyota Etios cars in Bidadi, on the outskirts of Bengaluru. Abhishek N Chinnappa / Reuters

Labourers work at the construction site of a bridge being built for metro rail in New Delhi. Anindito Mukherjee / Reuters

An engineer walks on an iron structure at the construction site of a railway bridge in Kouri in the Reasi district in Jammu and Kashmir state. Mukesh Gupta / Reuters

MUMBAI // Rajender Garg, the director of Garg Sons India, a manufacturer of stainless steel kitchen sinks, says he has always sourced the steel for his business from domestic producers, even when others turned to cheap imports from China.

“The biggest reason is I want to support Indian producers and Indian economy,” says Mr Garg, whose 20-year-old company is based in the northern Indian state of Haryana.

India’s steel industry is bouncing back after it was hit by a glut of cheap steel imports from countries including China that flooded the market as supply of the metal outpaced demand globally and prices slumped.

India is the only major market where consumption of steel is expanding, driven by the country’s economic rise and an increased focus on infrastructure development and manufacturing.

The Indian government has taken measures in recent months to control the low-cost imports that were hurting domestic steel producers. These steps include the introduction in February of a minimum price on steel imports, to remain in place for at least six months; safeguard duties on imports and an anti-dumping investigation into steel products from China. India last month introduced anti-dumping duties for some imports.

“At present, many steps are being taken to improve the demand of domestic steel as against the imported steel that has caused short term stress in the industry,” says Sumit Bhatia, the senior vice president of business operations at Power2SME, which sources raw materials including steel from major producers in India for its clients, which are small and medium-sized businesses.

“The steel industry is very competitive and there are challenges. The largest producer of steel in the world, China, has dumped steel products at a cheaper rate across global markets including India. This impacts the business and margins of local players. Prices of the dumped products are lower than the cost of production by local players, which becomes a challenge in highly competitive market like India,” he added.

Cheap steel imports were also coming in from Japan, South Korea, and Russia.

But he added that after the steps taken by the government, “the pressure on the steel industry in India is gradually coming down”.

Production and demand for steel is only set to rise in India, says Mr Bhatia.

“The Indian steel industry is bound to increase manifold, especially owing to infrastructural construction and thriving automobile and railway sectors,” he says. “Given the natural and human resources at its disposal, India has a lot of scope in the steel sector.”

India is the third-largest producer of steel in the world.

The total steel volume of domestic operations of four of the major steel companies – Tata Steel, JSW Steel, Sail, and JSPL – in the first quarter rose 15 per cent year-on-year and 26 per cent quarter-on-quarter to 10.8 million tonnes, according to figures from Edelweiss Securities, based in Mumbai.

“The spurt was driven by reduced imports in March as the effects of the minimum import price started to reflect,” says Amit Dixit, an analyst at Edelweiss. Indian steel companies lobbied the government to take protectionist measures because of the negative effect that the surge in imports had.

As a result of the minimum price and safeguard, steel imports fell to their lowest level in 14 months last month, dropping to 546,000 tonnes from 924,000 tonnes in the same month the previous year.

The consumption of steel grew by 4.5 per cent to 13.3 million tonnes in April and last month compared to the same months last year. Hundreds of billions of dollars are set to be invested in infrastructure over the coming years.

“If you look at the massive infrastructure push by the government, even going by conservative estimates, steel demand will grow a lot,” PK Singh, the chairman of Sail, told the Press Trust of India news agency last week.

“India will equal the global per capita consumption in 10 years. Look at the road sector – more highways are being built, which means more steel will be used. Similarly, in railways more tracks are to be laid and we expect a huge jump in spending there. The power sector is also expanding, which again will boost demand for the metal. The steel industry is of strategic importance and is the barometer of growth. We have to be cautious about the excess capacity in the world and in China.”

Rising incomes are also driving demand for cars in India, which is another sector heavily dependent on steel.

Tata Steel, which is selling off its British assets, reported strong numbers last month for its business in India in the January to March quarter.

“Tata Steel [India] recorded its highest-ever sales at 9.5 million tonnes in the financial year 2015-16 and consolidated its market share despite extremely challenging market conditions,” TV Narendran, the managing director of Tata Steel India and south-east Asia, said last month during he release of Tata Steel’s quarterly results. “Sales in [the January to March quarter increased by 16 per cent, with strong growth in key segments such as automotive and branded products. We continue to invest and build on the equity we have in the marketplace.”

Tata Steel at the same time announced the start of production at its Kalinganagar steel plant, which has a capacity of 3 million tonnes a year.

“The facility will produce flat steel for high-end applications, enabling the company to expand its product portfolio in the ship building, defence equipment, energy and power, infrastructure and aviation sectors,” said Tata Steel. “It will also consolidate Tata Steel’s leadership position in the domestic automotive segment.”

Mr Narendran says: “We are well-positioned to serve the increase in demand because of overall economic growth and the expected thrust on infrastructure in [the current financial year].”

Other major steel companies in India, including JSW Steel, are also boosting production.

Edelweiss forecasts that as steel companies in India increase their capacity and ramp up production over the coming quarters, steel production of the four companies it covers will rise to 44.5 million tonnes in the current financial year, which runs until the end of March, compared to 37.1 million tonnes in the past financial year. Production will rise further to 49.6 million tonnes the following year, it predicts.

“Going forward, we anticipate sales volume of companies to continue to rise as bulk of the capacities come onboard,” says Mr Dixit. “We expect this enhanced production to cater to consumption growth and the void left by reduced imports. Hence, while major suppliers are not likely to face hindrance on increasing their sales volume, the upside on prices is likely to be limited as supply-demand balance is maintained.”

But he adds that their headroom for growth and reaping the benefits of consumption growth in India is “contingent on continuance of the minimum import price or similar effective protectionist measures”, to avoid the country once again being swamped with cheap imports from abroad.

But while steel producers in India are determined for measures to curb cheap imports being kept in place, the efforts have riled other Asian steel producers. Japan has protested against India’s safeguard duties on imports of hot-rolled steel, resulting in a dispute between the two countries. Japan is the second-largest producer of steel globally. India’s safeguard tariffs have been extended until March 2018. Chinese authorities have also raised concerns about steps being taken by India.