Glimmer of hope for steel industry in coming financial year
One unique feature of this year’s Budget is that while it does not have a major direct impact on any particular industrial segment, almost all industry players are indirectly influenced by budgetary announcements. In a way, the Budget has made a sincere attempt to create an enabling environment for growth of industry.
The primary focus on agriculture and, for that matter, on the progress of the rural sector may appear in the first glance as a marked departure from what we have been witnessing in previous years’ Budgets. The industry must be prepared to look beyond a few normal relief measures dished out every year like duty enhancement (customs), duty reduction (excise) and more allocation of funds in areas that would lead to more demand generation for the sector.
In fact, by removing some of the major irritants in project implementation, revisiting PPP (public-private partnership) guidelines to invite private investment, making suitable policy changes in doing business in India, reiterating fiscal consolidation by sticking to the fiscal deficit target, and enhancing capital funding by the banks, the Budget has provided a roadmap on the envisaged fiscal, trade and other economic measures for the country in the short and medium term. The only missing link was a firm commitment to implement the goods and services tax (GST) in FY17.
For the steel sector, that has already been given in the pre-Budget customs duty hike. A safeguard duty and minimum import price (MIP) to guard against surging imports from China and other countries, the budget has increased energy cess on coal by R200 per tone and import duty on Zinc to 7.5%, thereby enhancing the cost of steel production, but the rise in capex for roads and railways, energy, ports and airports would help to generate steel demand. A programme for houses for all by 2022 sounds good for the steel industry, but it would require a comprehensive plan of promoting steel intensity in the housing sector by more use of light-gauge steel like hollow sections and pre-fabricated structures.
That the industry suffered irreparably due to the vicious inflow of cheap imports from the excess capacity-bearing China, Japan, Korea and CIS nations, is clearly evident from a mere 0.8% growth in Crude steel production in 11 months of the current fiscal and a negative growth (-1.9%) in finished steel availability in the market. The EBITDA margins of all the producers dropped sharply during the year, adversely affecting the profitability of the industry. Globally, however, the steel industry has experienced a similar fate. The only exception was that the demand growth in India (averaging 4-5% against negative global growth) was met by rising imports and the domestic industry was left with a conscious cut in production and rising inventory, and lesser share in the domestic market.
India is likely to end the year with around 90-91million tonne (mt) of crude steel (a 3% rise over last year). Total steel imports (including semis) is likely to exceed 12.3 mt in FY16 (a 20% rise over last year) with finished steel imports reaching 11.6 mt, with 80% of steel coming from the above four regions. The impact of safeguard duty on restricting HR imports is being realised, although the impact of MIP on all categories of steel imports would be felt from April 2016 onwards. Increased prices of steel in the domestic market is gradually being absorbed, which may only partially improve the dwindling profitability of the producers for the remaining period of March 2016. In China too, there is a hike in domestic prices of billets, rebars, PM plates and HR, which is pushing their export offers upwards.
For small and medium steel enterprises in the country, the rising prices of scrap, sponge iron and ship-breaking scrap at major consumption centres have led to increased prices of pencil ingots, rebars, wire rods and structural items.
Real steel consumption in the country in FY16 may reach around 81 mt, which is a 5% rise from last year. Enhanced prices in the global market are likely to result in higher export growth from India and lower flow of imports due to prevailing spate of trade measures. Expansion in the domestic market on account of larger flow of investment in infrastructure and the success of the Make in India programme to rejuvenate the manufacturing sector would for sure enable the domestic industry to enjoy higher capacity utilisation by meeting a higher component of incremental demand in FY17.