Domestic steel demand & production unlikely to be impacted in FY22

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Domestic steel demand & production unlikely to be impacted in FY22
© Provided by The Financial Express The steel ministry’s forecast of 2021-22 production and demand being 120 MT and over 100 MT, respectively, is more than likely to be proved right.

By Kunal Bose

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In a report published recently, Moody’s Investors Service has said the combination of steady progress in vaccinating people and rising government spending on infrastructure will support a sustained recovery in Indian economic activity. This, in turn, will give a fillip to demand for steel and cement required for infrastructure building and construction activities.

Besides Moody’s, which foresees a high single-digit percentage growth in Indian steel use, the World Steel Association in its latest global demand forecast for the metal says after significant demand destruction of 12.9% in 2020 due to Covid-induced lockdown, the world’s second-largest steel producing country will experience demand growth of 6.8% in 2022 following strong recovery in the past year. That all such positive demand and production forecasts are likely to be proved right unless of course a fresh health scare forces lockdown find confirmation in the industry’s working in the December quarter.

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After the battering the economy got during the first two Covid waves, the governments, both at the Centre and in the states, have enforced discipline during the current spread of Omicron variant in a way so as not to upset industry and construction activities. Such display of prudence, along with vaccination push, created an ideal environment for steel majors such as Tata Steel, JSW Steel, JSPL, ArcelorMittal Nippon Steel and government-owned SAIL to produce more in the three months to December, both on the quarter-on-quarter and year-on-year bases. For example, JSW’s third quarter production of 5.35 million tonne (MT) was up 6% on the previous three month output. As for Tata Steel, there was a rise of 1.5% QoQ in crude steel production to 4.80 MT in the December.

Improvements in steel production and deliveries are made possible by efficient movement of raw materials from mines and ports and despatch of finished products from mills, both in very large volumes by normal operation of rail, road and water transport.

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This, however, was not the case in 2020 when Indian crude steel production, according to the WSA, at 99.6 MT was down 10.6% over 2019. Logistics were in disarray and mobilisation of manpower became an insurmountable challenge. Domestic demand contraction during the first Covid-19 lockdown found local steelmakers becoming aggressive exporters to clear stocks. The country’s finished steel exports during 2020-21 were a record 10.785 MT, against 8.3 MT in 2019-20. Exports of semi-finished steel were up an impressive 133% at 6.6 MT.

At the same time, however, the country was required to import 4.75 MT of some high grade steel for which domestic capacity needs to be built. Hopefully, the production linked incentive (PLI) scheme for the industry will lead to filling capacity gaps in speciality steel and also lead to enhancement of production from 18 MT to 42 MT in five years. The scheme, for which the government has made an outlay of Rs 6,322 crore, hopefully will incentivise the industry to make an investment of at least Rs 40,000 crore to build speciality steel capacity.

But ahead of this, Tata Steel and JSW Steel are strengthening their R&D and technology prowess to be able to make import substituting steel. Tata Steel says: “Backed by strong R&D, we have launched several value-added products. We forayed into advanced steel grades for future mobility needs and are developing alternatives to imported steel grades in construction segments.”

Similarly, as JSW Steel is working to raise capacity to 37.5 MT by 2024-25 from 28 MT, development of grades of steel for which the country remains dependent on imports remains a focus area. Last year, the company introduced quite a few new grades of steel, including high strength low alloy steel and galvanealed ultra low carbon grade for automotive OEMs as it launched other new products, including electrical steel grades for general engineering application.

In the meantime, steelmakers are drawing comfort from the Reserve Bank’s observation that the trajectory of Omicron found in the third wave will not adversely impact the aggregate demand condition that is to remain resilient. However, the ones engaged in building new capacity through either greenfield or b rownfield route have once again got to put up with the challenge of mobilising casual migrant labourers at worksite. This is because Covid related curbs imposed by various state governments are impinging mobility across the country. Be that as it may, CEOs of major steel groups have confirmed that health issues have not impacted demand and production of the metal.

On the contrary, the earlier suspended steel demand is now being realised. The steel ministry’s forecast of 2021-22 production and demand being 120 MT and over 100 MT, respectively, is more than likely to be proved right.

A point of concern, as we go forward, will be the behaviour of steel prices which peaked in October-end but started softening since December. The 12 to 14% fall in hot rolled coil prices from the peak no doubt has got to do with retreat in prices of the two major steelmaking ingredients, iron ore and metallurgical coal. However, the fuel, which works as a reductant in iron making process, bought at high October prices is still in use here. The Argus premium low-volatile hard coking coal index was $432.35 a tonne, cfr India on October 21 after climbing a record high of $437.75 a tonne on September 23.

Correction in raw materials prices is linked to fall for the first time in six years in China’s steel production to 1.03 bn tonne in 2021 as Beijing steps us efforts to curb emissions. Under government direction, Chinese steel output may further contract in 2022. For environmental considerations, South Korea, too, is reducing steel output.

A former FT correspondent, the author is now India correspondent for Euro Money publication,Metal Market Magazine

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