Indian steel industry loses out to cheaper imports

Sometime early in the last fiscal year, Mumbai Port Trust suddenly discovered that vessels containing steel shipments from countries such as China, Japan and Korea were seeking permission to dock. The port obliged and the trend continued all year.

By the end of the fiscal year, the port, among those handling the bulk of steel imports into India, saw its incoming iron and steel shipments rise to 4.1 million tonnes (mt) from 1.9 mt, a 117% jump, the highest in three years.

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While the port had no reason to complain about the rise in traffic, domestic steel companies cried hoarse. And their ordeal is far from over.

But why this sudden interest in the Indian market from these countries?
While shipments from Japan and South Korea are nothing new as steelmakers there take advantage of free trade agreements (FTAs) with India, making their exports duty-free, it is China that is causing concern.

“Japan and South Korea are largely exporters of automotive-grade steel, which is not produced extensively in India, and they have been exporting even earlier. But China exports hot-rolled coils which compete directly with us; this year, they have increased their exports by a huge margin,” said T.V. Narendran, managing director, Tata Steel Ltd, on the sidelines of a press conference on 21 May.

Tata Steel, with a domestic capacity of 10 million tonnes per annum (mtpa), manufactures hot-rolled coils (HRCs) which are largely used for manufacturing automotive panels and white goods such as television sets, refrigerators and washing machines.

According to the joint plant committee (JPC), a statistical body under the ministry of steel, in fiscal 2015, India imported 9.3 million tonnes (mt) of finished steel, 71.1% higher from a year ago, while it exported a mere 5.5 mt.

“A majority of this incremental import was from China. Any further jump in imports from here on is going to be a major concern for steel companies in India,” said A.S. Firoz, chief economist, economic research unit, JPC.

India’s domestic steel production for sale in the same period was 90.5 mt, 3.3% higher than a year ago. The country’s consumption in April-March 2015 was at 76.3 mt, 3.1% higher from a year ago, according to JPC data. This rather large gap is explained by the fact that 1.45 million tonnes is retained as inventory by steel companies. Then, a significant quantity is counted twice—that is, steel bought for value addition such as galvanisation, and then resold in the market as premium steel. This double counting needs to be subtracted, putting steel consumption at 76.3 mt.

Imports from China rose by almost 70% in the last financial year due to two factors—first, Chinese steel prices are much lower than Indian steel prices; and two, if an Indian importer intends to import steel products from China or any other rouble-FTA country with the end-use of eventual exports, they are also exempted from import duty. This makes lower-priced Chinese steel preferable to steel from Japan, South Korea or even domestic steel, Firoz said.
He added that the rising imports from China is a trend seen never before, and is likely to continue in the current year if April imports are any indication.

“Chinese steel consumption, seen at 711 mt, is expected to come down 0.5%. However, Chinese steel production has not come down; in fact, there has been an incremental 7 mt of steel capacity added in calendar year 2014,” said M.V.S. Seshagiri Rao, joint managing director, JSW Steel Ltd, at a company press conference on Friday. A major part of this incremental steel capacity is finding its way to India, he added.

According to the World Steel Association, a global steel lobby based in the US, the demand for steel globally is expected to grow at a rate of 0.4% in 2015 and 1.4% in 2016. This is against a 5-6% growth in demand in emerging countries such as India.

Narendran said he expects the Indian steel industry to match the growth rate of the country’s gross domestic product (GDPThe gross domestic product (GDP) is one of the primary indicators used to gauge the health of a country's economy. It represents the total dollar value of all goods and services produced over a specific time period; you can think of it as the size of the economy...), which was 7.5% in the December quarter. The mismatch in growth rates of supply and demand put downward pressure on prices and make it a buyer’s market. But the growing demand continues to be attractive to exporting countries as their products come at a bargain.

“Prices of Chinese flat steel products, which now meet the quality standards of established Indian companies, are usually 15% lower than Indian steel prices, thereby making imports very attractive. This is true of imports from countries such as Russia and Ukraine, too,” said Vivek Gupta, vice-president, Indian Chamber of Steel, and a leading steel dealer in Mumbai.
While lacklustre Indian demand is keeping prices of steel in check, a lower exchange rupee-rouble exchange rate and tensions between Russia and Ukraine are making India a preferred destination for exports from these countries.

“Currently, the landed cost for China imports is 15% cheaper than India’s domestic prices. Russia has started getting closer to this due to favourable currency rates. Another important issue is that domestic producers change their product focus and their pricing, with the slightest change in demand. This makes them unreliable suppliers,” said another dealer of flat steel products in Mumbai.

“Indian importers say that the low cost of production in both countries (Russia and Ukraine), the devaluation of the rouble, along with a decline in domestic demand in Russia and Ukraine, made it possible for these countries to export steel to India at competitive prices,” said Charlotte Rao, associate editor, steel, Platts, a leading global commodity information provider.

The Russian rouble fell from 33.72 per dollar in June 2014 to 69.47 per dollar by January 2015. It has started improving since then, but it was still at 50.39 per dollar as on 26 May.
As of 16 April, Indian hot-rolled steel prices stood at Rs.39,681 per tonne or $627 per tonne. Prices of HRCs from China and Russia were significantly lower. According to Bloomberg, HRCs from China were priced at $387 per tonne. Even after adding shipping and transportation costs and export duty, the price added up to around $520 a tonne. Two dealers in Mumbai said Russian prices were similar to those of Chinese imports for the past few months.

The dealer of flat products said the influx of Chinese and Russian steel shipments had eaten into the market share of established Indian companies, with several end-users such as real estate companies now demanding low-cost imported steel.

This has put stress on the balance sheets of hundreds of Indian steel companies, dominated by the big three—Steel Authority of India Ltd (SAIL), Tata Steel and JSW Steel.
JSW Steel reported an 87% drop in its consolidated net profit for the March quarter to Rs.62.38 crore from Rs.482.83 crore in the same quarter last year. Tata Steel posted a loss of Rs.5,674.29 crore against a net profit of Rs.1,035.87 crore in the three months ended 31 March 2014. Net sales dropped 21% to Rs.33,336.81 crore in the quarter ended 31 March 2015 from Rs.42,017.63 crore in the year-agoperiod. SAIL Ltd is yet to report its financial results for the March quarter.

According to data from the Corporate Debt Restructuring (CDR) Cell, as on 31 March 2015, of the Rs.2.86 trillion in loans being restructured, 19.7% or Rs.56,443 crore worth of loans came from the iron and steel sector.

With the rupee dipping to Rs.63.23 per dollar in the current fiscal from an average of Rs.61.15 per dollar last fiscal, domestic steelmakers could get some respite. “This is a saving grace as imports are a little expensive for big trading houses in India now. But India will still not go back to its coveted status of being a net exporter of steel in the current year,” said Firoz.

While Mumbai Port Trust rejoices over the traffic staying high in the current fiscal year as well, the Indian steel industry is bracing for a long struggle ahead.

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