Indian Steelmakers May Be Turning A Corner. Here’s Why

But analysts and companies expect a revival soon.

Here’s why the next few quarters may be better for steel companies than previous two.

Higher Utilisation Levels

Utilisation levels of the steel industry grew since 2016 on the back of limited capacity addition and revival of demand. Analysts said the levels are expected to rise further between FY20 and FY23.

The utilisation level of the industry, which stands at 83 percent, is expected to rise to over 85 percent in 2020 and beyond, Kotak Institutional Equities said in a report. VR Sharma, managing director of Jindal Steel and Power Ltd., told BloombergQuint that it could rise above 90 percent, led by limited capacity addition and increased demand from the construction sector.

Revival In Demand

Lower domestic demand has been the only differentiating factor between the current slump in steel demand and the ones witnessed in 2009 and 2016, according to an analysis by BloombergQuint.

A slowdown in construction activity on the back of a general election and an extended monsoon and the worst slump in the automobile sector in over two decades hit demand.

Yet, Sharma expects the construction sector to significantly contribute towards steel demand revival after four years of subdued growth as the government focuses on affordable housing and sets up a housing fund to revive stalled projects.

The automobile sector, too, would contribute to demand revival, he said, as most of the ambiguities pertaining to the introduction of electric vehicles and Bharat Stage-VI emission norms and its implementation are out of the way.

Limited Capacity Addition

Capacity of around 15-18 million tonnes per annum is expected to be added over three years in India at a time when growth in demand would overtake supply, according to BloombergQuint’s calculations.

Steel production is expected to grow between 3-5.5 percent between 2019-20 and 2022-23, while consumption would rise between 4 percent and 6 percent in the same period, data from SteelMint, a publication that provides information on the iron and steel industry, showed.

Even that capacity addition would be spread out, with Steel Authority Of India Ltd. indicating no timeline for its 4.3 million tonnes per annum expansion plan, according to the rating agency ICRA. State-run NMDC Ltd. may add 3 MTPA in capacity by FY23, while industry leaders JSW Steel Ltd. and Tata Steel Ltd. may add 6 MTPA by 2020 and 5 MTPA by 2021, respectively.

Domestic Prices Recover

Tracking the recovery in global steel prices, domestic prices of hot-rolled coil steel rose nearly three percent over the previous month to Rs 1,128 per tonne in November.

The uptick in global prices was led by winter curbs on production of the alloy in China—the world’s largest steel producer.

Shanghai steel rebar futures, the benchmark, in the world’s second-largest economy rose for the fifth straight week—the longest run since February, amid measures taken by the country to combat air pollution. Steel production in Tangshan, the largest steel-producing city, was restricted since Nov. 19 following the start of an “anti-smog response”.

And domestic producers can expect price tailwinds as exports for January are being booked at higher levels and U.S.-based producers have hiked prices by $100 per tonne on average in the past month, Edelweiss Securities said in a recent report.

Ore Supply Woes

Companies fear disruption in the supply of iron ore—a key raw material for steelmaking—once the Odisha government conducts auctions for 33 iron ore mining blocks in 2020. That’s because the leases for these mines, which contribute nearly a third of India’s iron ore output, are to expire in March next year and companies anticipate delays of up to two years over securing clearances from various government departments once the licences are allotted to them. Those fears have seemingly tempered as global iron ore prices have eased.

Kotak Institutional Equities agreed and said in a report that it expects only six months of production stoppage at these mines. Any ore shortage, it said, can be met by:

• Inventory sales of up to 15 million tonnes.
• Captive mines that can provide up to 10 million tonnes as the government has allowed SAIL to sell its 70 MTPA inventory of sub-grade iron ore and 25 percent of its previous year iron ore production.
• Reduction in exports that can free up to 15 million tonnes.

There would be minimal impact even if the auctions were to stick to their timelines as merchant miners may ramp up output before the deadline as the industry faces high ore stockpiles of 150 million tonnes, according to Crisil.

CARE Ratings expects the industry to face a surplus iron ore capacity of 21.3 million tonnes in 2020, under the following assumptions:

• 10 percent increase in output from Odisha mines
• No output from NMDC’s Donimalai mine in Karnataka
• 10 percent increase in output from other mines in Karnataka supported by boosting production from JSW Steel’s captive iron ore mines.

Trading At Discount

Stocks of metal companies trade either at a discount or near their five-year average valuations. The discount is the steepest for SAIL and the least for Tata Steel. These are valuations from which the companies have bounced back historically.

Yet, the consensus of analysts tracked by Bloomberg has target prices for most steel stocks, barring JSPL, that’s lower than their current market prices.