The domestic steel demand in India has recovered in the past three months and is back at the pre-COVID levels largely due to an increase in demand from automotive and white goods.
Though the demand for steel from the construction segment still remains low, it is also likely to recover post the monsoons. At the same time, higher regional prices and tight domestic supply due to higher export bookings by domestic steel mills have resulted in an increase in prices of Indian hot rolled coil (HRC) steel (flat steel prices have risen by 15 per cent in the past two months and are above 9 per cent above pre-COVID levels i.e., March 2020).
As per a report by Motilal Oswal, with higher steel prices and lower coking coal prices, margins of primary steel producers in India remain strong and there are signs of domestic steel demand recovering gradually in the country. The report also highlights that India’s finished steel consumption is recovering gradually, after witnessing 85 per cent YoY (Year on Year) decline in April 2020. At the same time domestic consumption has been improving gradually, supported by the unlocking of the economy post the lockdown in March and April.
The report also points out that domestic steel production has also been on the rise due to improved capacity utilization. The crude steel production has also been improving in line with domestic demand, following 64 per cent YoY decline to 3.1 metric tonne in April 2020. It improved by 5 per cent MoM to 8.5mt in August 2020 and was down just 4 per cent YoY, supported by higher exports.
Interestingly, India turned to a net exporter of steel during April-August with net exports of 4.0mt vs net imports of 0.9mt in same period last year. However, with improving domestic demand and higher steel prices, domestic producers have lowered exports. It is expected that there may be a dip in steel exports in the coming months. Though domestic steel prices went down in June 2020, they have recovered due to multiple factors such as a recovery in the domestic steel demand, higher exports leading to low inventory buildup, restocking of demand at the dealers end and improving regional steel prices.
It is expected that a rise in domestic consumption will help all the major steel players in the country, though the JSW Steel's volume was impacted by lower domestic demand in the 1QFY21 and the spread of COVID-19 at its Vijayanagar plant in Karnataka, which affected production recovery in the auto segment demand bodes well for the company as it contributes around 15 per cent to its volumes in a normalised scenario. Similarly TATA Steel's India margins is expected to be strong in the near term. Robust integrated domestic operations with captive iron ore availability is expected to be positive for TATA Steel.
On the other hand, it is expected that SAIL’s margins will improve, supported by better realization. Motilal Oswal estimates that volumes are also expected to grow further supported by ramp up in under utilised capacities. Besides that improved pricing, lower coking coal costs, and better operating leverage is expected to help this steel major. It is expected that the SAIL margins will be better in the second half of FY21 on the back of improved pricing and operating leverage benefits.
As per a report by CRISIL sometime back, India had turned net exporter of steel to China for the first time in several years, with 69 per cent of semi-finished steel and 28 per cent of finished steel heading there between April and August 2020. The CRISIL report stated that exports helped large and primary steel steel makers through the lockdown months, with 60-80 per cent of their total production between April and August finding its way to various destinations, with China leading. At the same time the crude steel production had fallen to a lower 27 per cent on-year despite a massive 38 per cent fall in domestic demand from April to August 2020.
As per Brickwork Ratings, ever since the lockdown was lifted from July 2020 onwards, steel mills have increased steel prices by around 90 $ per tonne in the past three months. A further price hike is possible as domestic prices are still cheaper by around 7-8 per cent, compared with imported steel prices.
"The steel ministry has proposed incentives of around Rs 3,345 crore to boost the domestic production of various grades of steel that are largely imported to meet the local shortfall. While few sectors, such as automotive and domestic appliances, are showing encouraging signs of demand revival, going forward, infrastructure, construction, and real estate will play a crucial role in further driving demand. Larger steel players have made good progress on the digital front with technologies such as the digital twin of a blast furnace for the optimisation of operations in real time; smaller units are still lagging behind and need to adopt digitization as a key driver for sustainable growth," Bal Krishna Piparaiya, Senior Director- Ratings, Brickwork Ratings told THE WEEK.