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Indian steel surges ahead but needs demand to catch up

Indian steel market update: A Platts news and analysis feature

March 08, 2017 - By Charlotte Rao

India is poised to become the second-biggest steel producing nation in the world after China over the next 12 to 18 months, as steelmakers continue adding capacities in anticipation of upcoming demand. This is despite the slow pace of current steel consumption in the country.

India’s overall finished steel output over April-January was only 82.87 million mt, equivalent to 68% of installed steel capacity of 122 million mt/year.

India's finished steel exportsIndia’s steel ministry is drafting a new steel policy to raise the country’s steel production capacity to 300 million mt/year by 2030-2032, deftly pushing back the previous target of reaching this output by 2025, which industry insiders had long derided as impossible to achieve.

A number of private and state-owned mills have almost doubled their steelmaking capacities over the past five years. The front runner was India’s largest steelmaker, state-owned Steel Authority of India Ltd, which increased crude steel production capacity to 20 million mt/year from the previous 13 million mt/year.

But the increase in demand for steel is struggling to keep pace with the rise in capacity. Recent data from India’s Joint Plant Committee shows that during April 2016-January 2017, SAIL’s overall finished steel output rose by an impressive 15.6% year-on-year, but only reached 9.95 million mt, way behind installed capacity of 12 million mt/year.

While SAIL management aims to produce about 15 million mt of finished steel during the fiscal year ending March 31, company officials estimate real output at about 13 million mt.

Moreover, company management has indicated that output will rise by a further 20% during the coming financial year to 17 million mt. SAIL aims to complete some expansions in the year that will lift finished steel capacity to 20.2 million mt/year.

Analysis continues below...

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Meanwhile, ramping up previous expansions continues to be a challenge, as S&P Global Platts found out during a recent visit to the company’s newly-refurbished 2.5 million mt/year IISCO Steel Plant at Burnpur in India’s eastern state of West Bengal.

The completely overhauled plant with new facilities was officially inaugurated in May 2015 but continues to produce below capacity.

The Burnpur plant was targeted to achieve 80% capacity utilization by March 2016, as Platts was told by mill officials upon inauguration. However, during April-January, the Burnpur works produced only 1.14 million mt, Joint Plant Committee data shows, which annualizes out to just 1.5 million mt.

Burnpur hosts a new 4,160 cubic meter blast furnace, two 150-mt converters, a battery of seven-meter tall coke ovens. Downstream facilities include two 6-strand billet casters of 1.67 million mt/year, capacity a 830,000 mt/year 4-strand bloom-cum-beam blank caster, a 500,000 mt/year wire rod mill, a 750,000 mt/year bar mill, and a 600,000 mt/year sections mill.

SAIL's steel expansion program

Upcoming expansions at SAIL include a new blast furnace of 4,060 cu m at the Bhilai Steel Plant in the eastern state of Chattisgarh to be commissioned by April. This will raise crude steel capacity at the plant to 7 million mt/year from the current 5.06 million mt/year, a SAIL official said.

The 2.8 million mt/year BF was to have been started last August. It was originally scheduled for August 2015.

Expansion activities at Burnpur were delayed due to challenges acquiring land and regulatory and environmental permissions, resulting in stressed balance sheets. For instance, the local villagers had built a religious shrine for a local deity on the 900 acres of land that was identified for the plant’s construction. The villagers demanded jobs in return for removal of the shrine. Negotiations stalled the process of construction.

Recently, weak demand and the high cost of coking coal inputs pressurized profit margins. Early this month, SAIL reported a quarterly loss of Rupees 79.6 billion ($1.2 billion), against a loss of Rupees 5.67 billion recorded during the preceding quarter.

Ambitious expansion programs

Meanwhile, expansions undertaken by private steelmakers reflected efficiencies in scaling up operations, as witnessed by Platts during a visit to JSW Steel’s Vijayanagar plant in the southern state of Karnataka.

During the year ended March 2016, JSW completed expansion activities at all three of its integrated steelworks in India, raising steelmaking capacity to 18 million mt/year from the previous 14.3 million mt/year.

The 12 million mt/year Vijayanagar steelworks, which is the single largest steel plant in the country based at one location, saw its capacity raised to 12 million mt/year from 10 million mt/year during the year ended March.

JSW. Source: Platts
JSW. Source: Platts

Capacity was similarly raised at the Dolvi works in the western state of Maharashtra to 5 million mt/year from the previous 3.3 million mt/year, and at the Salem works in the southern state of Tamil Nadu to 1.25 million mt/year from the previous 1 million mt/year.

The company has further plans to expand steelmaking capacity to 40 million mt/year by 2025, its deputy managing director, Dr Vinod Nowal, revealed to Platts at the Vijayanagar works. The company plans to commission about 10 million mt/year of new capacity within the next five years.

The largest volume increase will be at JSW’s Dolvi unit, where an additional 5 million mt/year will be built to take capacity to 10 million mt/year. The Vijayanagar unit is likely to see 4 million mt/year added to raise the works’ overall capacity to 16 million mt/year. A further 1 million mt/year is planned at the Salem unit in the southern state of Tamil Nadu.

Other steelmakers are progressing capacity additions too. These include the second phase expansion at Tata Steel’s Kalinganagar unit in the eastern state of Odisha to add 3 million mt/year. India’s largest miner, state-owned National Mineral Development Corporation (NMDC), is currently in the midst of a 3 million mt/year greenfield expansion.

However, all these expansions have been planned while India’s present steel capacity of about 122 million mt/year is clearly underutilized. India’s overall finished steel output during last April-January rose by 10.7% on-year to 82.87 million mt – making for an annualized total of 99.4 million mt/year – while consumption inched up by 3.5% y-o-y to 68.89 million mt (or 82.6 million mt annualized).

Steelmakers such as SAIL, JSW and Tata in company statements issued early February, claimed that these expansions were planned in anticipation of upcoming steel demand likely to come from the various infrastructure projects planned by the Indian government.

The mills’ argument goes that New Delhi’s demonetization drive launched last November compelled citizens to surrender to banks their unreported stashes of currency notes of Rupees 500 and 1,000, since these notes were made redundant with immediate effect.

As the government begins to utilize the funds thus collected, this bounty can fund an increase in public expenditure in infrastructure projects, they claim.

The draft National Steel Policy 2017 aims to increase India’s per capita steel consumption to 160kgs by 2030-2032 from the current 61kg and turn the country into a net exporter by 2025-2026.

Fund allocations announced in the recent national budget for infrastructure building and affordable housing schemes are likely to help drive steel demand, provided they are implemented in a timely fashion.

India’s finance minister Arun Jaitley increased budget allocations for infrastructure projects by 13% over the present fiscal’s planned spend to Rupees 3.96 trillion ($59 billion). Similarly, allocations for rural housing were raised to Rupees 226 billion from the previous Rupees 150 billion and funding for urban housing was raised to Rupees 60.42 billion from the previous Rupees 50.75 billion.

“Plans have been announced; how and when they will be realized remains to be seen,” a Delhi mill official said. “A large number of infrastructure projects announced over the past few years are awaiting implementation for lack of funding,” warned Goutam Chakraborty, steel analyst with equity research firm Emkay Global.

India’s steel consumption will have to rise at a compound annual growth rate of at least 8% to be able to consume 300 million mt by 2030-2031, he estimates.

India's crude steel capacity

Setting sights on foreign markets

Meanwhile, Indian steel exports are rebounding as steelmakers chase more attractive prices overseas (while largely fending off import competition due to the minimum import price regime). “Export sales helped to tide over weak domestic demand,” a JSW mill official told Platts during the visit to Vijayanagar.

India’s finished steel exports during December soared by 92% on-year and by 12.8% on-month to 747,000 mt, according to Joint Plant Committee data.

The largest rise in December was seen in exports of galvanized and other coated steel products. Indian mills were also able to increase exports of hot rolled and cold rolled coils and sheets. During December, the country’s HRC exports surged by 94% m-o-m to 219,820 mt while CRC exports rose by 5% m-o-m to 160,370 mt.

Producers such as Tata, JSW and Essar Steel recorded growth in exports during the quarter ended December, as global steel prices began trending upwards. JSW recorded a 133% y-o-y rise in exports to 993,200 mt during the quarter ended December. Exports contributed about 21% of JSW’s total steel sales during the quarter.

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