By Sohrab Darabshaw
So what country will be the one bright spot in the global steel market this year?
It's no secret that for the last four years, the global steel sector has been floundering, and it's been tough for producers to find any silver lining. Now, with 2016 upon us, the one question that's been asked by everybody, even as prices plunge and the Chinese economy shows no signs of a recovery, is, what now? The unanimous response from around the globe is India.
Can Indian steel demand buoy the sector this year? Source: Adobe Stock/Jovanning
There's a lot riding on India, both domestically as well as internationally. Ironic, since both China and India are the world's top two emerging economies, and with the collapse of China, the world turns to its neighbor India, in these times of stress.
India to the Rescue?
Edwin Basson, Director General of the World Steel Association (WSA) echoes these voices in this article in the Gulf News where he was quoted as saying that there was really only one location that had the long-term potential to pull the global steel market out of its current slump, and that was India.
The over $100 billion Indian steel industry is placing bets on rising domestic demand in 2016, even as local players try to combat cheap imports. Last year saw a deflation of global commodity prices, including steel and other industrial metals. This affected the Indian market, like all of the others, leading to severe pressure on the operating margins of steel plants.
Ravi Uppal, Managing Director and Group CEO, JSPL, believes that the Indian steel industry would be able to recover and show growth in 2016. He told the Economic Times that even if the industry could grow at 6% to 7%, that would translate into additional demand of 4 to 5 million metric tons of steel, which is good news for Indian steel. However, this will only be possible if adequate precautions are taken against reckless dumping by the foreign producers.
Can Indian Steel Demand Deliver?
Spoiler alert! Even if there's unanimity on India being in the sweet spot this year, one big question remains: When will the world's largest democracy deliver? Yes, it has a huge unfilled demand and an even bigger economy, but when will the benefits start accruing? We have long heard of the potential of mass industrialization in India.
In 2015, India became the third-largest steel producer globally, bypassing the US, with demand between April and November going up by 5.3%, and production by 2.4% in the same period. India is now positioned just after China and Japan as a steel producer.
Yet, prices of some steel products in India hit a 10-year low in 2015, no thanks to the cheap exports from China, Japan and South Korea.
Financial Pressure Via Dumping
This has also jeopardized billions of dollars in loans raised by domestic steel producers for capacity expansion. Already, the steel sector is a leading contributor to the bad loan woes of Indian banks, and some sector experts fear that this would come in the way of capacity addition.
Global ratings agency Moody's expects profitability of Indian steel firms to be lower this year as compared to the previous years, but the country would be better placed than its peers in Asia.
The government still seems confident that India will, indeed, overcome many of these hurdles. Recently, Steel Minister Narendra Singh Tomar told news agency Press Trust of India that the steel industry was "tense" not just in India, but in the world over. In his opinion, India is better placed this year compared to other countries since both production and demand are likely to go up.
Increased Production... and Increased Tariffs
India's top three steel producers - state-run Steel Authority of India Ltd. (NYSE:SAIL), and private players Tata Steel and JSW Steel - are expected to ramp up production capacity in the next two years to capture domestic demand growth propelled by demand in the automotive, consumer durable goods and construction sectors.
Of late, the Indian government has taken steps to protect the domestic steel industry, including raising import duties on long and flat products.
If it's as clear that 2016 will be the year of India vis-à-vis steel, as some predict, will the country live up to global expectations and deliver or will it be a case of wasted opportunity?