Viewpoint: Indian steel demand faces headwinds

24-December-2018

India’s steel demand growth may slow in the 2019-20 financial year that starts 1 April, as political uncertainty and problems in the financial sector weigh on infrastructure creation and consumer demand.

Finished steel consumption in April-September 2018 rose by a strong 7.8pc to 47.69mn t, driven mostly by government infrastructure spending. India’s BJP government has invested billions of dollars over the past four years to build and renew railways, bridges, roads, waterways and irrigation projects, supporting steel demand amid slower growth in the real estate sector. But construction investment growth slipped to 7.8pc year on year in the July-September quarter from 8.7pc in the same period last year.

Indian real estate growth has been hit by the government’s demonetisation policy. Growth in the sector was already slow, but has yet to recover from Delhi’s abrupt decision in November 2016 to remove 1,000 and 500 rupee currency notes from circulation, derailing India’s cash-driven economy.

The outlook for the steel sector is also clouded by federal elections due in April or May 2019. Although the BJP-led coalition looks to be on course to win or come close to a majority in parliament, moves by major opposition parties to forge alliances mean the election outcome is uncertain. A weakened central government could lack the authority to implement ambitious spending or infrastructure programmes and instead focus on social projects, such as food and farm subsidies or loan waivers for distressed farmers, which would not provide a boost to steel demand.

Bank debts loom

Issues in the financial sector could also threaten steel demand. Mounting bad debts at Indian banks and other financial institutions are curbing loan availability, while India’s central bank is expected to raise lending rates through 2019 to keep inflation under check. These factors could exacerbate India’s already high borrowing costs, hitting private investment in industry or the credit-sensitive real estate sector.

Tighter credit is also likely to affect car sales, which are already in a downturn. Vehicle sales fell year on year in July, August and September, before posting only a marginal 1.6pc increase in October. High fuel prices and tight credit have slowed auto sales, in a bad sign for steelmakers. Large Indian mills make a substantial amount of their profits from sales of flat steel products to automakers.

The steel sector may also have to contend with an increase in supplies, as the bankruptcy resolution process of five steel mills draws to a close. Three of these mills — Bhushan Steel, Electrosteel and Monnet Ispat — have already found new owners, while a joint venture between Luxembourg-based ArcelorMittal and Japan’s Nippon Steel and Sumitomo Metal has emerged as the highest bidder for Essar Steel, although it still requires approval from the bankruptcy court. Only one bankrupt mill, Bhushan Power & Steel, is still looking for a buyer through the process.

The five mills account for a combined 16pc of Indian steel capacity, and the new owners are likely to invest to remove production bottlenecks or add new capacity.

Export uncertainty

Indian steel mills typically export surplus production, but face strong competition in the regional market from their Chinese rivals. China’s domestic steel market was robust in 2018, lifting the country’s domestic and export prices and enabling Indian companies to remain competitive in the key southeast Asian and European markets.

But China’s steel sector is slowing. If the weakness extends through 2019, Indian mills could struggle to win customers in export markets as they run up against cut-price Chinese competition, pressuring domestic prices and profitability.

Source: ARGUS MEDIA