Steel as a product is quite versatile and fundamental to our lives and is justifiably considered essential to economic growth. Consequently, for most of the past 50 years, the world has been producing increasingly more steel and sometimes more than was actually required – therefore promoting intense competition between its producers.
Countries like China, South Korea, Russia and Japan set up a production capacity which is far in excess of their own sustainable domestic demand. Their obvious ambition is to be global suppliers, but that left no space for any country to set up and produce their own.
So even if India’s domestic demand for steel was projected to grow, given the government’s emphasis on infrastructure and industrial sectors, the demand was met by the imports, rather than our own industry.
Furthermore, these imports happen to be extremely cheap as 1) the devaluation of the Yuan make Chinese imports more cost-effective, and 2) the excessive dumping of steel in the Indian market has caused a situation of excessive supply, which meant a sharp decline in the price of steel products.
Since our domestic industry has not able to compete with these price wars, the performance of the industry has deteriorated greatly in the past, causing heavy losses for these companies, from which they are still reeling. The big steel makers have had negative earnings that follow the addition of 30 million tonnes of capacity even with an investment of Rs.2 trillion since 2011 and the balance sheets of all these companies have been highly leveraged as a major part of investments came out of debt funding. In 2015, banks had to invoke strategic debt restructuring (SDR) and corporate debt restructuring (CDR) for a number of stressed steel makers, allowing creditors to convert to equity and this was when the financial industry had already given loans in excess of Rs.3 trillion to the steel industry.
Because of the unrestricted flow of imported steel, many of these companies were pushed to the brink of operational losses and capacity shutdowns by early 2016 and the industry ran the risk of probable terminal sickness.
The only probable solution was to take governmental support by way of protection, in terms of a combination of safeguard duties and minimum floor prices to prevent the importer from engaging in predatory practices. So in Dec, 2015, an anti-dumping duty—in the range of 5.3-57.4%—was levied on imports of cold rolled flat products of stainless steel and a 20% import tax on hot-rolled coils. 57.4% on China and a decreasing percentage on other steel exporters like EU, South Korea, South Africa, US and Thailand.
India also imposed a minimum import price (MIP) on steel products, in a range of $341-$752 per ton.
The imposition of duties did have an impact on the volume of imports (40% decrease by mid ’16) and the domestic steel prices, which happened to rise (because of the MIP). The domestic steel prices came very close to the price of imported steel, which helped Indian firms compete more effectively. They even impacted the shares of major steel makers (like Tata Steel, JSW, SAIL etc.) positively, for a brief period at least.
Categorically put, the problem of the Indian steel industry is three-way:
- market (low demand and high supply)
- high debts
- low prices.
The low prices due to imports were handled by the protectionist measures. Along with protectionist measures, Indian steel companies need two more things: bailouts and increase in production capacity.
For both, the government played a significant role. The government took bailout measures for the steel sector and gave them relief that the market couldn’t provide. It included bringing in international investors, giving national banks certain equity as redeemable preference shares and bringing in investors who would disinvest as soon as the companies would come back to health.
When the government realized that this wasn’t enough to help the injured sector, they brought in the new National Steel Policy in May, 2017. Since low demand was a major problem as domestic consumption had been anemic, the new Steel Policy focused on improving the demand by increasing government spending on defence, infrastructure, construction and railways and making it a condition to give the tenders to Indian steelmakers, barring some exceptions to the condition.
These efforts by the government to rein in the market did yield results. By the end of 2017, the industry did post a robust growth in production, and since the increase in production was still greater than increase in consumption, the industry posted doubled exports and declined imports. The fact that India is now a net exporter of steel, in 2018, comes as a good news from the macroeconomic point of view.
As for the individual companies reeling with high debts, some have been able formulate their revival e.g. Tata Steel and Jindal Steel, yet some have been declared insolvent and are proceeding for dilution. A brief about the defaulting companies:
The third problem of low prices which was in the interim handled by the protectionist measures (imposition of Anti-dumping duties and MIP), spiraled into a new issue.
By making foreign steel too expensive, domestic steel makers were able to raise prices, but higher prices, besides impeding importers, also pushed a number of other dependent variables (construction and infrastructure companies), steel processing firms and other SMEs into losses. It is estimated that for a 10% increase in steel prices due to a hike in anti-dumping or import duties, the cost of production of basic metal and non-metal products will increase by 5.4%..
Thus the imposition of trade tariffs on steel will immediately increase costs of production for all the industries relying on these inputs (e.g., cars, ships houses, etc.), making them less competitive in global markets and, therefore, hurting exporters.
(Source - https://www.dsij.in/article-details/ArticleID/23698/Steel-price-rise-impacts-margins-of-auto-industry)
Second, reducing import competition will have a direct negative impact on the productivity growth of the industry, in turn slowing down the wage growth of their workers. And, as it has been pointed out by many prominent economists, the slowdown in productivity growth is one of the greatest challenges all economies face.
2018 - The Way forward
Consistent efforts by the government finally led to good results for Indian Steel industry.India outstripped Asian industrial giant Japan to become the second largest steel producer in February as its crude steel output grew by 3.43 per cent to 8.434 million tonnes (MT) in the month against 8.296 MT of the latter, according to global steel body Worldsteel data.
But the effects on other industries also become visible:
Indian auto industry reported 9.4 per cent YoY growth in H1 FY18 period, with vehicle sales aggregating 1.27 crore. Though the revenue posted was a record high, the margins for the period were impacted significantly due to rise in steel prices, thereby affecting the bottomline growth.
Considering the circumstances, it is empirical that government cannot slack. With a recent dumping duty in USA, India’s steel exports might be in danger.
Now would be the time for Government and the industry to look for alternate ways of reviving growth, such as:
- Giving Infrastructure status to the industry, which would essentially help the steel manufacturers to raise capital for longer terms.
- Faster regulatory approvals
- Helping further consolidation in the sector. This would add trust and help consolidated companies get cheaper loans from PSU banks.