The Recent Past
The top five steel makers account for more than 70% of the market share in India. The selling prices are market determined. Being in a commoditized business, steel companies usually compete on the basis of production capacity, economies of scale, and access to raw material, among others.
The price of steel had reduced by about 50% between 2011 and 2015. Crude steel production capacity rose from 90.87 million tons per annum (MPTA) in 2011-2012 to 121.97 MPTA in 2015-2016, translating into a CAGR of 9%. Crude steel production increased at a CAGR of 5% from 74.29 MPTA in 2011-2012 to 89.79 MPTA in 2015-2016. Steel production stood at 95.6 MPTA as of 2016, a 7.4% y/y increase.
The difference between the capacity and the actual production was mostly due to lower demand for Indian-made steel products. The lower demand was due to the cheaper availability of Chinese steel products. China would dump steel at significantly lower prices, due to excess capacity and lower demand in its own domestic industry. The devaluation of yuan made them even more price competitive. The lower demand meant lower sales realizations and capacity utilization, while higher capital-intensive fixed costs and debt burden (average debt/equity ratio of Indian steel companies is in the range of 2.0-2.5x) typical to steel companies, remained the same or worsened.
The majority of the steel companies in India reported negative sales and EPS growth rates. Approximately 50% of the listed steel companies reported losses for the December 2016 quarter.
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Anti-dumping duty: Japan and South Korea primarily export automotive-grade steel to India, which do not directly compete with several of the Indian steel companies’ products. However, the Chinese steel exports to India, which includes hot-rolled coils and wires, directly compete with the Indian-steel makers. Following the recommendations made by the Directorate General of Anti-Dumping and Allied Duties (DGAD), the Department of Revenue (India), in November 2016, imposed an anti-dumping duty on certain Chinese steel products for six months to protect domestic steel producers. The GOI also reckoned that this is a WTO-compliant protectionist measure. In February 2017, the anti-dumping duty was extended to five years. From Q1 2017, the positive impact of the anti-dumping duties will start reflecting on the income statements of some of the Indian steel makers.
National Steel Policy 2017: India is currently the third-largest producer of steel after China and Japan, as opposed to its eighth position in 2003. Despite a low per capita steel consumption of 61 kilograms (India), compared to the global average of 208 kilograms, India is on track to surpass Japan as the second largest steel producer. The Union Cabinet passed the National Steel Policy 2017 in early May 2017, which will mandate government projects to source steel products domestically.
The policy also aims to triple the steel production capacity by 2030. To achieve the targeted 300 million ton steel-making capacity, the Government estimates an additional investment of INR 10 lakh crore by 2030-2031. It aims to achieve a per capita steel consumption of 160 kilograms by 2030, by making and promoting investments, which will increase the demand for steel.
The GST impact: Typically, iron ore, coal, and coking coal form about 60-80% of the total raw material costs in Indian steel manufacturing companies. The GST on such raw materials like iron ore and coal will be 5%, come July 2017, as opposed to the current 18%. The lower transportation (freight inwards) and raw material costs due to GST will improve the gross margins of steel companies.
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