Indian steel industry to break free of perpetual cyclicality

The steel industry is cyclical in nature and steel producers' profit margins follow a similar peak-and-trough trajectory. India is a bright spot on the global steel map, with steel consumption in the country anticipated to rise at a rate of 7.5% in 2022, as per World Steel Association.

But the question remains whether the steel industry in India will ever come out of the cyclicality that characterises it by emerging as a continuously growing industry, as envisaged in the National Steel Policy 2017?

Acid test for industry

A cyclical industry is one whose operations and strategy are directly affected by the business cycle. These industries tend to grow during an uptrend in the business cycle and decline during a period of economic downturn. The steel industry is known for being cyclical and reflects overall market conditions--demand increases during an economic boom and plummets during recession.

From the perspective of equity analysis, cement, construction, steel and capital goods are all classic examples of cyclical stocks. The expected recession in the global steel industry is going to be an acid test for the industry in India; it would be interesting to see if domestic consumption continues its uptake and the industry is able to insulate itself from the international market.

The key to boom and bust lies in the demand market supplemented by eight major inputs that affect the industry, namely cost of capital, access and adoption of technology, productivity and capacity utilisation, demand, shortage or break in supply chain, input quality of raw material, the costs of logistics and dependence on exports.

The steel industry in India has battled each and all of the above-mentioned odds and NCLT has pretty much cleaned up the industry, with vital lessons for the industry as a whole as regards the need to quickly embrace new technology to ensure productivity and capacity utilisation. The key, therefore, lies in demand.

The National Steel Policy's principal focus is on demand. High credit rates have opened opportunities for steelmakers to plough back profits as capex and look for cheaper loans from offshore sources. Technology adoption has been happening fast and a long-term vision is inbuilt in the Indian steel industry that prods steelmakers to look for new product ranges and markets. The ability to absorb the recent export duty imposition shows the industry's promptness and agility in decision-making.

Enhancing steel consumption

However, the key is domestic consumption. Is the Indian steel industry finally emerging out of the vicious cyclicality that has defined it thus far?

In 2023, too, India's steel demand growth is expected to be the second highest in the world at 6% after Germany. The latter's steel demand growth should be higher at 7.6%. Germany, however, consumes one-third of what India consumes annually. Out of India's total annual steel consumption, around 90% is domestic consumption.

The National Steel Policy also limits exports to 20% as the key to enhancing domestic consumption. The policy correction was done by amending the General Financial Rules (GFR) from 'cost' to 'lifecycle cost' thus enabling material choice decision-making in favour of steel.

This went some way in boosting infrastructure spending by the Indian Government, thereby driving per capita consumption of steel. "For 2022, construction and manufacturing (in India) will likely be supported by infrastructure spending and a gradual revival in automotive production, with an expected improvement in semiconductor supply. Expected raw material supply constraints in the international market will result in higher domestic mining output and support the capital goods sector," World Steel Association has observed.

The disruption due to the Russia-Ukraine war and high input costs were effectively managed by the Indian steel industry. The focus has been on diversified usage of steel in the domestic market which added to enhanced demand.

Policy enablers

The steel industry had touched its lowest ebb in the period between 2014-16 but a holistic approach by adopting critical analytics and a continuous process of dialogue with all stakeholders enabled the adoption of a conducive policy framework. Extensive dialogues resulted in the analysis of critical issues that culminated in the National Steel Policy 2017 in line with the government's clarion call for Atmanirbhar Bharat and the intention to trigger growth rate and employment opportunity by focusing on infrastructure development.

By Aruna Sharma

The writer is a practising development economist and ex-Secretary, Ministry of Steel, GoI