What demand drivers will impact Indian steel consumption in H2?

What factors will drive steel demand in the second half of the fiscal year of 2021-22 (FY22)? The Indian steel industry has already been plagued by challenges of weak domestic demand, large inventory build-ups, on and off and Covid-induced supply chain bottlenecks. These are but a few factors that have put pressure on prices in the last one year, preventing rapid production ramp-ups. In fact, the secondary sector has been often forced to cut production or opt for temporary shutdowns since the onset of the pandemic while large steel companies have had to focus on managing their free cash flows, working capital and lower capex. That apart, high power costs and raw material availability have also made the segment less competitive historically.

However, after a brief lull in the first half of FY'22, the Indian steel industry is expected to bounce back to a healthy growth phase in the second half FY'22. Already we have seen the GDP bouncing back in Q1 FY'22 with a growth rate of 20.1% as against the contraction of 24.4% witnessed in Q1 FY'21. Sectors that have witnessed double digit growth in Q1 FY'22 are: Automobile (113%), Mining and Quarrying (18.6%), Manufacturing (49.6%), Electricity, gas, Water supply & other utilities (14.3%) and construction (68.3%).

There are a few demand drivers that the industry is looking at to spearhead its growth in the days to come.

1) Construction

This includes residential, commercial and industrial, and infrastructure projects like transport networks and utilities. The share of construction in steel demand is around 60%.

Products required: Rebar, H-beams, pipes, sheet pipes and coated sheets.

Prospects: There is a strong focus on logistics infrastructure like Sagarmala and Bharatmala, highway construction, freight corridors, affordable housing and power transmission projects from the government.

Consumption in construction is expected to reach 138 million tonnes (mn t) by 2030-2031. The fourth quarter generally sees a push in project awarding.

2) Capital goods

This sector accounts for about 15% of India's steel demand and steel is consumed in manufacturing rotating and electrical equipment including cables, transformers and electric motors among other products.

Products required: Steel plates, sheets, pipes, bars, special and highly functional steel.

Prospects: Key demand drivers include aging equipment that require replacement, massive power capacity additions, the domestically Manufactured Iron & Steel Products Policy (DMI&SP), the aerospace and Defence sectors, and electrical equipment market.

Consumption in this segment is expected to reach 50 mn t by 2030-2031.

However, this is a leading import area because of low investments in technology and talent. Also, this sector is dependent on economic growth, construction and government spending.

3) Automobiles

This sector consumes around 10% of steel across vehicle categories.

Products required: Surface-treated sheets, advanced high-strength, galvanised and coated sheets, specialty steel with high tenacity and mechanical strength, steel plates, sheets, pipes and bars.

Prospects: There are short-term issues like chips shortage, the pandemic impact and production cuts. Also, the domestic steel industry does not have the capability to manufacture automotive-grade steel, resulting in high imports for this consumer sector.

4) Intermediate products

This segment has around 6% share in steel consumption and includes manufacturing of products like gear boxes, bearings, pipes, drums and barrels.

Products required: Sheets, special steels.

Prospects: The sector is closely linked to the auto, oil and gas and packaging segments. Overall demand is not so strong going forward because of the automotive weakness.

6) Consumer durables

The share in consumption is around 5% and includes white and yellow goods.

Products required: Sheets, strips, plates and stainless steel.

Prospects: Demand, going forward may be moderate since it is linked to consumer spending power which has taken a hit due to the pandemic.

7) Railways

Key demand is in the areas of wagons, coaches and track infrastructure. The share in steel consumption is 3%.

Products required: Steel metals, head hardened nails, special corrosion resistant steel for tracks.

Prospects: Drivers include rising passenger and freight traffic, network electrification, revamping of rail infrastructure, and programmes such as dedicated freight corridors, mass rapid transit system, the diamond quadrilateral network of high-speed rail.

An investment of INR 12-15 lakh crore under the national infrastructure pipeline is planned and demand looks strong.

8) Government initiatives

These play a key role in creating demand. Under the Union Budget 2020-21, the government allocated INR 39.25 crore ($5.4 million) to the Ministry of Steel with a focus on infrastructure and manufacturing with enhanced outlays for Defence, railways, roads, transport and highways.

9) Exports

This segment contributes around 30% share in steel production but offers higher realisations since margins are higher. Exports come to mills' rescue when domestic demand prospects turn bleak.

Products required: Across categories of long and flat products, raw materials.

Prospects: Export prospects are closely linked to global dynamics and mills have to go by the macro ebb and flow. But, overall, exports are a dependable source of revenue despite short-term hiccups. South East Asia, Europe and China are not buying now but the scenario may change from the fourth quarter onwards when lockdowns ease in SE Asia, European traders resume buying for Jan'22 and China traders have more clarity on policy aspects.

Outlook

The key challenge for the mills now is to restore profitability and cash flows, before further capacity augmentation can be undertaken.