23-12-2017

India overcomes policy hurdles to strengthen steel sector in 2018-19

Just over a year ago, delegates flying into Mumbai to attend the S&P Global Platts Steel Markets Asia conference were confronted by enormous queues at the sole ATM near the terminal exit gates.

“Surely there are other ATMs in Mumbai,” your correspondent thought. What no one realized at the time was that we had stumbled upon India’s extraordinary demonetization experiment. It resulted in some 86% of cash liquidity in the form of certain Rupee notes being taken out of circulation in a bid to eradicate the country’s “shadow economy” and generate more tax.

Fast forward to this year’s steel conference in November and there were no such dramas to overcome. Instead, Indian delegates and mill officials were able to look back on the impact of both demonetization and the introduction of the new goods and services tax in July this year.

From an economic perspective, both were vital measures rolled out by the Modi government to speed up growth. From a steel market perspective, demonetization and the GST took some of the heat out of trading for several months. In the case of the former, severe liquidity shortages stifled demand, while the latter generated confusion about how the new tax would be applied to existing inventories.
Steel officials at the conference said steel markets had subsequently recovered and were back to normal. In contrast to the likely reaction in many other countries, Indians generally accepted the temporary pain if the long-term gain would be beneficial to the nation.

Another major policy move by the Modi government — one that received less coverage but which has far greater implications for domestic steel demand — was the October announcement of a $32.5 billion recapitalization of India’s state-owned banks. Public sector banks comprised 70% of total lending between 2008 and 2014, according to Indian finance minister Arun Jaitley.

The private sector, meanwhile, had been largely sitting on its hands in recent years. Until the recapitalization move, the banks were weighed down by non-performing assets (not a few belonging to steel companies, some of whom are currently looking for new owners), and were unable to fund the huge infrastructure developments required to enable the country to realize its economic potential. India’s growth trajectory is undoubtedly a positive one, but will be more uneven than China’s economic journey.

Financial institutions including Bank of America Merrill Lynch and Nomura have downgraded their GDP growth forecasts for India for 2017 to below 7% — largely due to the anchor on growth caused by demonetization.

Indian steel mills have been lifting production capacity to play their part in Modi’s “Make in India” agenda, and also to snare a greater share of a growing market. But they have increasingly been obliged to export steel while waiting for domestic demand to catch up. In fact, whisper it quietly, but India has been exporting a larger proportion of its steel production this year than China. Current projections could see India export around 9 million mt in 2017.

Indian steel end-user growth CAGR

Past 5 years (%) Next 5 years (%)
Building and construction 2%-3% 3%-4%
Infrastructure 5%-6% 8%-10%
Auto 0%-1% 6%-1%

Source: JPC, CRISIL

FUNDING SHOULD START TO FLOW INTO INDIA
During several visits to India over the past couple of years, steel executives would routinely say that demand from infrastructure projects and affordable housing should start to flow through and positively impact steel demand “in the next 12-18 months.”

At the Platts conference in November, the positive outlook was more forthright. This was due to the fact that funding is now more readily available, and also due to the “pull” effect of India’s general election in 2019. Infrastructure projects need to be approved ahead of the election because of the 90-day moratorium on new approvals before the country goes to the polls. And like all incumbent leaders heading into an election, Modi will want the economy ticking along nicely and will likely stimulate the economy through additional lending to boost growth.

Speaking at the S&P Global Platts conference in Mumbai, Gaurav Bhatiani, chief operating officer of Indian infrastructure development and finance company IL&FS, said the private sector would contribute to a “rush of project implementation” over the next 18 months. There would be a big step up in new railways, urban development, highways, shipping and power transmission and distribution, which would generate strong demand for steel. However, the downside could be a post-election “hangover” of slower growth in late 2019 and 2020.

CRISIL research director Rahul Prithiani said total steel demand in India will reach around 113 million mt by early 2022, up from almost 93 million mt in the current financial year ending March 31. India’s current installed crude steel capacity is 126 million mt/year. In other words, India already has enough capacity to satisfy demand for the next five or so years. But New Delhi still insists the country wants to reach capacity of 300 million mt/year by 2030. While most believe this target is unrealistic, a better policy might be a more measured ramp-up that more closely tracks demand expectations. But Indian mills, like their counterparts in other regions, will largely respond to market conditions rather than policy targets imposed from above.

Source: Platts

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