Indian steel embarks on a growth path with consolidation

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India is edging closer to becoming the second largest steel producer in the world, as consolidation provides impetus to ailing domestic mills in the country.

Major local and foreign steel makers have stepped in to bid for the takeover of heavily indebted steel mills in the country. In February, India overtook Japan as the second largest crude steel producer with overall output at 8.4 million metric tons, increasing by 3.4% year on year. This was higher than Japan’s 8.3 million mt, produced during the same month, at a declining rate of 0.5% year on year, according to data published by World Steel Association.

In 2018, India’s overall steel production is expected to increase with new capacity ramping up and the consolidation of indebted mills operating at low capacity utilization. Steel consumption in the financial year ending 2019 is likely to continue unchanged at an estimated 4%-5% over the previous year, according to a survey conducted of mill officials and traders by S&P Global Platts. During April-February, India’s overall crude steel output increased by 4.4% year on year to 93.11 million mt, according to India’s Joint Plant Committee.

In June last year, several steelmakers were referred by their lenders to an insolvency committee under India’s Insolvency & Bankruptcy Code. However, these proceedings did not deter these mills from raising steel output. The process of consolidation will infuse fresh funds into these stressed mills, helping them to raise capacity utilization, analysts believe. “Consolidation will benefit large steel players with economies of scale and better bargaining power on sourcing [raw materials],” said a recent report published by Mumbai-based India Ratings.

India’s Crude Steel Output during April 2017-February 2018:

A year of consolidation

The process of consolidation began with lenders approving Tata Steel as the most eligible bidder to take over the 5 million mt/year Bhushan Steel Limited (BSL) on March 23. Tata Steel will also be liable for BSL’s existing debts of an estimated INR 450 billion ($6.9 billion). The acquisition will raise Tata Steel’s overall steelmaking capacity to 18 million mt/year. This was followed by the selection of Vedanta as the highest bidder for acquisition of the 2.5 million mt/year Electrosteel Steels. Vedanta is likely to utilize iron ore from its mines in Karnataka for steelmaking through the acquired unit.

Proceedings are also underway for acquisition of the 10 million mt/year Essar Steel. While bids have been placed, lenders have yet to approve the eligibility of these bids. Bids have been placed for Essar Steel by global players, such as Nippon Steel & Sumitomo Metal Corp, together with ArcelorMittal and Russia’s VTB Bank promoted Numetal Mauritius. Similarly, JSW Steel has emerged as the sole bidder for the acquisition of the 1.5 million mt/year Monnet Ispat & Energy. However, the company has not yet received any official communication from the resolution professional overseeing investigations of Monnet Ispat, company officials said. JSW Steel is in the process of expanding its reach in other regions. On March 30, JSW Steel announced the buying of USA-based Acero Junction’s Ohio sheet mill for $80.85 million. JSW Steel is also reported to be in the running to acquire Italy’s largest steel company—the 10 million mt/year Ilva in a joint bid with Acciai Italia.

Consolidation of assets is likely to increase India’s overall capacity utilization to 80% during the 2018- 2019 financial year (April 1-March 31). However, some of the stressed assets may take 12-18 months to ramp up utilization to optimum levels, analysts have said. While capacity utilization at major integrated mills is currently about 70%-75% of capacity, the mills awaiting resolution of their debts are currently operating at about 50% of their capacity.

Estimated debts of Indian steel companies

Estimated debts of Indian steel companies

Infrastructure push to spur steel demand

A turnaround in these stressed assets, along with new capacity rampups could more or less meet India’s incremental demand increase, the report says. India’s finished steel demand during April-February, increased by 7.6% year on year to 81.95 million mt, according to the latest JPC data. This anticipated increase in steel demand is spurred by the launch of numerous infrastructure projects announced by Prime Minister Narendra Modi’s government for 2018. The implementation of these projects is expected to pick up speed before the country goes to the polls in 2019, market participants said. On October 25, the Indian government approved the Bharatmala project, which includes the building of about 34,800 km of roads. Phase 1 comprising 24,800 km of roads is scheduled to be completed in 2022. This is in addition to other road construction projects comprising 48,877 km planned by the National Highways Authority of India over the next five years. Steel consumption for housing construction is also likely to rise due to Modi’s Housing for All by 2022 movement aimed at providing slum dwellers with affordable housing by building 12 million units in urban areas.

Besides, Indian steel is also gaining favor in export markets. The country’s overall steel exports jumped by 34% year on year to 8.9 million mt during April-February, the JPC data shows. Export demand is providing an additional drive push to local steelmakers to increase output.

India’s Finished Steel output and demand during April 2017-February 2018

India’s Finished Steel output and demand during April 2017-February 2018

Raw material demand on the rise

Raw material suppliers to India are equally enthused by the anticipated rise in India’s steel output. Considering an estimated 4% year on year increase as predicted by sources, India’s overall steel output is likely to rise to an estimated 105 million mt, during 2018-2019.

With India’s dependence on imports for coking coal, seller sources report an expectation for coking coal demand to rise significantly. India imported 54 million mt of coking coal in 2017, with the figures set to rise to 60 million mt in 2018, according to a recent Goldman Sachs report. One coking coal miner said that as most of the smaller mills sort out their credit issues and consolidate, he expects coking coal demand to increase significantly. He added that he had already been approached bya customer set to increase its tonnages by close to 2.5 million mt over the next five years.

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