India's steel prices soar, impact on exports

Steel prices in India have doubled in the past year. The price surge mirrors a similar rally in international steel prices. There are several reasons why steel is trading at record levels across the world. A steep rise in prices of iron ore (the main ingredient in steel) is one such reason. Another is a supply crunch caused by China’s decision to cut steel production and exports.

In India, the price hike has impacted the steel industry in contrasting ways. While it has resulted in big profits for major steel manufacturers who dictate domestic prices, the micro, small, and medium enterprises (MSMEs) that manufacture steel and engineered steel products have suffered a huge setback. They have complained several times to the government regarding the high prices of various steel products and the non-availability of raw material, including iron ore. Due to their difficulties, the country’s steel output has suffered.On the contrary, India’s steel exports have grown significantly to make the most of the global price rally.    

India is the world’s second largest steel producing country after China. It has the capacity to produce 142 million tonnes (MT) of steel in a year, which it intends to expand to 300 MT by 2030-31. India’s leading steel manufacturers are the public sector giant Steel Authority of India Limited (SAIL) as well as private enterprises Tata Steel, JSW Steel, Jindal Steel and Power Limited (JSPL), and ArcelorMittal Nippon Steel (AMNS). These together account for 55 percent of the country’s steel production.

Read on to know about:

• Why steel prices are on the rise in India
• How this has impacted steel production, profits and exports
• What steelmakers want from the government

• What the government has done to help the steel industry  

Source: The Indian steel industry: growth, challenges and digital disruption report by PwC and Indian Steel Association

India’s steel march

The steel price escalation in India started in the second half of 2020-21 and has continued unabated, except for a slight dip in February. In June, the wholesale price of hot rolled coils (HRC) shot up by INR3,000 to touch INR69,000 per tonne in Mumbai. Cold rolled coils (CRC) registered an INR5,000 increase to sell at INR86,000 per tonne in Mumbai’s wholesale markets. Now, compare these to prices in June 2020, when HRC cost INR35,900 per tonne and CRC sold for INR41,700 per tonne in Mumbai. Both HRC and CRC are flat steel used in industries such as automobile, construction, transport, capital goods and shipbuilding. An increase in steel prices – and there have been several since mid-2020 – affects prices of vehicles and consumer goods as well as construction costs.

Despite prices of the alloy reaching multi-year highs, there is apparently room for further growth. This is because domestic steel sells at a 20-25 percent discount in comparison to international steel rates and is also 15-20 percent cheaper than imported steel.

Source: Industry source quoted in The Times of India

Why the price surge?

When it comes to raising prices, Indian steel makers take a cue from their global counterparts. In the US, HRC prices went up from $550 per tonne in September 2020 to $1,500 per tonne in May 2021. In Europe, HRC hit $1,050 per tonne in May 2021, doubling from $500 per tonne in September 2020. At around the same period, HRC prices doubled in Germany and Brazil. What are the factors driving this impressive run in steel prices in India and abroad?

1. Strong demand: The price rebound started with the global steel demand picking up shortly after the first wave of Covid-19 in 2020, as countries prioritised infrastructure development. The US, Europe, China, and India were among regions that saw a strong demand for steel. But with production just picking up and supply tight, there was a demand-supply gap.    

2. China’s recovery: Another factor that immediately drove steel prices north was China’s quick exit from lockdown and return to economic activity last year. The country produces 55% of the world’s steel.      

3. Iron ore shortage and price spike: The growth in steel demand and prices rubbed off on iron ore. In the last year, prices of the raw material have jumped 140% and are now at a 10-year high. In India, iron ore touched INR6,560 per tonne in April, a 156 percent jump from INR2,560 a year ago. With prices soaring, India’s iron ore exports grew 66 percent between January and April, with 90 percent of the shipments bound for China (the world’s largest importer of the mineral). The record prices and export growth led to a raw material shortage in India, resulting in a fall in steel production.      

4. The other China factor: International steel prices have also been influenced by some key decisions taken by China in recent months:

• The first decision was to cut its steel output to reduce carbon emissions. As part of this plan, China introduced production curbs in Tangshan, its highly polluted steel city. This immediately pushed up prices of steel in China. While Chinese production of crude steel hit an all-time high in April despite the curbs, the decision still managed to contribute to the rise in global steel prices.    

• Anticipating a fall in production as a result of the curbs, China announced plans to reduce steel exports and focus on feeding domestic demand. On May 1, China removed VAT rebates on the export of 146 steel products (including HRC) and increased export duty on other steel items.
• At the same time, the country is encouraging steel imports and has eliminated import duty on raw material, including pig iron, crude steel and recycled steel.              

Impact on production

India produced 7.9 MT of steel in April, down from 10 MT in March and 9.1 MT in February and the lowest level since June 2020. Integrated producers Tata Steel, JSW Steel, JSPL, SAIL, and Rashtriya Ispat Nigam Limited (RINL) accounted for 5.2 MT, a 14 percent drop from March. The secondary steelmakers produced 2.8 MT, a sharp fall of 30 percent. Production of finished steel also fell to 7 MT in April from 9.1 MT in March.  

Steelmakers have blamed the drop in production on rising prices of steel and raw materials and on aggressive iron ore exports. In December 2020, the Indian Steel Association – which represents the steel industry and counts most of the country’s major steel firms among its members – demanded a six-month ban on iron ore exports. Big manufacturers are largely insulated from the raw material pinch as they have their own captive mines. But smaller players have had to slash their production levels on account of the crunch.

And it isn’t just soaring steel prices and the iron ore supply shortage that are responsible for the fall in India’s steel production. Other contributing factors include:

• Fresh restrictions after a deadly second wave of Covid-19, starting in April
• The workforce displacement it caused
• Diversion of the steel industry’s captive oxygen plants from steelmaking to the production of liquid medical oxygen, to make up for a drastic shortage of oxygen in the country amid soaring coronavirus infections                      

Source: The Indian steel industry: growth, challenges and digital disruption report by PwC and Indian Steel Association

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Impact on profits

India’s primary steelmakers have profited greatly from the global price surge by marking up their products. These companies are expected to use their high profit margins to reduce their debt by 15 percent or INR35,000 crore between 2020-21 and 2021-22, says a report by credit ratings agency Crisil. Tata Steel, for example, is reported to have repaid INR30,000 crore of its debt in 2020-21. Its EBITDA (earnings before interest, taxes, depreciation, and amortisation) jumped to INR27,828 per tonne in January-March from INR12,573 per tonne in the same period last year.

The same cannot be said for steel MSMEs, which have suffered losses. Some have even had to halt operations. Maninder Pal Guliani, President of the Ludhiana Beopar Mandal, told The Times of India in June that price hikes in the range of 20 percent to 100 percent for various steel inputs had dealt the industry its “biggest blow”. The report also quoted Narinder Bhamra, President of the Fasteners Manufacturers Association of India, saying that the price hikes made no sense when demand for steel raw material had actually fallen due to the pandemic. The Indian Pipe Manufacturers’ Association said volatile steel prices in the past eight months had driven many plants to closure while many more were on the verge of shutting down. The industry body has written to Union Steel Minister Dharmendra Pradhan – with a copy marked to the Prime Minister's Office – seeking a temporary ban on steel exports and government intervention to regulate steel prices in the country.           

Impact on exports

Despite a slowdown in production, India's steel exports touched record levels in 2020-21. Between April 2020 and March 2021, finished steel exports rose 29.1 percent to 10.785 MT while semi-finished steel exports grew at an impressive 133 percent to hit 6.6 MT, according to the Joint Plant Committee, which collects data on the iron and steel industry. The committee said the last time steel exports touched such record highs was in 2017-18, when export volume stood at 11.614 MT.

With Covid-19 lockdowns making a reappearance in the first half of 2021 and domestic demand for steel consequently plunging, companies focused largely on exports, mainly to Europe and China. A 26 percent year-on-year growth in finished steel exports between January and March has been attributed to strong demand from Europe. Meanwhile, China’s withdrawal of export rebates and its pledge to reduce steel output has encouraged Indian steelmakers to produce largely for foreign markets. Even SAIL, which usually depends on domestic demand, has started exports to China, a spokesperson for the company told Mint.

Exports to China and South Asia are dominated by semi-finished steel products, VR Sharma, Managing Director of JSPL, told Mint. The SAIL spokesperson said the company had received orders from China for semis such as HRC, billets and slabs. On the flipside, the demand in Europe is largely for finished products.

However, not all steel exporters seem to be part of this success story. Ludhiana Hand Tools Association President SC Rahlan claimed that there was actually a sharp decline in export trends for value-added steel products, and blamed it on the lack of raw material at affordable rates.        

What the steel industry wants from the government

To tide over the crisis, both in the short and long run, Indian steelmakers have made the following demands from the government:

• Supply of steel and related raw materials at affordable rates to steel plants, on the lines of the state support provided by China to its steel industry
• Government regulation of steel prices

• Temporary ban on steel exports to address the alloy shortage at home
• Six-month ban on iron ore exports to make up for the shortage of the raw material
• The Federation of Indian Mineral Industries demanded withdrawal of import duty to make the domestic steel industry more competitive  

Echoing the steel industry’s protests against soaring prices, Union Road and Transport Minister Nitin Gadkari has accused big steel firms of forming a “cartel” and pushing up prices artificially. As a solution, he has suggested that a regulator for the steel sector be set up.        

What the government has done

To provide relief to steel MSMEs and other sectors dependent on steel, the government aims to increase imports of steel at cheaper prices. To this end, it announced the withdrawal (part or full) of certain protections provided to the steel industry. The announcements were made during February’s Union Budget. They are:      

• Basic customs duty on imports of semi-flat steel (used to build equipment, ships, bridges) reduced to 7.5 percent from 12.5 percent
• Basic customs duty on imports of longs (used to build rails, wire rods) also reduced to 7.5 percent from 10 percent earlier  
• Import duty exemption on iron and steel scrap till 31 March 2022

• Anti-dumping duty and countervailing duty on some steel products withdrawn till 30 September 2021  

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Will these measures provide relief?

Some experts are of the view that the government’s measures might not make much of a difference, according to a Bloomberg Quint report published on 1 February. The report cited analyst Vishal Chandak as saying that India sources 70 percent of its steel from countries with which it has free trade agreements. This means the imports already attract zero duty. According to researcher Amit Dixit, who is also quoted in the article, India does not import longs, which makes the duty reduction announced by the government irrelevant.  

From its Budget announcements, the government appears willing to help steelmakers gain access to imported steel at lower rates to make up for the domestic shortfall. But will these measures work, especially in the face of the Atmanirbhar Bharat (Self-reliant India) Mission which discourages imports, along with the recently announced restrictions on steel imports?  

Aside from this, as of October 2020, the government has expanded the list of importers of iron and steel products who must register themselves with the Steel Import Monitoring System. Earlier, registration was mandatory for 300 steel and iron imports. The list has now been extended to cover 530 more import items. Registration requires the payment of a fee, which means the import price goes up. This adds to the importer’s woes, rather than easing them.      

Long-term plans for the steel sector

Despite the current crisis, India’s steel industry remains one of its most protected sectors. Listed here are some key protections provided by the government as well as some long-term plans it has to support the industry:  

• Planned expansion of India’s steel-making capacity to 300 MT per annum by 2030-31 under the National Steel Policy
• Development of the steel sector in the east, India’s steel hub, with an investment of $70 million  

• Incentives worth INR3,346 crore under the Production-linked Incentive (PLI) scheme to push domestic production of various grades of steel that are largely imported  
• Introduction of PLI scheme in specialty steel to boost manufacturing and export of value-added steel products
• An export duty of 30% is already levied on iron ore to ensure domestic supply

The march in steel prices is set to continue, at least for this year. By some accounts, it might even take two years for prices to cool down. Explaining why it could take that long, JSPL Managing Director VR Sharma said that India (like other countries) has announced a stimulus package to help the pandemic-battered economy recover. This is expected to drive steel demand in the foreseeable future and keep prices high. In such a scenario, the disruptions in India’s steel industry, particularly its MSME units, could last a while. It goes without saying that the sector would need more government intervention to make it through the crisis.