The current situation in the global steel industry has been aptly described by Peter Marcus of World Steel Dynamics as PCP — ‘P’ for protection against imports, ‘C’ for capacity rationalisation and ‘P’ for price maximisation.
Capturing the true concerns for the Indian steel industry with these three words seems inappropriate. Protection against cheap and injurious imports has been well addressed by the government through MIP, SD and AD measures and the domestic steel industry could obtain a much higher return for their products after trigger prices for semis, wire rods, HRC, plate, CR, coated and electrical sheets were imposed. It must also be appreciated that the changed global market scenario helped the indigenous producers a great deal when the export offers of Chinese HRC (SS400) in January 2016 at $256/t FOB Tianjin reached $ 520/t FOB in December, a growth of 103% in the past 10 months.
The argument of import parity in setting domestic pricing was no longer valid in view of rising global prices. The MIP is to last till February 2017, safeguard duty till mid-2018 and anti-dumping duty on HR, CR and wire rods for another five years after sunset review.
Secondly, capacity utilisation for us is not a conscious decision but falls out of the production targeting activities which are largely market-based. The brown field capacity augmentation is being carried on despite the current subdued market scenario and in anticipation of rush in order flows in the coming months.
We are yet to hear in India any significant capacity rationalisation due to environmental guidelines. The capacity utilisation ratio coming down from 82% in FY12 to 74% in FY16 is the offshoot of actual production and installed capacity and it is market-determined.
Thirdly, price maximisation for the Indian steel market is to be changed to price correction by the producers to take advantage of market dynamics. A large part of price increase is on account of cost enhancement.
For the Indian steel industry therefore, the real concerns and the tactical plan can be summarised under DRAPP.
‘D’ stands for demand boost. The industry badly needs mega investment in infrastructures in roads, rail and shipping network, urban development, rural infrastructure, minor and major ports, Sagarmala project, DFC, affordable housing for all and smart cities. The steel industry must ensure steady availability of steel for smooth implementation of the critical infrastructure projects.
‘R’ denotes raw material availability at right prices and quality. While iron ore availability from domestic sources have nearly stabilised with availability from the allocated mines through the auction route, the global prices of traded ore is gradually climbing up from $45/t cfr China in January 2016 to $78/t cfr China in December 2016.
The resultant average increase of R350/t in lumps and fines prices by NMDC would put some upward pressure on prices of finished steel in the market. The hike in international prime coking coal prices from $80/t FOB Australia in January 2016 to $300 /t FOB Australia in December 2016 with Q4 of FY17 likely to be settled at $260-270/t FOB Australia is a real threat to price stability in the domestic market for BF producers.
The government has advised CIL to create blending and washing facilities for coking coal in order to minimise the ash content of domestically available coal. However, till such time these are adequately installed, the dependence on imported coking coal would lead to volatility in steel prices in the domestic market.
The last two ‘P’s stand for protection and prices which would continue to be the two most critical concerns for our steel industry.
The demand for lightweight high-performance steel by construction sector, defence, automobile, railways and aircraft is increasing at a fast pace. The sophisticated mills of Japan, Germany, Finland and South Korea are intently looking at the growing Indian market with significant excess capacity engulfing the major markets in the US and EU.
It must be appreciated that the import protection safety net is temporary and would be withdrawn on completion of the mandatory period specified under the duty clauses.
Within this period, the capacity augmentation by the domestic steel producers must target the emerging needs of the niche segments so as to impart cost-effectiveness to the fresh capacity creation activities.
The author is DG, Institute of Steel Growth and Development. Views expressed are personal.
Source: financialexpress.com