MENU

Published on 12/11/2018 3:38:06 PM | Source: Motilal Oswal Securities Ltd

Steel demand growth outlook robust, but for near-term hiccups - Motilal Oswal

Steel demand growth outlook robust, but for near-term hiccups

Indian steel imports may rise to 10-11mt in few years

We hosted a conference call with Dr. AS Firoz (Chief Economist at the Economic Research Unit of the Ministry of Steel) to understand demand outlook for steel and key issues in the industry. Key highlights - (1) Steel demand is expected to grow at 10% CAGR over the next 2-3 years, but, with near-term hiccups, (2) quality control measures have helped curb unfettered growth in imports, (3) supply growth will lag due to shortage of capital, while net imports may rise to 10-11mt, (4) many iron ore mining leases will expire by end-FY20E, yet there are no answers to key issues regarding transfer, (5) SAIL has many operational and product mix issues and will continue to require investments, and (6) there are structural changes in the consumption pattern of stainless steel.

Demand outlook robust, but, for near-term hiccups

*  Dr. Firoz expects domestic steel demand to grow close to 9% in FY19. He has toned down expectations by 2pp as a cloud of uncertainty has emerged over infrastructure spending. There is a bit of a slowdown and issue of non-payment in road and few other sectors, too. These issues are likely to be short-lived. However, the longer-term outlook is very positive.

*  Steel demand is expected to grow at a rate in excess of 10% per annum over FY20 and FY21. Rail demand has been hovering around 800kt for a long time but it is now at an inflection point and is expected to increase to 1.5mt in FY19 and 2.5mt over the next few years. Drinking water supply program has been driving demand for pipes. River linking program will add further to demand. Construction and infrastructure building is now getting more steel intensive. Railways are going in for a big revamp with much gas-pipeline infrastructure being built. Private sector investment cycle has yet to start, which may take another couple of years to begin.

Quality control helped control unfettered imports

*  Introduction of quality control measures has helped reduced unfettered imports as the approval process takes 6-10 months. Many suppliers have taken approval but they are limited. This has also helped improve quality of steel from induction furnaces. Most products are now covered under the quality control order. There are some products that don't require quality orders because of rigorous quality testing requirements, e.g. rails and railway materials. Iron ore mining’s lease expiry in 2020; yet no answers for many issues

*  It is not clear how the transition will take place. There are various issues with regards to passing the baton from the current miner to another successful miner in the bidding process. Various issues pertain to mine closure, valuation and utility of infrastructure at mines, etc., which the government is aware of.

Iron ore mining’s lease expiry in 2020; yet no answers for many issues

*  It is not clear how the transition will take place. There are various issues with regards to passing the baton from the current miner to another successful miner in the bidding process. Various issues pertain to mine closure, valuation and utility of infrastructure at mines, etc., which the government is aware of.

India's net imports may rise to 10-11mt as supply will lag

* India has turned net importer of steel because of stronger domestic demand and steel prices rising above the anti-dumping floor prices. India currently has a capacity of 135mt. There is poor visibility on capacity addition due to balance sheet stress across the sector. It is likely that India could turn net importer of steel to the extent of 10-11mt from being neutral right now. India will need 60-70mt of brownfield capacity expansion and a similar size of Greenfield projects by 2030. Unless the steel sector sees high profitability for the next 10-15 years, it will be difficult to get capital for such capacity additions.

Why is SAIL not sailing?

*  SAIL has issues with its product mix, lack of coordination in projects and layout. It is present mostly in the lowend segment. SAIL has never tried to target niche markets like autos. A brand new CRM has been installed at Bokaro, but the Hot Strip Mill is still old. SAIL will continue to require huge investments. The plants are spread over huge tracks of land, which requires higher maintenance cost, e.g. Bokaro is producing 4mt steel over a land area of 60,000acres (after losing 40,000acres to illegal occupants), while JSW Dolvi produces same amount of steel in about 1200acres of land.

Stainless steel - structural changes in the consumption pattern

*  Stainless steel is witnessing structural changes in its consumption pattern. Its share in utensils has declined from 80% earlier to 40% currently in India, which is further expected to decline to 30%. Currently, majority of the stainless steel is getting consumed in capital goods, infrastructure, housing, public housing, public utilities, chemical industries, food processing industries, etc. Stainless steel sector is now well protected against imports.

 

To Read Complete Report & Disclaimer Click Here

 

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412 

 

Above views are of the author and not of the website kindly read disclaimer