Indian steel output gets a wake-up call from China

According to the Indian Steel Ministry, Indian steel demand fell by 63% to just 9.10 million tonnes in the April-June period, which was the peak COVID period.

Sep 04, 2020 08:09 IST India Infoline News Service

A recent report published by Moody’s expects India's steel demand to fall by 10% during financial year 2020-21. In financial year 2019-20, the steel demand in India stood at 100.15 million tons. However, the actual demand in 2020-21 is likely to be less than 90 million tons. That is because, most principal steel using sectors like construction, infrastructure, white goods and automobiles have been operating at sub-optimal capacities reducing the demand for steel. Even the 10% fall that Moody’s estimating for the full year is based on the assumption that GDP growth and industrial capacity utilization will pick up in Q3 and Q4.

How India compared to global steel makers in July 2020?

In the last few years, India has overtaken the US, Japan, South Korea and Russia to emerge as the second largest producer of steel in the world. Of course, China alone accounts for over 60% of the global steel output and Indian steel output is less than 1/10th of China. But the Indian steel growth story cannot be denied. Here is the global steel production in Jul-20.

July 2020 Steel Production (Only Countries producing above 1 MT)
Country Steel Output (MT) Steel Output Growth (YOY)
China 93.36 9.11%
India 7.15 -24.61%
Japan 6.05 -27.90%
Russia 5.81 -5.00%
South Korea 5.53 -8.30%
United States 5.24 -29.40%
Turkey 3.14 7.40%
Brazil 2.59 3.50%
Germany 2.43 -24.70%
Iran 2.34 14.40%
Taiwan 2.15 -6.30%
Italy 1.75 -11.20%
Ukraine 1.75 -1.90%
Mexico 1.15 -22.60%
Global Steel Output 152.69 -2.50%
  Data Source: WORLDSTEEL.ORG

Clearly, some steel producers have managed to buck the trend while others have seen deep cuts in July 2020. Among the major producers of steel, India, Japan, the US and Germany saw production cuts of around 25%. The pressure clearly came from lockdowns, deep compression in demand and the unfavourable cost structure of these countries. Among the countries with large domestic steel markets, India and the US have shown clear pressure but China has actually shown a 9.11% rise in steel production in July 2020. There was an expansion, not only in its domestic markets but also in its global exports of steel. China appears to have grown at the cost of the other steel producers in the world, which also explains the reason China accounts for more than 60% of the global steel output in Jul-20.

Why is Indian steel output under strain?

To an extent this has been largely driven by weak demand for steel in India and the pandemic is hardly making it any better. Weak demand from automakers, builders, infrastructure developers and shipping companies has taken its toll. According to the Indian Steel Ministry, Indian steel demand fell by 63% to just 9.10 million tonnes in the April-June period, which was the peak COVID period. During the June quarter, consumer spending plummeted and the nationwide lockdown sent migrant labourers back home. This virtually stalled manufacturing and construction as well as the supply chains.

As a result, despite Indian crude steel output falling by 44% in the Apr-Jun quarter to 14.87 MT, there still was a huge surplus to expend as demand was just 9.10 MT. Steel demand has picked up from July 2020 due to the resumption of manufacturing and construction activity. However, Moody’s has not ruled out downside risks to steel demand from a possible second and third wave of Coronavirus infections.

Despite the fall in production, there is still a surplus as demand has been especially weak. Hence Indian companies are looking at export destinations in Southeast Asia, Middle East and even China that recently emerged as a key buyer of Indian steel. However, India's total steel exports in April-June at 3.26 MT are still very small despite tripling on a YOY basis. The reality is that exports are less profitable compared to domestic sales as domestic steel benefits from import-parity and anti-dumping duties. This benefit is not available to exports, where India has to compete with lower priced Chinese and Korean steel.

Risk of ceding more space in steel to China

Some of India’s largest steel makers are currently operating at around 50% capacity utilization. This is expected to move up to 80% by March 2021 but that is only likely to happen if the domestic demand picks up as exports are still not a viable proposition. So the risk of ceding more space to China is absolutely real. Check the chart below.

Data Source: WORLDSTEEL.ORG

The above chart captures how China is expanding its hold on the global steel industry. There are two aspects to note in this chart. Firstly, China is taking away a larger chunk of global steel production, already at 60% today. Secondly, even as Chinese steel output continues to grow, rest of the world is seeing de-growth. For India, the message is to get steel output back to pre-COVID levels and also to boost user industries to create the demand. That would be the immediate steel agenda for India!

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