APL Apollo Tubes Ltd Management Discussions.

Global economy

After strong growth in 2017 and early 2018, global economic activity slowed notably in the second half of last year, reflecting a confluence of factors affecting major economies. Chinas growth declined following a combination of needed regulatory tightening to rein in shadow banking and an increase in trade tensions with the United States.

the Euro Area economy witnessed a higher plunge than expected as consumer and business confidence weakened and car production in Germany was disrupted by the introduction of new emission standards; investment dropped in Italy as sovereign spreads widened; and external demand, especially from emerging Asia, softened.

Elsewhere, natural disasters hurt activity in Japan. Trade tensions increasingly took a toll on business confidence. the financial market sentiment aggravated, with financial conditions tightening in emerging markets in the spring of 2018 and then in advanced economies later in the year also weighing on global demand.

With persist World downturns global

Global 4% in and is to 3.3% global the outlook for many countries is very challenging, as advanced economy growth rates converge toward their modest long-term potential.

Indian economy

India, the bright start in the global economic village, appeared to slow a little in 2018-19 as Indias GDP growth dipped for the second consecutive year. According to the National Statistical Office (NSO), the nation achieved GDP growth of 6.8% in 2018-19 down from 7.2% in 2017-18. Experts suggest that the Indian economy is on the brink of a slowdown.

is is because fiscal 2018-19 which was looked upon as a year of considerable promise did not live up to expectations. the economy slid with every successive quarter – from 8% in Q1 to 6.5% in Q4.

Indias industrial production (IIP) growth slowed to three-year low of 3.6% in the 2018-19 as against 4.4% in the previous fiscal.

Besides, there is a drop in several key economic indicators.

• Household savings have declined, these - not corporate demand - have pulled down investments by 10 basis points during 2012 to 2018.

• Direct tax collections fell short by Rs. 50,000 crore on account of poor personal income tax collections, thereby failing to meet the revised target of Rs. 12 lakh crore for 2018-19.

• IIP contracted by 0.1% in March, 2019, the lowest in 21 months, mainly due to manufacturing sector slow down.

• Sale of passenger vehicles in the domestic market declined by 2.96% on a year-on-year basis in March to 291,806 units.

• Foreign Direct Investment (FDI) into India, which had spiked up over the past few years, contracted by 7% to US$33.49 billion during April-December in the current fiscal.

Going forward: the International Monetary Fund (IMF) cut Indias GDP growth forecast for 2019-20. They project growth to pick up to 7.0% in 2019 (2019-20), supported by a recovery of investment and improved consumption amid a more expansionary stance of the monetary policy and some expected impetus from the fiscal policy.

In addition, ADB and RBI cut their 2019-20 growth projection for India to 7.2% from 7.4% earlier, owing to growing risks to the global economic growth as well as weakening domestic investment activity.

Moving up the pecking order

As per the recent World Bank report, India is a top improver in the Ease of Doing Business Rankings for the second year in a row. India has improved 65 places from 142 to 77 in span of last 4 years, which is a remarkable achievement in itself.

the steel industry

A healthy economy needs a healthy steel industry providing employment and driving growth.

Steel is the most versatile material to be manufactured today.

Steel is the most widely used metal in modern society, a key material for industrialisation and urbanisation. Be it construction, automobile, or households products like refrigerator/washing machine. Steel touches our lives in more ways than one. the beauty of steel is that without losing its property it can be recycled over and over again.

Steel is everywhere in our lives for a reason. Steel is the great collaborator, working together with all other materials to advance growth and development.

Steel is the foundation of the last 100 years of progress. Steel will be equally fundamental to meeting the challenges of the next 100.

By 2050, steel use is projected to increase to be 1.5 times higher than present levels in order to meet the needs of our growing population.

Global steel industry

Global crude steel production reached 1,808.6 million tonnes (MT) for the year 2018, up by 4.6% compared to 2017. Crude steel production increased in all regions in 2018 except in the EU, which saw a 0.3% decline.

Asia produced 1,271.1 MT of crude steel in 2018, an increase of 5.6% compared to 2017. Chinas crude steel production in 2018 reached 928.3 MT, up by 6.6% on 2017. Chinas share of global crude steel production increased from 50.3% in 2017 to 51.3% in 2018. Indias crude steel production for 2018 was 106.5 MT, up by 4.9% on 2017, replacing Japan as the worlds second largest steel producing nation.

For the steel sector, there were downturns in 2018 with decreasing market prices which was accompanied by a substantial increase in crude steel production by almost 5%. the growth of steel consumption, on the contrary, slowed down in multiple large economies. Despite the efforts by some economies like closing down a limited number of capacity, this causes a continuation of overcapacity at a high level which remains the key challenge of the steel sector globally. As long as this structural imbalance between steel capacity and production persists, we will continue to witness a struggling sector facing high risks going forward.

Another concern for the steel sector is the rising trade actions globally in the steel market and the further decline of the steel trade in 2018 in comparison to 2017.

Going forward: Although growth in steel demand remains positive, the y-o-y growth rate is indeed decelerating. In the recent publication of the April 2019 Short Range Outlook (SRO), the World Steel Association (worldsteel) forecasts the 2019 global steel demand to reach 1,735 MT – a 1.3% y-o-y increase. In 2020, demand is projected to grow by 1% to reach 1,752 MT.

A sustainable future for steel

A new economic model like circular economy maximises the value of raw materials by encouraging reuse and remanufacturing. In a circular economy, the already-high recycling rate for steel will increase and will result in more recycled steel to make new steel products.

Indias steel demand is increasing every consecutive year and in 2019. It is being forecasted by worldsteel that India is likely to overtake the US in steel demand. Indias demand will be supported by improving investment and infrastructure programmes. However, stressed government finances and corporate debt weighs on the outlook.

Indian steel sector

the Indian steel industry has entered into a new development stage, post deregulation, riding high on the resurgent economy and rising demand for steel.

Indias crude steel production in 2018 was at 106.5 MT, up by 4.9% from 101.5 MT in 2017; India has replaced Japan as the worlds second largest steel producing country. the country is also the largest producer of sponge iron or DRI in the world and the 3rd largest finished steel consumer in the world after China and the US.

Performance in 2018-19

Compared to the global slowdown, Indian demand has shown resilience. Provisional figures compiled by analysts show a 7.5% rise in 2018-19 sales, making India one of the fastest-growing steel markets among large economies. Even though this is marginally lower, it still compares well with a 7.9% rise in 2017-18. Contrastingly, global steel demand is projected to slow to 1.4% in 2019, more than halving from the 3% increase in 2018.

Data from Joint Plant Committee showed a 7.8% rise in steel consumption from April 2018 to January 2019.

After almost two years of a strong steel cycle, aided by disciplined Chinese production/exports, steel prices globally slumped toward the end of Q3 FY19, with impacts visible in Q4 FY19. But inventory restocking and the seasonal upswing in demand drove volumes in the last quarter of 2018-19.

Challenges

Demand in India is largely being driven by the infrastructure sector. Demand for long steel products increased 9.6% during the April 2018-February 2019 period. Similarly, demand for flat products, which largely emanates from the automobile sector, was up by 4.8%. With automobile sales decelerating further in recent months, the concern is that a prolonged slowdown could impact steel demand in the coming months.

Another challenge is the slowdown in China. is demand slowdown in China is driving imports to India. the sharp fall in international prices increased imports to India, weighing on domestic prices.

Outlook

ere is clear indication that steel consumption will increase in India, owing to the growing preference of a superior lifestyle by the present generation. is reality will persist with the next generation too. is is because the level of consumption of steel is known to be one of the key indices for measuring the quality of life.

the housing and construction sector, where major chunk of steel is consumed, shall get a boost with an increase in the per capita income and social sector schemes like Pradhan Mantri Awas Yojna-Housing for All, Sardar Patel Urban Housing Mission, 100 Smart Cities Mission (by 2022), Pradhan Mantri Gram Sadak Yojna, Urban Infrastructure Development Scheme for Small & Medium Towns (UIDSSMT), National Heritage City Development and Augmentation Yojana (HRIDAY), Bharatmala project, Development of Industrial Corridors & National Investment & Manufacturing Zones, 75,000 MW Clean-Energy initiative (by 2022) and many others.

In a nutshell, with the increasing thrust on the "Make-in-India" vision by the Indian Government, the Indian steel industry is expected to sustain its growth momentum over the coming years.

the brightest spot for the steel sector

According to Moodys Investors Service, India will be the brightest spot for the steel sector over the medium term. With minimal new steel capacity expected to be commissioned until 2021 in India, robust steel demand -- especially from the construction, infrastructure and automotive sectors -- will keep end-product prices high.

steel tubes and pipes

Global market

Global steel tubes market is expected to grow at a CAGR of over 6% by 2020, led by high demand from the construction, transmission and distribution sectors. the consumption of steel pipes has also increased in the Oil & Gas segment due to continuous innovation in drilling technologies (such as horizontal drilling) as these technologies provide access to the most remote locations, unconventional formations and deepwater regions.

Domestic market

India is a leading ERW steel pipes and tubes manufacturing hub globally.

Demand for ERW pipes in India is ~7.5mn MTPA which is expected to grow by 8-9% every year (in addition to the replacement demand) driven by government capex in infrastructure (conduits, support structures, fencing, railings and scaffolding in ports, stations, airports), rising residential construction as well as the rising auto demand.

For instance, the Government has announced an investment of US$110 bn for improving ports and shipbuilding industry by 2020. It will be spending Rs. 8,500 bn in the next five years to modernise the Indian Railways, a major growth driver for the industry. Furthermore, the Government plans to establish about 100 airports in the next 15 years at an estimated cost of Rs. 4 lakh crore. Among them, 70 airports will be at new locations while the rest will be second airports or expansion of existing airfields to handle commercial flights. These high-ticket projects are expected to drive demand for steel tubes and pipes.

About the company

APL Apollo Tubes Limited (APL Apollo) is one of Indias leading manufacturers of branded steel products. Headquartered at Delhi NCR, the Company operates 11 manufacturing facilities with a total capacity of 2.55 MTPA. It has a PAN-Indian presence with units strategically located in Sikandarabad (4 units), Malur, Bengaluru, Hosur, Dujana, Raipur, Murbad and Telangana. APL Apollos multi-product offerings include over 1,100 varieties of MS Black pipes, Galvanized Tubes, Pre-Galvanized

Tubes, Structural ERW Steel tubes and Hollow Sections. With state-of-the-art-manufacturing facilities, APL Apollo serves as a ‘one-stop shop for a wide spectrum of steel products, catering to an array of industrial applications such as urban infrastructure, housing, irrigation, solar plants, greenhouses and engineering. the Companys vast 3-tier distribution network of over 790 dealers is spread all across India, with warehouses cum- branch offices in over 29 cities.