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India’s healthy steel demand stands out in a global scenario of slowing growth. That’s good news for steel producers in India. But it also raises the question of a tightening market that could lead to prices going higher and lead to higher imports. It’s a familiar situation in the steel industry and if it repeats, then it could play out in the coming quarters. The good news is that domestic output is also projected to increase by the end of the fiscal.
For two months in a row, India’s finished steel consumption has been ahead of output in absolute terms. Of course, in the calendar year 2023 so far, output is still slightly ahead of consumption. This tightening situation is good news for domestic steel producers as prices tend to move up. The second half is also the ‘busy season’ in the economy as monsoons end and construction activity and festival-related spending picks up.
Writing on JSW Steel’s September quarter results, my colleague Nandish Shah says higher steel realisations in August-October are likely to reflect in better performance in the December quarter, although tempered by higher coking coal and iron ore prices. The management also expects steel prices to remain firm. Overall, the country too is expected to see steel capacity increase by March 2024, to the tune of 12 million tonnes, due to the integrated steel producers ramping up capacity. Do read his analysis for more details.
But there is the global situation to also keep an eye on. Until India’s steel output ramps up, there’s the likelihood of steel users seeking out cheaper imports. Today’s Chart of the day focuses on the World Steel Association’s global demand outlook for 2023 and 2024. While the association forecasts growth in China in 2023 and then a flat year in 2024, much of that is predicated on a stimulus that’s strong enough to revive the real estate market. So far, the indications are that the measures are not having that strong an effect on demand. Developed economies too are undergoing a difficult readjustment as interest rates have been hiked sharply to lower demand. The risks to steel consumption appear to be on the downside.
The risk here is that steel demand underperforms expectations, but global output, especially in a major producer like China, keeps inching up. That could then lead to a surplus situation that could weaken prices. A demand hotspot such as India becomes a magnet for steel producers in such circumstances. India has turned into a net steel importer in recent months and that should give some cause for concern, if the trend continues or accelerates.
The bright spot is that iron ore prices are holding steady around the $115-120 a tonne levels since September, which provides a floor under steel prices.
In the near term, the main risk is if steel imports turn into a flood taking advantage of strong domestic demand conditions. But, as domestic capacity goes on stream, Indian producers should be able to ward off any significant threat from imports. Some softening of prices could occur due to higher output, however. Meanwhile, the government will be keeping an eye on these developments, as it would want to protect the steel industry from the threat of imports but also not want a sharp jump in steel prices which can be inflationary. The second half of FY24 may well prove to be an interesting time for steel companies and their investors.
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Ravi AnanthanarayananMoneycontrol Pro
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