Falling Demand Impacts Profitability of Indian Steel Industry

The Indian steel industry is on a slow growth curve. Domestic demand for steel has fallen because of inflation and high interest rates. Low availability of raw materials, high cost, upheaval in the mining sector, state bans, and environmentalist pressures are creating more problems for steel producers. The Editorial March 2013 reveals that the growth rate of the Indian iron and steel industry fell from 11% in 2010 to 4.3% in 2011.

finished steel - india

India is the fourth largest producer of crude steel in the world today. It is also an importer of steel since 2007. It is projected that if the 12th Five Year Plan proposals are implemented as per schedule, India could grab second place by 2015-16. However, as the 12th Plan Period (2012-17) commences, the prospect does not look bright for domestic demand of steel though per capita consumption in India has increased from 36.6kg in 2005 to 51.7kg in 2010.

Challenges facing the Indian steel industry

There are many problems that are hurting the growth of the Indian steel industry:

  • Non-availability of iron ore: Iron ore is available in plenty in India but unregulated mining and large scale exports have raised concerns on the long-term availability of raw materials to address domestic demand. For the sake of sustainability, the Ministry is restricting exports and making efforts to preserve the non-renewable iron ore fields.
  • Non-availability of coking coal: Coking coal is largely imported as domestic availability of the resource is limited. Raw material security and price volatility are challenges. Non-coking coal used for sponge iron production is growing scarce; imports will create heavy cost burdens on the steel sector.
  • Inadequate infrastructure: Inadequate sintering and pelletisation facilities for steel as well as domestic technology to process low grade iron ore are significant challenges. Existing road, railway, port and power facilities are not good enough to support the 12th Plan working group’s optimistic projection of steel production doubling in the next 5 years.
  • Outdated technology and R&D: The performance of Indian steel plants is lagging because of low quality inputs, obsolete technology in treating resources, and insufficient R&D on alternate technologies to reduce wastes and cost, and address environmental concerns.
  • Cheap steel imports: Indian steel industry players are concerned about the cheap steel dumped into India by Japan and Korea, following the Free Trade Agreement and lower import duties. “India has spent over $5.5 billion of precious foreign exchange Iast year in importing steel which Indian steel mills are capable of producing,” says Dilip Oommen, CEO & MD, Essar Steel India Limited.

 Steel industry prospects

As per the 12th Five Year Plan, infrastructure will receive an investment of $1 million. If that happens, domestic demand, infrastructure and the economy will receive a boost. The Steel Ministry proposes to increase steel production to 60 million tonnes in the next 5 years with an investment of ₹2.5 crore. Therefore, the Ministry plans to review steel-related sectoral caps by banks and consider relaxation of norms on External Commercial Borrowings (ECBs).

The Steel Ministry also expects domestic steel demand to rise by 10.3% annually by the final year of the 12th Plan. World Steel Association, a leading global steel body, predicts steel consumption will increase by 5% in India in 2013.

steel demand - india

As of now, the steel industry is experiencing immense pressure on profit margins. Rising input costs have increased steel production outlay. At the same time, low demand has created over-capacity. JSW Steel reported ₹669 crore in losses (analysis) in the second quarter of this fiscal. Tata Steel also saw profits going down by 89% (analysis). Steel companies may have to look at export options to maintain profits but the global scenario is hardly more encouraging. To be sure, it’s a tough time for steel manufacturers.


[stockquote]JSWSTEEL[/stockquote] [stockquote]TATASTEEL[/stockquote]

Analysis: JSWSTEEL – To Catch A Falling Knife?

The entire steel sector has taken it on the chin lately and JSW Steel [stockquote]JSWSTEEL[/stockquote] is no exception. After making a 52 week high close to Rs. 900 levels, the stock has seen a one-way hammering all the way down to Rs. 600 with its all time low of Rs. 566 in sight.

JSWSTEEL analysis chart

The question on everyone’s mind is when is the slide going to end? It is trading at a PE of ~6.8 while its most recent quarter EPS was 5.76. Also, JSW paid a dividend of Rs. 7.50/share last year and Rs. 12.25 before that. JSW was never a profit engine – historically, net profit and margins have not been that great.

JSW Steel Quarterly results

As you can see from the chart below, RSI at 20 is showing extremely oversold conditions. However MACD is not confirming RSI.


Should you catch this falling knife? The answer is wait a while before you take the plunge. With a beta of 1.71, it is pretty volatile and given a choice between JSWSTEEL and TATASTEEL [stockquote]TATASTEEL[/stockquote], I will take Tata Steel for its global footprint and profitability any day. However, keep a close eye on JSW, a good bargain might just be around the corner as the stock races towards its 52 week lows.

JSW Steel to raise output at Karnataka plant

India’s No.3 steelmaker JSW Steel said on Monday it plans to raise production at its plant in Karnataka state after the Supreme Court partially lifted an iron ore mining ban imposed in a key region of the state.

The Mumbai-based steelmaker has a capacity of 11 million tonnes per annum (MTPA), with plants in Karnataka and Tamil Nadu state, and requires 18 MTPA of iron ore to operate them at full capacity, it said.

On Friday, Supreme Court allowed state-run miner NMDC to mine up to 1 million tonnes per month of the steel-making ingredient from 6 August in Bellary.

JSW Steel to raise output at Karnataka plant – Corporate News – livemint.com.

JSW Steel denies Lokayukta report

Indian steelmaker JSW Steel on Thursday denied the conclusions drawn in a report by an anti-graft watchdog against the company on procurement and transportation of iron ore in Karnataka.

Karnataka’s anti-graft watchdog – Lokayukta- had cited certain alleged illegal purchase of iron ore and transactions linking the company and a group firm.

JSW Steel has already invested over Rs33,500 crore ($7.5 billion) to set up a 10 million tonne per annum capacity steel plant in Karnataka, while it is still waiting to get mining leases in the state for over 15 years, the firm said in the statement.

“Today iron ore is not available, therefore we have cut the production.”

JSW Steel denies Lokayukta report, says followed law – livemint.com.