Indian Economy News

Steel demand off to a strong start in 2018

New Delhi: Steel demand has moved up a few notches in recent months. April and May have collectively seen an 8.5% increase in steel consumption over a year ago, according to the Joint Plant Committee flash report. There was no low base effect, as FY17 April and May saw output rise by 4.2%.

The strength of domestic demand meant that even as steel output rose by 6.1%, exports declined as producers found buyers at home. Steel producers benefit more from selling locally, earning more relative to exports. Imports actually rose by 14.8% in these two months.

Rising demand does not seem a one-off phenomenon. The last quarter of FY18 too saw a step-up in demand, taking full-year demand growth to 7.9%. Demand growth in the first nine months was a relatively low 5.2%.

One reason for domestic demand growth is the pickup in automobile sales. For instance, the top three commercial vehicle companies in India saw their sales in May increase by 50% over a year ago, with a similar increase in April. While automobiles chiefly use flat steel, long steel products were finding the going tough in FY18, due to a slowdown in end use sectors such as real estate and industrial projects.

Sector-wise consumption of steel in India shows construction and infrastructure having just under a two-thirds share, with engineering and fabrication a fifth, automotive at above 10%, and the rest from other sectors. Construction and infrastructure is vital for steel demand.

There seems to be a recent recovery in that segment. In FY18, non-flat steel (chiefly bars and rods) were not doing well, with demand increasing by 1.5% in the April-December period. But the last quarter saw a spurt in demand, pushing the FY18 number up to 2.6%. That implies demand grew by 5.6% in the last quarter.

Although these numbers for April-May are not yet available, it would be reasonable to expect a decent contribution by both segments to the growth rate.

The government’s thrust on infrastructure projects and rising consumer spending (consumer durables and automobiles) are likely to contribute to domestic steel demand of 6-7% in the medium term, according to Icra Ltd.

The rating agency also pointed out to softening of iron ore and coking coal prices while steel prices remain firm as positive factors for the industry. The risks remain global, with the uncertainty caused by protectionism and the possibility of surplus steel in the export market depressing prices.

Back home, one more trend is emerging. April and May also saw the output of Other Producers increase by 7.2%. This category comprises medium and small steel producers, who were hit hard by the steel industry’s troubles.

A revival in their output indicates factors may have turned conducive for them as well. While that’s good news for these producers (and their employees and bankers), it also means higher availability of steel in the market. As long as demand remains up, it gets absorbed, but any reversal can magnify the effect on steel prices.

For investors, this raises the prospect of steel companies continuing to post good numbers through FY19, especially as higher domestic demand is good news for earnings. If the trend in “Others” holds up, smaller steel companies will join in too.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.

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