Since Q3 CY2020, the global steel sector has experienced an unexpected V-shaped rebound as a combination of coordinated fiscal and monetary policy initiatives by governments and central banks throughout the world pumped unprecedented liquidity into the global economy to encourage development. The result has been a boom in earnings for local steelmakers over the last six quarters, with most companies reporting their highest-ever profits, assisting in the rapid reduction of the industry’s debt levels.
While China spearheaded the first leg of the global steel market recovery in CY2020 and the early part of CY2021, the upcycle’s continuation in the second leg will be dependent on the solid demand momentum outside of China. In India, typically steel consumption increases in the second half of the financial year. While the pick-up in domestic steel demand in H2 FY2021 was a healthy 16.8 percent year-on-year (Y-o-Y), in the current fiscal, the demand recovery post-monsoon has been slower than expected, contracting by 9 percent Y-o-Y in Q3 FY2022 over the same period of last fiscal. This suggests that demand from the infrastructure and construction sectors, which accounts for around 60 percent of domestic steel demand, has slowed down in recent months.
In the 2021 Union Budget, the Government of India targeted a 34.5 percent increase in the annual capex spending in FY2022BE (budget estimate) over the FY2021BE, making a strong push for infrastructure-led growth, especially in steel-intensive sectors such as the railways, roadways, urban infrastructure, affordable housing, and energy. However, the actual spending on the ground has been much slower than budgeted, with the government’s progress in capital expenditure in April-November of FY2022 being just 49 percent of the full-year target. In addition, what is more worrisome is that there has been a marked slowdown in the pace of the Union government capex, after the monsoon, with cumulative capex in October and November of FY2022 being lower by 41.2 percent over the same period last fiscal.
India has announced its carbon-neutrality target by 2070, which would need carbon-intensive sectors such as steel to invest in cleaner methods of steelmaking like the electric arc furnace (EAF) or hydrogen-based iron-making plants, and investments in carbon capture technologies. India’s National Steel Policy of 2017 projects 60-65 percent of the country’s steelmaking capacity in FY2031 to be from the cost-efficient blast furnace route, which unfortunately has a large carbon footprint. However, given the country’s carbon neutrality targets, fiscal incentives in cleaner steelmaking technologies could help the steel industry reduce its carbon footprint. This is particularly relevant, since many large Indian steel producers have announced capacity expansion projects recently.
This has been a key factor behind the lacklustre sequential recovery in domestic steel demand in Q3 FY2022, leading to steel prices correcting by 12 percent from its peak level recorded in October 2021. Given the slower-than-expected capex spend during October-November of 2021, and following the Omicron outbreak in December, the government’s ability to meet the full-year capex target during the remaining months of the current fiscal remains uncertain. Therefore, in the 2022 Union Budget, a combination of a higher budgetary allocation along with a closer monitoring of progress and fund mobilisation for projects in the infrastructure and transportation sectors could provide a fillip to domestic steelmakers in FY2023.
On the raw material side, India’s scrap supply chain, which feeds mills producing steel through the environmentally cleaner electrical route, remains fragmented and unorganised, leading to increased import dependence. Though the government has recently notified the Vehicle Scrappage Policy 2021, there is a demand from industry players to further increase the incentives for scrapping old vehicles so that the domestic supplies improve meaningfully. Additionally, infrastructure for scrap segregation and recycling is inadequate at present, which makes the case for targeted capital subsidy to incentivise the private sector for investing in this segment.
After a long gap, new investment activity in the steel sector has seen a rebound as lenders redraw their negative list for sectors following the earnings surge of steel companies. What is interesting to note is that apart from confirmed brownfield expansions accumulating to around 21 million tonnes per annum lined up for commissioning in the next three years, leading global steelmakers such as Arcelor Mittal and POSCO have announced plans to set up mega greenfield steel plants in India.
However, with private sector capex yet to pick up meaningfully, the government’s infrastructure spending programme would be one of the key pillars that would support growth in domestic steel demand going forward. Therefore, steel companies would be closely watching the government’s infrastructure spending budget before deciding on additional investment plans.
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