The steel industry's performance in Q2FY23 was weaker than expected due to the imposition of export duty on steel in May this year. A global decline in steel prices and higher input costs only added to its woes. In a bid to boost the sector, the government revoked the export duty on steel on November 19, 2022. According to the new notification, iron ore lumps with grades lower than 58% will have no export duty, while grades higher than 58% will attract 30%. The rate of duty for these was 50% earlier.
Seshagiri Rao, Joint MD, JSW Steel and Group CFO, hailed this move, saying, “This will revive domestic steel demand, particularly at a time global demand is in decline." The Indian government imposed the export duty in May to rein in the price surge precipitated by supply disruptions with the Russia-Ukraine war. Even though the prices were falling in the past few months, rising interest rates raised concerns of an impending global recession. Demand from China, the world’s largest consumer of steel, also fell following a crisis in the realty sector and Covid-led lockdowns across regions.
Steel sector struggles after a strong run for two years
The performance of steel companies has been lacklustre in Q2FY23. The top-performing sector of the pandemic period is now struggling to maintain its margins even after economic activities have recovered from the lockdown-induced slump.
Data indicate that companies with higher domestic sales as compared to exports saw their revenues rise both YoY and sequentially. JSW Steel and APL Apollo Tubes are cases in point. JSW Steel's exports ratio, which was 32% in Q2FY22, decreased to 10% in Q2FY23.
Meanwhile, domestic demand remains strong for a number of reasons. The government continues to focus on infrastructure on the back of rising tax collections. Gati Shakti, the National Logistics Policy, is further expected to increase spending on infrastructure. Growing production in defence under Aatmanirbhar Bharat, PLI schemes for the manufacturing sector, record sales and booking in the real estate sector, including affordable housing – all these make a strong case for the sustenance of demand in the steel sector.
Sharp drop in profitability in Q2FY23
The concern really is the falling profits of steel companies. After a stellar run for two years, JSW Steel posted negative numbers in Q2FY23, as against a net profit of Rs 7,170 crore in Q2FY22. Even on a sequential basis, profits have fallen sharply for Tata Steel, Jindal Steel and Power and SAIL.
The only steel company that was able to gain profits both YoY and sequentially was APL Apollo Tubes. This was due to the differentiated business model that the company follows. Its focus has been on value-added products as they offer much higher margins compared to traditional steel products like longs and flats. APL Apollo’s entry into the pre-fabricated building segment is also paying dividends with an ongoing order for multiple hospital projects from the Delhi government.
Tata group proposes to merge all steel entities into Tata Steel
On 22 September 2022, Tata Steel announced that its board approved its merger with six subsidiaries and one associate using share swaps instead of cash. The proposed merger aims to enhance management efficiency and centralise procurement, optimise inventory and combine marketing efforts.
Tata Steel estimates the annual cost savings after the merger to be over Rs 8 billion, with a large contribution from lower royalty payments. Its listed subsidiaries like Tata Steel Long Products, Tata Metaliks, The Tinplate Company of India and TRF Limited, and unlisted companies like Indian Steel & Wire Products, Tata Steel Mining and S&T Mining will be amalgamated into Tata Steel.
“India should be making steel for domestic purposes and also for the world. Unlike other big steel exporters who have to import iron ores, we have our own and, thus, a great advantage in steel export. It is an opportunity to add value to our iron ores, create jobs in economically weaker parts of the country and build a large-scale globally competitive industry,” says TV Narendran, MD, Tata Steel.
Twofold setback of export duty and falling prices
Even though steel prices were on an upward trend at the beginning of the year, they dipped by about 40% to Rs 57,000 a tonne in the domestic market over the past six months. Its impact can be seen in the drastic fall in operating margins for steel companies. The prices in the domestic market peaked at Rs 78,800 per tonne in April.
At its peak, steel price became a matter of concern as it had a direct impact on industries like real estate and housing, infrastructure and construction, automobile and consumer goods.
Additionally, the drop in exports also contributed significantly to the lower margins. India’s steel exports dipped by nearly 54% to 3.6 million tonne in H1FY23. Exports in H1FY22 was 7.8 million tonne. The decline was caused by global recessionary trends affecting demand and the continued imposition of export duty by the Centre, making offerings pricier compared with competing countries.
Steel exports in September, at 0.6 million tonne, were down by over 57% YoY. India’s steel exports have been on the decline since April this year, with July being the worst with imports higher than exports.
The steel industry had extraordinary returns in the past three years with a minimum of 2X returns over the time period for each steel stock. APL Apollo Tubes stands out with 6X returns during this period. However, the dream run seems to have ended this year with negative YTD returns for Tata Steel and SAIL and slightly better performance by Jindal Steel and Power with 35.6% and APL Apollo tubes with 19.5% returns.
Expansion plans across the industry remain unchanged
Almost all the companies in the industry have expansion plans in progress. JSW Steel has an under-construction 5 mtpa (million tonnes per annum) brownfield project in Vijayawada. Construction activities are underway and equipment erection has commenced. The project is expected to be completed by FY24. In addition, it is expanding production capacity at Vasind, Tarapur, Punjab and Jammu & Kashmir.
Tata Steel is adding 5 mtpa capacity at Kalinganagar, which is under construction and is expected to be commissioned by FY24. APL Apollo is setting up a greenfield plant in New Raipur, which will be its largest facility spread over 400 acres. The project will commence in phases starting H2FY23, with 100% value-added products. The total capex for the project is Rs 8-10 billion, of which 80% is already incurred.
The outlook for the steel industry is bright in the long run. However, short-term issues may persist for a while. The impact of revoking the export duty on steel will play out over the next two quarters. While it is difficult to say whether the worst is over for the industry, favourable prices and improvement in global demand could help the sector bounce back from the lows that it hit in this quarter.