An imbalanced steel market has the potential to arrest India’s booming growth and severely impact the downstream industries associated with the metal.
After enjoying a prolonged period of highs over the past 6 months on the back of a strong recovery in domestic demand and high international prices, steel prices in India have finally started to normalise and inch back to their usual range. From a multi-year high level of INR 58,000/tonne, steel prices have now started trading at Rs 48,000/tonne and are expected to continue to decline.
The drop has been primarily driven by resistance from end-user industries. It has also been aided by the Chinese Lunar New Year – a period when industrial activity usually remains subdued. Barring a fleeting uptick in prices in the near-term (as China returns from its New Year), in the medium-term steel prices in India are expected to dip, in line with weakening global rates as production picks up globally.
Prices will be further dampened by a fall in domestic iron ore prices as issues related to iron ore availability in India ease out. As mines have started production, pellet prices have gone down.
Consequently, miners such as NMDC have reduced iron ore prices, giving breathing space to steelmakers. A correction in prices is taking across the value chain.
An indirect effect of this enhanced availability of iron ore, that will soften steel prices, is the resumption of steel production by smaller units. Earlier, smaller- and medium-sized steel production mills could not function due to the unavailability of the feedstock, resulting in a demand-supply mismatch.
Further, the Indian government’s move of reducing import duties and doing away with anti-dumping duty and countervailing duties temporarily will force domestic producers to align their prices with the landed cost of imports.
In the Union Budget 2021, customs duty on semis, flats, and long products of non-alloy, alloy, and stainless steels was reduced to 7.5 per cent. Duty on steel scrap was exempted for a period up to March 31, 2022. Also, anti-dumping and countervailing duties on certain steel products were revoked till September 30, 2021.
Fifty per cent of India’s imports come from FTA nations. If domestic steel prices are higher than imports – something that is currently the case – then the latter flood the market. Now as supplies from countries such as Japan, Korea and Russia resume in 2021, there will be a price correction in the domestic market. This correction is expected to take place in the next 2 months – the average lead time for imports to arrive at Indian ports.
The resulting drop in steel prices due to the aforementioned reasons would be partially offset by a few factors.
One – The large fiscal stimulus packages rolled out by governments across Europe, the US and South East Asia region. China alone has announced a USD 550 billion stimulus package aimed at recovery in the economy and an uptick in steel demand.
These stimulus packages will spur growth in these nation’s respective infrastructure sectors, pumping up steel demand. In India too, the biggest push to steel would be from government spending on infrastructure projects, something that is contributing to 50-60 per cent of incremental demand.
Second – Strong growth in end-user industries, primarily automobiles, white goods, bearing and forging industry, piping industries, drums and barrels and packaging industries, is also boding well for the sector. Consequently, steel off-take has risen and demand in rural India has also picked up.
Additionally, the introduction of the PLI scheme in end-use sectors will also spur production in these industries, accounting for increased demand for steel in the nation.
Lastly, central banks’ efforts to enhance liquidity in the market will also significantly contribute to the commodity’s positive outlook.
The coming few months will be very critical for the Indian economy.
An imbalanced steel market has the potential to arrest India’s booming growth and severely impact the downstream industries associated with the metal. It will be interesting to see how steel prices move as the economy continues to pick up from the slump it witnessed in 2020.
(Ishaan Jain leads the Metal & Mining Sector of Invest India, the National Investment Promotion and Facilitation Agency of Government of India. Views are personal)