Revival of steel sector
A number of positive developments are taking place in the steel sector, which, in
turn, will warrant a re-rating of Indian steel stocks. Levy of anti-dumping duties,
lack of new capacities, and additional demand as a result of the government’s affordable
housing initiative, focus on infrastructure development and growth in the automobiles
sector will not only limit a further price fall, but will result in steel prices
Levy of anti-dumping duties extended by 4 years
The government has announced continuing levy of anti-dumping duties on steel (hot
rolled coil and cold rolled coil steel) imports for 4 years more (till August 2021).
There is also an expectation of extending levy of anti-dumping duties on colour
coated and wire rods. Levy of these duties will result in making steel imports expensive
thereby benefitting Indian steel manufacturers who will see a pickup in demand and
margins. The benefits of this duty levy are already evident in the performance of
Indian steel companies, which have recorded an improvement in their finances. Considering
the significant outstanding debt of Indian steel makers, the government is expected
to continue with the duty levy.
Higher demand; static capacity will result in boosting steel prices
No new capacities have been added in the Indian steel industry over the last 3 years.
With an expectation of higher domestic demand along with static supply, existing
capacity utilization will become optimal and domestic steel prices will move northward
going forward. Any new capacity that may be set up will carry a gestation period
of 3-4 years before production and hence, will not have any impact on controlling
the rise in steel prices.
Rising steel demand
While steel demand had slowed in the past, with the government’s affordable housing
initiative and focus on infrastructure development, economic growth resulting in
increase in demand in the automobile sector, higher oil & gas capacities, etc.,
there is an expectation of steel demand picking up significantly, going forward.
Additionally, with the government’s ‘Make in India’ initiative, there is an expectation
of steel being sourced from domestic producers for public sector infrastructure
projects. For instance, GAIL (Gas Authority of India Ltd), a PSU company, has indicated
that it will source steel from domestic producers for its forthcoming projects worth
Rs. 3,000 crores.
Over the next decade, steel production is expected to increase from the present
124.77 million tonnes (MT) to 300 MT in order to meet rising demand 1 .
India’s competitive advantage in steel
India is presently the 2 nd largest crude steel producer globally. India has the
advantage of low cost manpower, availability of abundant iron ore reserves. India’s
steel exports rose 102% in 2016-17 to 8.24 million tonnes (MT) over the previous
year (4.08 MT).
Positives for Indian steel stocks
A combination of anti-dumping duties on imports, static steel supply and rising
steel demand will see turnaround in financials of Indian steel businesses.
Jindal Stainless (JSL), belongs to the OP Jindal / Savitri Jindal group and is lead/managed
by Mr. Rattan Jindal. It is the largest integrated manufacturer in India and is
also a ‘global player’ in the sector, having world class facilities and capacities
at par with top ten manufacturers across the world. The group has a whole has a
Hot Rolling capacity of 2.5 million MT and Steel melting capacity of 1.78 million
MT as in FY17.
Owing to pressures from imports and new expansion in Odisha, the Company had significant
losses over the past few years. After large losses for the past few years, the company
demerged different business units under JSL, so that each business unit is operationally
stable and not a drag on each other and more importantly has a manageable/viable
capital structure. The scheme of arrangement post demerging is as follows:
1. Hisar unit (listed as Jindal Stainless Hisar Ltd – JSHL with Steel meting facility
of 780,000 MT as well as Ferro Chrome factory and the Chromite Ore mine).
2. Odisha Unit - Smelting Plant (10 lakh MT capacity) and 264 MW power plant, holds
26% stake in JCL and JUSL each. This is the existing listed Company (JSL).
3. Coke unit (Jindal Coke Ltd or JCL).
4. Hot Rolling Units at Vizag (Jindal United Steel Ltd or JUSL).
The de-merger was approved in November 2015.