Caught in meltdown

The day Tata Steel announced a 200% growth in its net profit in the second quarter, the chief finance officer and company secretary of Adhunik Metaliks, which supplies high grade alloy steel for auto components to Tata Motors, resigned, perhaps sensing the bad days ahead for Adhunik.

Once a big player in the niche and alloy steel sector, Adhunik, with its own iron ore and manganese mines, couldn’t save itself from the prolonged downturn.

Downstream downhill

Now under the insolvency resolution process, Adhunik faces uncertain days as the successful bidder selected by the Committee of Creditors, the Liberty House of the UK, hasn’t shown the money yet.

Adhunik might still get lucky as Liberty Group head Sanjeev Gupta has reportedly expressed intention to pay up soon.

Many other small steel players, some of them listed, weren’t as fortunate.

Jai Balaji Industries, which once had plans to build a five million tonne steel plant and tied up funds with State Bank of India, was earlier dragged by the lender to National Company Law Tribunal (NCLT), which has ordered winding up of the company.

Closed wire rope maker Ramsarup Industries, which was dragged to NCLT by ICICI Bank in January, is still waiting for a buyer.

MSP Steel and Power had a different fate with 12 banks, led by SBI, taking over the mid-sized steel maker through the conversion of debt under the now scrapped S4A scheme.  The firm has just reported a handsome growth in topline and a significant drop in its losses.

These two contrasting stories of large sized primary steel makers and the troubled secondary smaller plants sum up the state of affairs of India’s steel sector. While the stronger primary steel makers have weathered the storm or are being rescued because of being inherently profitable at a time of up-cycle in the industry, several smaller primary and secondary steel makers are gasping for breath.

“When an economy is growing at a healthy rate, the tolerance level is high. But in a downturn, what happened is that, out of the various classes of secondary steel producers, the ones with very inefficient processes are in trouble, while those which had efficient processes and produced value added steel products are far better off. Also, the environmental laws have become tighter and those generating a lot of effluents were all hauled up. So I believe there has been a necessary shake-up in the industry,” Anand Sen, president, steel business and quality at Tata Steel, told DNA Money.

When they went down

“High working capital requirement, very low profitability and current ratio, the high inventory level coupled with significant long-term borrowings and risks associated with current expansion plans” — was how a rating agency assessed the health of Adhunik Metaliks just when it started going down.

While the more prominent power sector received some kind of breather from the government, without which many of the power plants may had to be closed down, the secondary steel sector hasn’t got any relief.

“The Insolvency process has its own momentum, and this is just the beginning phase. The initial successes would impact future cases. The secondary steel sector is important for us but not from the perspective of the insolvency process, but from the perspective of raw material security; how they get coal, power or other inputs and how they get access to logistics. These are some of the things we are trying to work out,” Binoy Kumar, secretary, Ministry of Steel, said when asked about the impending crisis for those downstream companies.

Kumar, however, said that the downstream sector plays a crucial role accounting for more than 50% of the diversified steel sector.

“We don’t want that the secondary sector gets buried,” he said.

Insolvency and Bankruptcy Code

While regulations call for the resolution process to be completed within 270 days, so far only three of the five cases have been concluded; Bhushan Steel was acquired by Tata Steel, Monnet has been taken over by JSW in partnership with a private equity firm and Electrosteel has gone to Vedanta Resources.

“Whatever the IBC process has been able to sort out for the steel sector is a welcome development,” the steel secretary said.

In contrast, there has been no resolution in sight for small secondary and niche downstream players.

“FY19 will be a year of sector consolidation, with a revival of stressed steel assets in a conclusive environment. We expect flat steel sub-sectors (HR coils) to consolidate in the hands of the top four players. Indian steelmakers that participated in the bidding process, which also include global companies such as ArcelorMittal, seek to gain capacity more cheaply and quickly compared to executing greenfield projects,” says India Ratings.

At a time when the steel industry is enjoying a good time in term of price realisation, the IBC process provided the existing large players with a rare opportunity to acquire working assets cheap.

This also provided domestic players new capacities, to enter newer markets and also offered the opportunity to foreign players to enter Indian markets, it said.

Advantage Bhushan

After acquiring Bhushan Steel, Tata steel is now busy exploring ways of how to exploit synergy between the two steel makers and how to integrate and align the operations. In terms of synergy, Tata Steel is looking at the benefits from combined coal sourcing and integrated logistics costs. “Tata Steel is now a 19-million-tonne buyer of metallurgical coal in the international markets. So Bhushan still gets the benefit of being part of that. Secondly, when in terms of shipping -- buying and shipping in terms of long-term charters and things like that, there are advantages,” T V Narendran, managing director of Tata Steel had told analysts.

Consumption is key

India is now the second-largest steel producer in the country after China, overtaking Japan during the fiscal 2018.

But with production of just 102.34 million tonne of crude steel in FY18, a growth of just 4.5% over the previous even during time of an upswing,

India’s per capita consumption of steel stands at 69 kgs, way below the global average of about 214 kg.

“Consumption of steel is extremely low and it has been a historical issue. The aim is to take the figure to somewhere around 160 kg by 2030 and the government has been taking initiatives towards this target,” steel secretary Kumar said.

And in a bid to promote Rs 10 lakh-crore investment in the steel sector to take domestic capacity to 300 million tonne by 2031, the government is doing some minor tinkering, prominent among such steps is giving preference to domestic production over imported steel.

“Our policy for preference to domestically manufactured iron and steel has worked well and we are proud of this initiative. Because of this, the government was able to save over Rs 8,000 crore on import bill of steel over the last one-and-a-half years alone. Large PSUs like ONGC or GAIL which spend a huge amount of money in creating infrastructure like pipelines are now buying Indian steel,” he said.

The large players are enjoying an all-round improvement in demand and prices.

A majority of the large primary steel makers witnessed a revision in their rating outlook to stable from negative in during the first half while a few mid-scale entities were upgraded due to a significant improvement in their credit profiles.

Future tense

The good times are not expected to continue for long, though.

Margins are at peak with coking coal prices and currency depreciation seeping into cost of production in subsequent quarters.

“Tata Steel should emerge stronger once it digests M&A and achieve synergies. However, overall group cash flows remain hostage to steel prices, which are trending down in the international market but holding up well in India,” says research house Motilal Oswal. “We remain positive on the domestic demand. The EU steel demand recovery continues. However, imports are growing at a higher pace and that is an area of concern,” Tata Steel MD told analysts.