Twitter
Advertisement

Uncertainty dents funding for steel

With raw material prices fluctuating and finished steel prices likely to be depressed, lenders are reluctant to advance capital.

Latest News
article-main
FacebookTwitterWhatsappLinkedin

India is upbeat about its growing clout in the global steel industry.

But steel producers are a worried lot. While their plans are big, getting money to finance them has not been easy.

And it is not because banks do not have the funds, or also because the market potential is uncertain. The market is there. But none of the numbers can be frozen.

Sounds strange, right? But that is what is happening. Take finished steel first. With China’s domestic consumption slowing down to less than the consumption growth rates of all BRIC countries, there are good reasons to believe that China will look to exporting more of its steel than ever before.

Its favourite markets were South Korea and India. But South Korea has been expanding its own capacities. “This will cause South Korea to cut back on imports of around 6 to 8 million tonnes a year,” said Changho Kwag, director, Posco Research Institute, at a MetalBulletin Steel conference in Mumbai last month.

“We expect the import of hot rolled products to decline from the 25% level to around 15% and for steel plates from 50% to around 30%.”

This cutback on imports will mean that surplus steel from both Japan and China will have to find other markets in South and South-East Asia.

This is because steel remains a freight sensitive commodity, and longer distances add to freight charges substantially. This could mean that both these countries are likely to target India for their markets.

M Venkatraman, director, Essar Steel, added, “We expect China’s demand for steel to probably hit the ceiling. Steel consumption per head in China has already reached a high level, comparable with those of the industrialised countries. Demand growth of 30 to 50 million tonne/ year will not continue so long.

True, demand will surely grow in India, Brazil and Asean countries, but the growth in tonnage is likely to be far below that realised in the past 10 years by China. Their growth cannot fully compensate for Chinese demand becoming flat.”

He expects demand in North America, EU and Japan would at best be equal to the levels before the Lehman shock or even lower. Slow domestic demand and the shifting of steel consuming industries to other countries would be the main reason for this decline.

The biggest relief for India could come from the recent withdrawal of export subsidy of $50-60 that China’s steel producers got from the government. Also, if the yuan appreciates, China’s exports will become more expensive.

There is also trouble for Indian steel producers on the raw materials front, thanks again to China. The first sign of trouble came from the unilateral decision of major iron ore mining companies like Rio Tinto to replace annual contracts by a three-month spot price for iron ore.

This will greatly increase the risk of price volatility in iron ore and scrap, which in turn will have a negative impact on the entire steel supply chain.

Mining companies took this decision last year thanks to runaway prices of iron ore and coking coal - both critical inputs for the steel industry - spurred on primarily on account of demand from China.

With raw material prices constantly fluctuating, and finished steel prices likely to be depressed by dumping of steel from China and Japan, lenders have found advancing working capital to steel companies that much more problematic.

It has also affected the financial closure of several steel projects, as there is no clarity on the kind of prices they should expect on the raw material front.

Given the high investment levels in setting up steel capacity, and coupled with uncertainty on the pricing front for both finished products and even raw material, the financing of many steel projects could get hit adversely.

This could force many cash-rich producers to compress project implementation timetables.

Now comes another warning. China’s surge in automobile and white goods production and consumption has meant that China will soon emerge as one of the largest producers of steel scrap after the US. World Steel Association experts believe steel scrap could account for almost 70% of China’s raw material needs within the next five years. That could cause iron ore prices to crash.

Indian iron ore exporters are likely to seek their profit margins get squeezed. But this may be good news to steel producers as they will see a reduction in the cost of their own raw material inputs.

But there could be a silver lining. With iron ore prices climbing down, and with new technologies like Posco’s Finex, which claims to work on India’s high-ash content coal in lieu of expensive imported coking coal, there is the possibility of India becoming one of the most cost effective producers of steel in the world.

Result: There will be turbulence in the near future, but there is the hope of high demand in the medium (5-10 year) term.

Find your daily dose of news & explainers in your WhatsApp. Stay updated, Stay informed-  Follow DNA on WhatsApp.
Advertisement

Live tv

Advertisement
Advertisement