India’s rising steel demand is making companies starry-eyed

23-Oct-2018

Steel companies are behaving like children in a candy store. Their appetite for distressed steel assets remains robust, despite worrying external events such as trade wars and the resultant scaling down of global growth projections. Despite the fact that investors are worried about steel companies taking on more debt than they should, it has not melted the resolve of India’s steel companies.

Could they be on to something? World Steel Association, a global industry body, released its short-range demand outlook this week, saying what was already known that India’s growth ranks highest among major steel-consuming countries, but the gap is widening sharply.

Six months ago, World Steel had projected India’s demand to grow by 5.5% in 2018 and 6% in 2019. In its latest report, those numbers have been revised to 7.5% and 7.3%, respectively. The organization expects steel growth to remain robust, as the economy is recovering after the twin shocks of demonetization and the roll-out of the goods and services tax. It said that demand will be supported by improving investment and infrastructure. Indeed, steel demand growth has been robust in the current fiscal year.

What about the global outlook for steel? Excluding China, global steel demand is expected to increase by 2.1% in 2018, followed by 2.7% in 2019. This is lower than the April estimate, possibly due to the effect of the global trade war on economic growth. Europe and the Americas are projected to see slower demand growth, while Africa and the Middle East are expected to do better.

Coming to China, the closure of illegal induction furnaces (to curb pollution) is making it difficult for World Steel to accurately project steel usage. Since the demand that was being met by these illegal operations is now moving to legal units, reported numbers need to be adjusted.

Therefore, while China’s demand grew by 8.3% in 2017, real growth was just at 3%. Similarly, projected demand growth in 2018 is 6%, but real demand is expected to grow by 2.1%. A more reliable number for 2018 should be available in the next outlook report.

Even then, in deciding global growth, China is critical as it accounts for 46% of all demand. How it navigates its economy in these troubled times will play an important part in determining its real steel demand.

Coming back to India, news reports this week said that JSW Steel Ltd’s bid for Bhushan Power and Steel Ltd at ₹19,700 crore is finding approval from lenders. While litigations related to this case are ongoing, the possibility of a further increase in bids cannot be ruled out. Another large steel asset in the queue is Essar Steel Ltd. The two-week deadline for ArcelorMittal and Numetal to repay outstanding loans of related parties will end this week. Arcelor said on Wednesday that it has approved paying off these dues. Once the deadline passes, it should become clear which bidders remain in the fray.

Steel companies are paying through their nose for these assets, in the hope that they can turn them around, scale up their operations and, eventually, justify their investment decision to shareholders. The pace of demand growth and stable steel prices is giving them the confidence for these acquisitions. Needless to say, the big risks in this strategy are a sustained fall in steel prices or demand.

Source: LIVEMINT