Worldsteel Short Range Outlook

Worldsteel expects steel demand to grow by 1.8% in 2023 and reach 1,814.5 million tonne (mt) after contracting by 3.3% in 2022. In 2024, steel demand will see a further increase of 1.9% to 1,849.1 mt. Worldsteel expects demand recovery would be slow in developed economies while it sounded upbeat about the prospects of developing nations. Steel demand has been feeling the impact of the high inflation and interest rate environment. Since the second half of 2022, the activities of steel-using sectors have been cooling sharply both for most sectors and regions as both investment and consumption weakened. The situation continued into 2023, particularly affecting the EU and the US. Considering the delayed effect of the tightening monetary policy, it expect steel demand recovery in 2024 to be slow in the advanced economies. Emerging economies are expected to grow faster than developed economies, but the performance of emerging economies continues to diverge, with emerging Asia maintaining resilience.

The Indian economy remains stable against the pressure of the high interest rate environment, and India’s steel demand is expected to continue its high growth momentum. Growth in India’s construction sector is driven by government spending on infrastructure and recovery in private investment. Infrastructure investment will also support the capital goods sector growth. Healthy growth momentum will continue in the automotive sector as well. After growth of 9.3 percent in 2022, steel demand is expected to show healthy growth of 8.6 percent in 2023 and 7.7 percent in 2024.

Chinese steel demand contracted in 2021 and 2022 as its economy decelerated sharply due to unexpected lockdowns that extended across the country. The depression in the property market that continued into 2023 is weighing on the economy, leading to an unexpected slowing of the Chinese economy. Almost all steel-using sectors have shown signs of weakening since the second quarter. The government may kick off some additional infrastructure projects. As a result, infrastructure investment in both 2023 and 2024 is expected to remain moderately positive.

India turned a net importer of finished steel in the first eight months of the fiscal year that began in April with shipments from China reaching their highest in five years. China was the top exporter of finished steel to India between April and November, shipping 1.3 million metric tonne of the alloy, up 48.2% from the same period a year earlier. The world's top steel producer exported mostly hot-rolled and cold-rolled coil or sheets to India, followed by plates, and pipes. The Indian steel industry has sought government intervention to safeguard against Chinese imports. During April-November, India imported a total of 4.3 million tons of finished steel, up 13.4% from a year earlier with shipments at a four-year high. South Korea was the second-biggest exporter of finished steel to India over the period, shipping 1.3 million metric tonne. India is the world's second-biggest crude steel producer with output standing at 94.1 million tonne in the eight months, up 14.7% from a year earlier. Domestic consumption of finished steel was 87.1 million tonne, up 14.9% at a five-year high.

Government envisions PLI 2.0 for steel sector in 2024

The government is working on Production Linked Incentive (PLI) scheme 2.0 as well as looking at ways to ensure adequate raw material supply for the steel sector in 2024. Further, efforts will be made to push for the use of artificial intelligence and new age technologies among the industry players to boost steel output while also look at reducing carbon emissions. While a robust economic growth will increase the demand for steel, industry players remain concerned about rising imports and high raw material prices amid geopolitical uncertainties.

Production and consumption of steel have shown a strong recovery after the coronavirus pandemic that impacted the sector in 2020-21. During the April-November period this year, the cumulative production of crude steel was 94.01 million tonne (mt), up 14.5 percent year-on-year. The consumption of finished steel jumped 14 percent to 86.97 mt on an annual basis during the same period. India has set a target of having an installed steel manufacturing capacity of 300 mt by 2030. At present, the country has a capacity of around 161 mt. The government had approved the PLI scheme 1.0 to boost the production of speciality steel that would help create additional capacity of around 25 mt.

The government is actively considering the inclusion of refractories in the upcoming PLI scheme 2.0 for steel and will align with the ambitious goal of doubling the country's steel production capacity to 300 mt by the year 2030.

UK plans to implement carbon tax on imported goods like steel from 2027

The British government announced has plans to charge a carbon levy on imported raw materials such as aluminum, iron, steel and cement from 2027, in an attempt to prevent firms being undercut by overseas producers. However, the plan has come under criticism from the body representing British steel as being too sluggish, as it will come into effect one year after similar proposals from the European Union (EU) are implemented. For years, fears have been expressed that efforts to cut greenhouse gases in the UK are not being matched overseas, meaning that emissions are just being displaced to other countries without ambitious net-zero targets, leading to little global benefit. This levy will make sure carbon-intensive products from overseas like steel and ceramics face a comparable carbon price to those produced in the UK, so that its decarbonisation efforts translate into reductions in global emissions.

Tata Steel aims to complete Kalinganagar project expansion by Dec 2024

Tata Steel aims to complete expansion of its Kalinganagar project by December next year. The company had commenced the second phase of expansion of its Kalinganagar project in Odisha in November 2018 to reach the production capacity of 8 million tonne per annum (mtpa), from 3 mtpa, with an investment of Rs 23,500 crore. The project includes raw material capacity expansion, upstream and mid-stream facilities, infrastructure and downstream facilities including a cold rolling mill complex. The phase 2 expansion will increase the production of flat steel at the plant to meet the growing requirements of automotive, general engineering, oil & gas, lifting & excavation and other value-added segments in the country. Along with its 8 mt of annual production capacity at Kalinganagar, the total output capacity of Tata Steel's India operations will reach 26.6 mtpa.

Steel sector aggregate performance in Q2FY24

Aggregate net sales of 109 steel producers rose 4% to Rs 200958 crore in the quarter ended September 2023 (Q2) compared with a year ago. The operating profit margins (OPM) increased 470 basis point (bps) to 12.1% resulting in 70% rise in operating profit (OP) to Rs 24393 crore. Interest cost rose 26% to Rs 6346 crore while depreciation increased 10% to Rs 7835 crore. PBT increased 199% to Rs 11796 crore. Tax expense increased 63% to Rs 2886 crore leading to 262% rise in profit to Rs 9544 crore.

Tata Steel’s consolidated sales fell 7% to Rs 55681.93 crore in Q2 of FY2024 compared to Q2 of FY2023. OPM fell 240 bps to 7.7% leading to 30% decrease in OP to Rs 4267.82 crore. Standalone performance was broadly stable, but the UK and the Netherlands performance has been adversely impacted during this quarter. The UK operations suffered from low steel prices as well as higher costs on the emission rights front. The company reported exceptional items of Rs 6,899 crore including an impairment charge of Rs 2,631 crore for TSUK (Tata Steel UK Limited) and a provision of Rs 2,425 crore towards restructuring costs (including potential asset closure and redundancy costs) in TSUK. Net profit reported was loss of Rs 6196.24 crore compared to profit of Rs 1514.42 crore.

JSW Steel’s consolidated top line increased 7% to Rs 44584 crore on strong volume growth in domestic operations. Steel Sales for the quarter was up by 11% to 6.34 million tonnes in Q2 of FY2024 compared to Q2 of FY2023. OPM increased 1350 bps to 17.7% on lower base & lower coking coal costs leading to 350% increase in OP to Rs 7886 crore. Net profit reported was Rs 2760 crore compared to loss of Rs 848 crore in Q2 of FY2023 on the back of higher sales and lower coking coal costs. The company plans to incur capex of Rs 52000 crore till FY26 to reach 37 mtpa capacity majorly funded by internal accruals.

JSPL consolidated net sales fell 9% to Rs 12250.16 crore in Q2 of FY2024 compared to Q2 of FY2023. Sales volume was flat at 2.01 mt compared to previous year quarter. OPM rose 440 bps to 18.7% leading a 18% increase in OP to Rs 2285.68 crore led by lower input costs, partially offset by lower realizations. Pat was up 595% to Rs 1387.82 crore. The strong performance was driven by a sharp reduction in costs, which offset seasonally weak pricing environment during the quarter. The company's costs fell 13%, helped by a drop in costs of iron ore and metallurgical coal, the two main raw materials used in making steel.

PSU steel producer Steel Authority of India (SAIL) posted a 13% increase in net sales to Rs 29712.07 crore. Q2 results had benefit of one-time receipt of Rs. 1749 crore on account of rail price revision for FY22. OPM of the company was down 1020 bps to 13% leading a 427% decrease in OP to Rs 3875.36 crore. Net profit reported was Rs 1305.59 crore. SAIL plans to spend Rs. 15000-20000 crore of capex over the next five years on debottlenecking of existing facilities which could yield additional capacity of 3.5-4 mtpa in phased manner starting from FY25. The company aims for reduction in debt to Rs. 22,000 by end-FY24 versus Q2FY24 debt of Rs. 25490 crore.

Conclusion

The primary steel industry is likely to experience a challenging environment during the second half of FY24 amid increased input cost and weakening steel prices. The domestic hot rolled coil (HRC) prices have corrected by 6.7 percent since early October 2023, while the rebar prices witnessed a fall of 4.7 percent in the same period. The overall industry's operating profit margins in H2 FY2024 are expected to be lower compared to H1 FY2024, largely driven by weaker profitability from the blast furnace operators. While seaborne coking coal prices have been volatile since Q2 FY2024, thermal coal prices have remained more range-bound. Due to supply-related constraints in Australia, spot premium hard coking coal cargoes unexpectedly rallied up by 50-55 percent in a short span of three months, reaching an interim high of USD 363 per tonne (metric tonne fob Australia) in mid-October 2023. The blast furnace operators have been diversifying their coal sourcing by progressively reducing the share of coking coal imports from Australia from 71 percent in FY2022 to 52 percent in H1 FY2024.

Coupled with the higher resilience of long steel prices, the operating profit margins of secondary steelmakers are projected to be higher by 75 basis points in H2 over H1 of FY2024, even as primary producers, which are primarily blast furnace players, are slated to witness a drop in operating margins by 135 basis points over the same period. Primary steel players manufacture steel through blast furnace route and the secondary industry uses electric arc furnaces and induction furnaces to manufacture steel.