Securing a robust and sustainable future for the Indian steel industry

The latest EY and CII joint study – ‘Securing a robust and sustainable future for the Indian steel industry’ – highlights the importance of a unique strategic plan to nurture the future of a robust and a sustainable steel industry. This can include fast track execution of the declared infrastructure projects by the government, rationalizing duties and taxes to make domestic steel globally competitive, and deploy the latest management techniques to make their capital deployed more efficient with shorter time for returns to investments. The COVID-19 impact has triggered a sharper digitalization adoption curve, which needs to be sustained and taken forward appropriately. Adequate incentivization for adoption of digital technologies by the government will be key to drive growth specially for MSME players.

The impact of COVID-19 on the Indian steel sector and other challenges

The steel industry which was in an expansion mode till March 2020 with a Purchasing Manager’s Index (PMI) over 50, has been deeply affected due the lockdown. The supply side constraints due to inter-state border closures, along with labour shortage and office shutdowns put the economic cycle to a grinding halt, resulting in record low levels. The weak domestic demand along with large inventory build-up and supply chain bottlenecks caused prices to stay low and prevented rapid production ramp ups. Many large steel companies are forced to focus on managing the free cash flows for the rest of the year with structural interventions on cost take out, working capital and lower capex.

Indian steel sector is disadvantaged due to limited availability of some of the essential raw material such as high-grade lumpy Manganese ore & Chromite, coking coal, steel grade limestone, refractory raw material, nickel and ferrous scrap. High power costs in India make the steel industry less competitive and attractive as a commodity in comparison to other substitutes.

The key challenge that lies ahead of the Indian steel industry which was already battling with suppressed steel prices and escalated input prices the past financial year, is to restore back its profitability and cash flows, before the capacities can be augmented.

Opportunities that lie ahead

The sector is hopeful of rapid growth in near future, owing to myriad government infrastructure projects like Bharatmala, Sagarmala, Atal Mission for Rejuvenation and Urban Transformation, setting up of National Investment and Manufacturing Zone, Smart cities etc. The opening of Mining sector and rapid investment in the infrastructure sector shall surely result in a growth in capital goods which consumes nearly 15% of the domestic steel productions. Automobile sector is expected to sustain the steel demand in mid to long term, if not in the immediate near future, owning to ambitious Automotive Mission Plan 2026.

The figure below represents a summary perspective of the sector wise important drivers, expected to contribute to the steel demand:

Key interventions to boost the demand of steel

Today, the steel industry is looking forward to the support from the government, to bolster the steel demand not only in the short term, but also propel India’s steel industry to fulfil its ambitious targets. Resumption of construction activities through Unlock 4.0 is expected to strengthen domestic demand, while steel exports are likely to lose its momentum as China ramps up its domestic productions. Apart from this, the government can further support the steel sector through targeted policy initiatives such as reduction of taxes and cess on steel manufacturing inputs like iron ore and coke for domestic consumption, introduction of Border Adjustment Tax on import can be introduced less than or equal to the indirect levies to provide a level playing field for domestic steel manufacturers, expedite the imposition of Remission of Duties or Taxes on Export Product (RoDTEP) scheme and to work out favourable quota and duty regimes with US and GCC countries.

In line with the National Steel Policy envisaging at a capacity augmentation to 300 million tonnes (mt), major steel players will be adding capacity to reach ~ 200 mt by 2026, as per their announced plans. Fiscal incentives that are capital, expenditure and sales linked can act as enablers for players to set up steel mills.

While large steel plants investing progressively on green and clean technologies, the MSME/ SMEs sector are lagging way behind. Steel plants being one of the major polluters, significant incentives need to be provided to both large and small plants, to cut down carbon emissions, and improve dust, and water management. Experts believe that the next big wave of cleaner technology will see use of hydrogen as a fuel substitute to carbon, coupled with use of renewable energy.

As far as the role of private sector is concerned, there is a need for continued and rapid investment to fund research on steel as a key sustainable substitute of wood, plastic, concrete and aluminium would be an added incentive for the steel to remain a most sought after material for the future of India and its steel industry. Adoption of digital technologies is yet another key lever for a sustainable growth, while maintaining robustness. Digitalization of steel industries in an integrated manner will further improve the operating efficiency and quality, thereby, reducing the operating cost.