Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint

A troubled time for India’s steel industry

Tumbling prices and global competition are just two problems forthe sector

The sharp decline in global commodity prices is generally good news for the Indian economy. There could be one exception to the rule: steel.

Global steel prices are now at their lowest level since 2003—and steadily falling. This has created problems for the steel industry in many countries. Even global giants such as US Steel, Posco and Nippon Steel have seen profits come under pressure in their latest quarters. Indian steel companies are unlikely to be exceptions to the overall global trend.

A further deterioration in the financial health of Indian steel companies can add to the problems that banks are currently facing. Investment bank Credit Suisse estimates that the $50 billion of debt in the books of the major steel companies is around 15 times their collective operating profit in fiscal year 2015. That is very high. The recent decline in global steel prices could worsen the arithmetic. In fact, the Credit Suisse analysts believe that the cash costs of Indian steel companies were higher than steel prices in China. In other words, they would make losses at current prices even if they have no interest costs to pay.

Banks have good reason to worry. Lending to the steel industry accounts for around a 10th of the bad loans of the Indian banking system, according to the latest Financial Stability Report published by the Reserve Bank of India in June. The other major contributors to the problem are loans to textile companies, power distributors and infrastructure projects. But the domestic steel industry is particularly exposed to global price shocks.

But that is not the entire story. The Financial Stability Report also notes: “Five out of the top 10 private steel producing companies are under severe stress on account of delayed implementation of their projects due to land acquisition and environmental clearances, among other factors."

The sectoral credit stress tests conducted by the central bank show that the steel industry is least able to withstand shocks. The sensitivity analysis showed that the most significant effect of a single sector shock would be on the steel industry exposures, in terms of restructured assets becoming non-performing assets. Steel makers in many countries are already complaining about dumping by Chinese steel makers. A Bloomberg report cites Chinese customs data to show that steel exports from China shot up by 28% to 52.4 million tonnes in the six months to July. China is thus pushing down steel prices in two ways: its economic slowdown has reduced global demand for steel while domestic overcapacity is pushing firms to cut prices aggressively to sell abroad.

Some reports suggest that the Indian government is already under pressure to impose higher tariffs on steel imports. Anti-dumping action has also been initiated against imports of some steel varieties from China, South Korea and Malaysia.

But there is an interesting twist to this tale: the US commerce department has said Indian steel companies are among those that are said to be dumping the alloy in the US market. It seems as if a mild trade war is brewing.

It is quite likely that the coming months will see calls for higher protective tariffs, regulatory forbearance on bad loans, some attempts to sell assets to reduce debt, and some general complaints that projects got into trouble not because of business risks but regulatory problems in the last years of the previous government.

History has a useful lesson to offer. The Indian steel industry has been through a similar situation in the early years of this century: high levels of debt, excess capacity, low global prices, Chinese dumping, demands for protection and failure to service bank loans. The way out of the mess was a long one. Hard decisions had to be taken. Neither steel company managements nor the bankers who have lent to the industry can afford to ignore this harsh reality.

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