Covid impact: Large steel mills return to near normal production levels in May
After an unprecedented fall in domestic steel production in April due to one of the most stringent lockdowns in the world, large Indian steel manufacturers revived production to normal through May. Preliminary production numbers from two large firms, JSW Steel and Jindal Steel and Power (JSPL), and industry estimates for others suggest that average capacity utilisation has improved to nearly 75% level in May, backed by renewed domestic demand.
Companies continue to export the bulk of their production while selling at a discount in the domestic market, keeping their profit margins under pressure this quarter even as they try to boost sales.
JSW Steel ramped up its capacity utilisation in May to an average of 83%, recovering from the 38% average utilisation of April. Crude steel production in May was at 12.48 lakh tonnes, showing growth of 122% over April, but lower than the 14.53 lakh tonnes it reported in May 2019. The bulk of this month’s production came from flat steel products, accounting for 9.05 lakh tonnes.
Meanwhile, JSPL, which bucked the industry downtrend in April, continued to outperform in May. It recorded its highest ever standalone steel sales of 6.4 lakh tonnes in May, growing 28% as compared to sales of 5 lakh tonnes in the same month a year ago. For JSPL too, exports have kept the mills running. Out of the 6.4 lakh tonnes, 4.01 lakh tonnes were export sales. Consolidated steel sales stood at 7.97 lakh tonnes, growing 26% year-on-year.
The other large steel players in India had marginally less stellar performance in May, but have recovered from a dismal April nonetheless. Steel Authority of India (SAIL), the largest public sector producer, operated at 55% levels, even as it struggled to offload nearly 2 million tonnes of an inventory backlog by boosting export sales and forging new relationships with customers abroad.
Tata Steel, according to a senior company official, is operating at levels of between 65% and 70% currently in India, even as it is in talks with the UK government for financial support to continue operations at its high-cost Port Talbot steel mills. ArcelorMittal Nippon Steel India (AM/NS India) is also operating at near full capacity after a production cut in April and early May.
These large producers account for nearly 75 million tonnes (mt) of India’s installed steel capacity of 140 million tonnes per annum.
In a recent interview with Mint, MVS Seshagiri Rao, Joint MD and Group CFO, JSW Steel, substantiated this recovery, saying: “Indian steel demand in May improved by 25-30%. By the time the problems of labour, liquidity and logistics are corrected – which I believe will happen only in the second half of this year – until then shortfalls in domestic recovery will be offset by higher exports. We are selling whatever domestic demand can absorb and the rest is for exports. I would say that our exports have gone up to 50% of production.”
“Domestic demand is slowly coming back,” Anil Kumar Chaudhary, Chairman, SAIL, told Mint. “We’re seeing some construction projects start again in some states such as Telangana. They’ve started booking demand for steel and cement. Many auto companies like Hyundai, Maruti have started production. We are also supplying 1-1.5 lakh tonnes of steel to railways every month and these despatches happened through the lockdown.”
However, steel prices have remained subdued, both locally and internationally, keeping profit margins under pressure even as industry ramps up production. Domestic prices of hot rolled coils, the industry standard for price comparison on basic steel products, fell by ₹300/tonne in the first week of June. Manufacturers are compensating for the weak demand and prices by exporting more than two-thirds of their production.
A June 4 note by Edelweiss Institutional Securities says that “against a normal level of 15–20%, exports have gone up to 65–70% in the sales mix. As export prices are at a 14% discount to domestic prices, we believe margins of steel companies would come under pressure. Furthermore, our channel checks indicate that steel companies may offer a discount of up to ₹1,500/tonne on flat products and ₹1,000/tonne on long products in the domestic market to boost sales volume. This might further dent margins.”
Despite the fall in prices, production bouncing back points to signs of a broader economic revival. Mint had reported in April that the domestic steel industry was reeling under the side-effects of an extended national lockdown and a near complete disappearance of demand. Several key blast furnaces had been shut, mimicking the near total shutdown of the Indian economy. India’s crude steel production fell by a record 69.5% y-o-y in April, with all of the country’s manufacturers producing only 2.8mt on steel in the first full month of the lockdown, reflecting a 91% contraction.