If the last few years have been any indication, 2016-2017 is likely to be a tough year for Indian steelmakers. As the world’s largest producer of sponge iron, the third-largest producer of crude steel, and the fourth-largest producer of finished steel, India needs to be able to move ore and steel products fast. In 2015, that’s been a problem for multiple reasons, and it could get worse in the next year, because none of the underlying drivers of steel demand are likely to change.
For CIOs in the sector, both those at the mining and the manufacturing ends, 2016 is likely to be about finding ways to hone their companies’ processes with the end aim of making these enterprises more competitive so that they can either lower prices, or combat profitability pressures in a depressed market.
And a depressed market it will be. There’s a glut in the international market led by China dumping excess steel. One Macquarie analysts went so far as to call the steel industry the poster child for oversupplied commodity markets.
In its report 2016 Outlook: Indian Steel Sector, Fitch expects steel consumption in India to rise modestly, and has said it has a negative outlook on the sector.
From April 2015 to November 2016, Indian steel manufacturers produced 60 MT (million tons) of finished steel (alloy+non-alloy). A majority of that (52 MT) was consumed domestically, a 5.3 percent uptick from the last period last year. That’s good news for Indian steel manufacturers, but many feel that it’s a blimp on an otherwise bleak outlook. The major consumers for steel including the auto and consumer durables sector, and infrastructure projects as well as housing. But with soft consumer demand in these areas, and stalled infrastructure projects, it’s unlikely demand for steel will see a spike in the next year.
The problem of decreasing steel prices is made worse by the falling costs of iron ore. According to a Bloomberg, in the first week of December 2015, prices for iron ore (with 62 percent iron content) fell to its lowest level since 2009, and analysts are saying there’s no reason why it shouldn’t fall lower. Since 2011, the report said, iron prices have fallen by 80 percent.
In the first week of December 2015, prices for iron ore (with 62 percent iron content) fell to its lowest level since 2009.
Not everyone is as negative. According to Anjani Agrawal, National Leader, Metals and Mining, EY, “Primary demand is expected to come from ports, oil and gas, power and construction in the near future. Urbanization will further increase demand for steel. As per industry estimates, the Indian real estate market is estimated to grow to approximately $ 140 billion by 2017, which is likely to contribute to a significant portion of long-steel demand.”
But even if domestic demand does rise, there’s a danger that it will be fulfilled by cheaper imports, thanks to the glut in international markets. From April 2015 to November 2016, India’s steel imports saw a 30 percent jump compared to the year before. During 2015, Indian steel companies have complained against rising imports of products like hot-rolled steel from countries including China, Korea, Japan and Russia.
@arunjaitley @nstomarminister need to strengthen the Indian steel industry by putting safeguard on other down stream products also
— Sajjan Jindal (@sajjanjindal59) September 14, 2015
The import of steel wasn’t always such a challenge. In 2003-2004, India exported more steel than it imported. In that year, India exported 4.5 MT of steel, but imported only 1.5 MT. That’s reversed today. From April 2015 to November 2016, India exported only 2.5 MT of steel, compared to imports of 7.4 MT. By the end of March 2016, Aruna Sundararajan, India’s steel secretary, expects steel imports will be about 14-15 MT, compared to 10 MT in the last year.
It’s something the government has taken cognizance of. In June, it made anti-dumping moves when it imposed an additional duty of $316 on every ton of imported steel (for specific categories) coming from certain countries. In September 2015, it also slapped on a 20 percent safeguard duty to protect Indian steel manufacturers from a surge of steel imports. According to news reports, the duty is taking effect. In November 2015, imports dropped 6.9 percent compared to November 2014.
In 2016, Sundararajan is reported to have promised more disincentives on steel imports.
But going into the next year, it’s important for the industry to recognize that government protectionism are merely temporary, while the problem of a demand-supply mismatch at the global level is a long-term one. As an underlying driver of steel prices, the international glut is unlikely to ease in the next year. Standard & Poor’s expects it will take a few years before the world clears through the current steel glut.
For CIOs in this sector, 2016 will be about finding ways to hone their companies’ processes with the aim of increasing competitiveness so that they can either lower prices, or combat profitability pressures, to tackle a depressed market.
“The sales realization of the Indian steel industry largely depends on global pricing,” says Agrawal. “With volatility in steel prices, effective cost management would be very critical to ensure healthy rate of returns for new projects and the viability of Greenfield projects in a capital-intensive industry such as steel. Thus, steel companies need to focus on initiatives such as yield optimization, improvement in overall equipment effectiveness, supply chain optimization and manpower productivity improvement to optimize costs to remain competitive in the coming years.”
For CIOs in the sector, Agrawal’s words rings true. They show what to focus on in 2016: Operations, processes and lowering costs.
At Jindal Steel and Power, group CIO Vipul Anand, is ready for what 2016 may bring. “This is the right time for large organizations like us to be ready for the future by improving internal processes, by investing in R&D, and the right people.”
He is also ensuring greater competitiveness by introducing more intelligence. “Like every business, our business, too, needs to get our products to customers at a committed price, at the right time, and at the agreed quality. Every business has these challenges, and it’s a question of how intelligently these challenges are handled,” he says.
That’s why, increasingly, Jindal Steel and Power is turning to intelligence. “Key areas where we are focusing on include business analytics to help our managers take decisions based on real-time information,” says Anand. This data includes both internal data, and data from the external world, like competition data, industry data, and market analysis, he says.
He also says that the company already has its private cloud, upping the company’s ability to be efficient.
One of the advantages of being an Indian steel manufacturer is access to cheap labor. But the productivity of India’s workers is also lower, as a result Indian companies have to hire many more to do the same job their counterparts in other nations do.
According to a May 2015 research paper written by Dr. B.S.N. Raju, HOD and associate professor, Department of Management Studies, M.R.P.G. College, on average “labor productivity in India is 126 tons/man year”. At RINL and TISCO, he says, labor productivity is higher at “385 tons/man year and 450 tons/man year respectively.” But that’s still lower than their global peers. The productivity of workers at POSCO and NIPPON, for example, are 1,345 tons/man year and 980 tons/man year, according to Dr Raju.
And over time, with wage increases, inexpensive but less-than-productive employees, could work against steel manufacturers.
This creates potential for Indian CIOs to add value. By setting up systems and using video conferencing tools, just like their counterparts in the auto sector have done, CIOs in the mining and steel sectors can potentially educate large numbers of Indian steel workers, thereby increasing their productivity.
Despite the challenges and the slow growth 2016 will bring, there is still plenty of opportunity of the Indian steel sector, given the latent demand in the country. India’s per capita consumption of steel is about 59 kilos, a far cry from the per capita use of steel in other countries. In China, per capita use of steel was 480 kilos in 2014. In Japan and Spain that number is 500 kilos a year. The global average is 217 kilos, according to EY. That’s one of the reasons why government of India is trying to grow steel production to 300 MT by 2025.
The medium term outlook for the sector is good, but CIOs in India’s mining and steel industry shouldn’t expect an easy 2016.