Raising the bar: Indian steel sector on capex spree

Sumit Maitra

Indian steel industry, particularly the large primary steel makers, are ferociously creating new production capacities prodded by an apparent commodity supercycle, sustained high domestic price levels, profit reserve buffer created out of a spiraling revenue and margin improvement supported by aggressive investment in infrastructure by the government, a stated policy to overcome the ravages of the Corona pandemic.

With historic sales and profit growth, steel makers are paying off their debt and thus improving their financial health to take on the responsibility of undertaking the current round of capex.

And considering that steel mills are already operating at close to 90 percent capacity utilisation, steelmakers have already doubled their planned capex for the period 2022-24 compared with the previous three fiscals.

Medium term capacity addition plans

The top six players (SAIL, Tata Steel, JSW, RINL, Jindal Steel & Power, Tata Steel BSL) constitute around half of India’s crude steel capacity, with the balance being constituted by other small to medium scale producers.

Blast Oxygen Furnace (BOF) technology accounted for 40 percent share in terms of installed capacity and 44 percent share in terms of production in Fiscal 2020.

As much as 27 million tons of capacity, accounting for almost 20 percent of domestic capacity, is expected to get added by fiscal 2025. This could get accelerated further, given sizeable brownfield opportunities for companies, including in acquired assets, says rating agency Crisil.

By the fag end of the current fiscal, around 7 mt of capacities including JSW’s Dolvi plant expansion of 5.6 mt, will come on board. Almost 18 mt would come as flat steel capacity and with flat steel taking more time to recover, it shall weigh on utilisation or, alternatively, driving more flat steel towards export markets, said industry insiders.

On the other hand, long steel will see better utilisation levels due to limited additions in modest demand growth scenario.

Large steel makers to gain market share

All these capacities would come from large steel players.

And with stressed assets worth 22 mt under the bankruptcy court along with brownfield capex and acquisitions, there will be consolidation in the industry with share of large players expected to rise to 65 percent by FY25.

Large steel makers exploited the opportunities thrown up by the pandemic induced realignment of the global trade, increasing their market share by 500 basis

points on year to 58 percent at the cost of smaller players as their share of industry capacity remained unchanged.

The improvement was driven by supplychain efficiencies, higher exports, and captive mines that limited the impact of iron ore shortage.

Higher exports helped counter lacklustre domestic demand for large steel makers (especially in the closing quarter of last fiscal and the first quarter of this fiscal). They also gained domestic market share, especially in the long-steel space. Consequently, they operated at over 80 percent utilisation levels as against sub-optimum levels of 62 percent by midsized and small steel makers.

Shadow of steel sector bankruptcy

Any major mismatch between the long term demand and current capex plans in an inherently capital-intensive and cyclical sector might trigger another round of debt defaults and bankruptcies seen in the previous down-cycle.

Following the steel sector upcycle from 2004–2011, steel makers, primary as well as secondary, expanded at a fast pace.

However, the sector faced a severe downturn between 2014 and 2016 leading to widespread bankruptcy proceedings in 2018. Financial institutions suffered as most of these projects were funded by banks leading to sharp haircuts.

“This time, the industry is better positioned for a down-cycle, with almost the entire expansion expected through brownfield mode, which involves lower cost and is less likely to see delays. Also, about 35 percent of the capex is towards increasing the proportion of downstream value-added products, besides on mining and efficiency, while the balance is on upstream capacities. More importantly, the industry has seen significant consolidation and balance sheets are expected to be much stronger,” say Naveen Vaidyanathan, Associate Director, Crisil Ratings in a report.

Major expansion plans

Tata Steel eyes up to 40 mtpa by 2030

Tata Steel is increasing capacity of its India operations through organic and inorganic growth with a target of achieving 35-40 million tons per annum (mtpa) by 2030.

This would double its steelmaking capacity in India from 19.6 mt currently.

The company’s work on 2.2 mtpa CRM Complex and pellet plant at Kalinganagar is progressing well while expansion of the 5 mtpa Kalinganagar Phase II is on full swing, Tata Steel official said during a recent virtual Investors Day where the company laid out its growth plans and carbon reduction strategy.

For this, the company would be investing Rs 10,000-12,000 crore a year over the next five years.

While no new projects were announced, the organic capex plan of Rs 50,000–60000 crore in India over the next five years indicates more brownfield expansions (beyond Kalinganagar Phase 2) are likely to be initiated soon to achieve the targeted doubling of India capacity by 2030, analysts said.

With the resumption of the 5 mt expansion at Kalinganagar, it has already taken the first step in this direction.

It also aims to set up a 0.5mt Electric Arc Furnace capacity by 2024, which would take its capacity to 25 mtpa in FY25.

It would pursue the remaining 15mtpa of growth through a mix of brownfield expansions at Kalinganagar, Angul, Jamshedpur and inorganic growth opportunities for long products.

The expansion process would improve the share of longs in its products mix to 25 percent by 2030 from 20 percent currently implying 2.5x inorganic growth in longs capacity.

It aims to increase its downstream capacities such as CRM, ductile iron pipes, tinplate, tubes, and wires to 11.5 mtpa (from 6.6 mtpa) over the medium term.

Furthermore, it aims to increase its iron ore capacity to 50 mtpa to meet the higher iron ore requirement and sell the surplus iron ore on the market.

Capex outgo to reach its earlier peak