Steel industry prioritises exports amid low domestic demand - but it comes at a cost

The domestic steel industry in India has for the last two months increased its focus on exports to compensate for the steep contraction in demand in the domestic market but it comes at a cost as exports fetch almost 15 per cent lower realisation.

In the month of April, when the country was in a complete lockdown mode, exports accounted for an all-time high of 28 per cent of finished steel production in the country. While Europe remains one of the major destinations for shipments out of India - it had a share of close to 20 per cent in FY 2020 - other markets like the UAE, Vietnam and China together contributed 64 per cent to the total finished steel exports in April.

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"India's export realisations for HRC remain much lower, at $405/MT (FOB price, Rs 30,600/MT at current exchange rates) than the domestic realisation of Rs 36,000/MT, resulting in a 15 per cent lower gross contribution on such exports. Given that the lockdown in India continued in May 2020 and remains in force for some COVID-19 hotspots till June 2020, and the fact that Q2 is a seasonally weak quarter, domestic steel demand is likely to remain shallow in the first half of FY2021," says Jayanta Roy, Senior Vice-President and Group Head, Corporate Sector Ratings, ICRA. "In such a scenario, Indian steelmakers would have to push exports, even though less profitable, to keep operating at somewhat better capacity utilisation rates than what was reported in April 2020."

Even with the high percentage however, in absolute terms finished steel exports remained low at just 0.43 million tonne (mt) in April 2020, a 25 per cent drop over March and 16 per cent lower than in April 2019. Domestic steel production during the month contracted by 82.5 per cent while consumption was down 87 per cent. It came on the back of a lackadaisical year in 2019-20 when production had grown by just 1.4 per cent.

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"We have seen early signs of some pent-up demand in the long product segment, where some of the projects, which had stopped near their peak execution cycle at the end of the last fiscal, following the lockdown, have gradually restarted. With many of the secondary steel producers yet to resume full-fledged operations, long product prices have consequently seen a healthy increase of late," Roy said. "However, what is unclear is if this price buoyancy is sustainable, as it would largely depend on the fresh project pipeline from central and state governments who are grappling with revenue shortfalls amid the pandemic."

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