As we all know that steel is an important raw material and is used by many industries for manufacturing their products. Aviation, engineering, construction, automobile, any industry you name under the sun, one way or the other, are using steel, for the manufacturing of their goods. Interestingly the growth of the steel industry is also directly proportional to that of these industries. Therefore, it is not surprising that the steel industries took a battering this year. The economic slowdown has had a domino effect on the growth of most of these industries and due to this, there was a decline in demand for raw steel.
It is imperative for the development of any country that it has a robust steel industry. India is at present the fourth-largest producer of crude steel in the world and it is predicted that it will place itself in the second position by 2020. The contribution of the steel industry in India’s growth is two percent of its GDP. But at present, the steel industry is grappling with many problems. The effect of the economic slowdown is palpable on the growth of
this industry. The profit of Tata Steel Ltd’s first-quarter growth plummeted to the lowest in two years. JSW Steel Limited’s growth slumped to more than half. Moreover, there is a foreboding that profit margins for steel companies will further slump against the backdrop of low domestic steel consumption, the incoherent approach towards global growth and the ongoing trade war between nations. Over the last four quarters, the operating profit margins of the steel industry are going downhill, reducing gradually from 22.6 percent in the first quarter of the financial year 2019 to 18.2 percent in quarter one of the financial year 2020. The Indian economy grew slowest in six years at only five percent in the first quarter of FY20.
Stagnation in the demand of steel globally:
It is not that only the Indian steel industry is bearing the brunt of this economic turmoil. Globally there has been a decline in the consumption of steel. Steel demands are going down a slippery road in the US, European Union, and Asia. The Chinese hot-rolled coil (HRC) has faced a decline in export by 13 percent since the beginning of FY20.
Way out of this conundrum:
It is no surprise that the steel spreads have seen a drastic contraction in FY20 compared to FY19. Therefore, it is right to assume that unless the steelmakers try to counter the weaker margins with higher sale volumes there is any likelihood that the industry earnings will improve. Rating agency ‘India Ratings and Research’ said this slow growth in the industry is due to the apprehension that there will be no improvement in the demands for steel. The infusion of fresh capital from the government is extremely crucial to bring out the industry out of this predicament. The industry should try to capitalize on opportunities that might arise in the second half of the financial year as large projects of railways, pipelines, electricity transmission, etc can help it to regain the momentum. Finally, it can be concluded that in the future unless and until there is some improvement in the current scenario of demand, it is unlikely that large players in this industry will see any light at the end of the tunnel.