Steel: spirits down

Domestic steel production is on a steep decline. Unlike cement though, exports are not cushioning the blow to total sales. The silver lining, if one were hard pressed to find one, is that the production slump is due to a lack in demand, rather a rise in imports. In fact, imports of steel finished goods have volumetrically fallen more than the decline witnessed in the import of steel scraps, which serve as raw material for local steel manufacturers.

The difference however, is stark—the fall in steel production has been substantially more in long products (21% in 7MFY19) than flat products (3%). Long products mainly billets, bars and ingots are used largely in the construction, infrastructure and housing sectors while flat products like sheets and plates are also sold to industrial sectors such as automobiles, engineering, electronics and so on. Flat steel players like International Steels (ISL) also export some of their products such as galvanized iron while serving non-construction led industries.

The PSDP expenditure cuts (down 26% in 1H) and the ongoing moratorium on non-filers to purchase properties have contracted construction activity across the board.

This has resulted in a drop in domestic production as well as a 10 percent decline in volumetric imports of scrap. However, the country still paid 18 percent more in rupee terms during 8MFY19 year on year. On the other hand, steel finished goods also volumetrically declined (11%) but were more expensive to buy (value up 16% in rupee terms) nevertheless due to the depreciating rupee.

The SBP’s second quarterly report argues that the trade war between China and the US has sent steel prices in flux. Steel scrap cost per ton in USD was up 9 percent in 1H year on year—latest numbers for 8M indicate this to be 7 percent. Nevertheless, scrap has cost steel manufacturers more dollars raising their cost of production.

The report argues that “it was hard for the local industry to compete with imported products that became relatively cheaper”. SBP may be right then, since in 1H, import of finished goods were virtually the same as last year volumetrically. In 8M however, these have declined by 11 percent.

Competition from imports may still be there, but it is not increasing. One of the reasons is that the steel industry enjoys protection from imports in the form of tariffs and regulatory duties (RD) while the industry also has remedial anti-dumping duties (ADD) set against imports of steel products mainly from China. If steel is down, it is because of poor domestic demand. Though, margins do depend greatly on international prices for HRC and scrap as well as the rupee-dollar parity.