Tata Steel To JSPL’s Take On If China Will Spoil India’s Steel Exports Party

China’s steel cutbacks fired up Indian exports and allowed local producers of the alloy to gain from higher international prices. Now, that may be at risk.

The world’s largest steel producer and exporter is easing the deadline to achieve green targets for steel to 2030, and potentially resuming curtailed production. As Chinese shipments rise, Indian steelmakers may lose share in exports. And higher demand for raw materials from China could increase input prices, squeezing margins.

Bundles of steel reinforcing bar at a metal stock yard in Shanghai.

In early February, Beijing extended the deadline for the steel industry to hit peak emissions by five years. That relaxed its earlier policy of winter production cuts announced in September 2021 in Beijing and Tianjin as well as in provinces of Hebei, Shanxi, Shandong, and Henan till March 15, 2022. It required mills to restrict steel output by at least 30%.

China’s move to curtail output and encourage imports of semi-finished steel was propelling demand for the Indian producers. But now, the eased pollution deadlines could reverse gains for the domestic Industry.

While China’s production fell in 2021, India’s steel output rose, according to available data. As did the exports—India shipped 21 million tonnes of the alloy last year compared with 17 million tonnes in 2020.

According to a Bloomberg report, Australia and New Zealand Banking Group forecasts China’s steel output to reverse last year’s decline and grow 5% in 2022. If met, that would throw off the World Steel Association’s near-term China projections anticipating stagnant growth in steel demand in 2022 because of depressed demand from the real estate sector.

Raw Material Costs May Spike:

The biggest exporters of steel over the last two decades have been China (60-120 million tonnes a year), followed by Japan and Korea (30 million tonnes a year each), according to data cited by Tata Steel Ltd. in an earnings call.

All these countries have been trying to reduce their exports to shrink their carbon footprint.

India, thus far, has been one of the cheapest markets in the world to buy steel, and it has remained so for most of the last one year, said TV Narendran, managing director, Tata Steel, in the earnings call.

It placed Indian exporters, using steel made and sold in India, at an advantage which was reflected in “higher engineering exports during the year compared to the previous years”, he said.

Jindal Steel and Power Ltd.’s Managing Director VR Sharma said in an earnings call that cuts in “steel production by China has played a significant role” so far, and the four countries likely to benefit from any lag would be “India, Iran, Ukraine and Russia”.Logically, with Chinese output picking up, these countries stand also to lose market share again.While India’s steelmakers expected moderation in exports as domestic demand picks up, they were hoping for a respite from rising costs.Cost inflation will be dictated by international trends once demand for raw material rises in China. A direct impact would be felt on coking coal and iron ore prices.“At current prices, Indian steel prices are at a slight discount compared to the landed cost of imported steel (sum of expenses in shipping a product),” Jayanta Roy, senior vice president at ICRA Ltd., said in response to BloombergQuint queries.”Softer international price trends would have a downward impact on domestic steel prices, which will affect profitability of players,” he said. “Higher Chinese production will support raw material prices internationally, which, too, will eat into the margins of Indian players.

According to JSPL’s Sharma, however, the Indian steel industry is “well-insulated and positioned in case of growing production from China”.He does not expect incremental cost pressures, and since India only exports low-grade iron ore—something that’s not as useful for the Indian steel industry—iron ore prices would not shoot through the roof, he said. Coking coal prices, too, are likely to remain stable as India imports 90% of its requirement from Australia, which China doesn’t.India will continue to export and not be an importer from China in any situation, given the country’s lower cost of production, he said.Rakesh Arora, managing partner at Go India Advisors, also does not see a threat to the domestic steel industry. “China is unlikely to allow increased exports of steel and have shown enough intentions to limit production to domestic demand only.”Arora sees the latest development in China to be “extremely positive”. “With an uptick in production, iron ore demand will improve, which would support the international iron ore prices,” he said. “It will in turn improve the competitive advantage of Indian steel mills since this will make China’s cost of production even higher.”