Falling consumer demand may curb India's steel production boom

After a weak January result, steel production in India rose in February, up 5.7% from a year earlier. Joint production committee data compiled by SBICAP Securities Ltd also show healthy growth in steel demand, with consumption increasing 8.6% last month. However, amid growing evidence of declining demand in industries such as automotive and real estate, questions about the sustainability of the steel recovery are not going away.

By the end of last year, buyers had cut purchases in anticipation of a further drop in steel prices. In response, steelmakers cut production. However, as the onset of the calendar year kicked off new customer purchasing cycles, companies ramped up production. This time, the recovery was boosted by disruptions in iron ore production in Brazil and subsequent increases in steel prices. It looks like the price increase has led to restocking by buyers.

However, beyond cyclical factors such as restocking and pre-purchases to hedge against the likelihood of price increases, there is little evidence of a sustained recovery in demand. Rather, a slowdown in large user industries could make it harder for steelmakers to grow steel.

For example, the automotive industry is a major consumer of flat products, and declining car sales are causing car firms to offer discounts on reduced inventory. “Demand for cars and two-wheelers continues to be weak. Hence, it should come as no surprise that incentives have returned. Channel inventory, which was also in correction mode, jumped to 60 days, ”added analysts at Edelweiss Securities Ltd.

Slowing down the launch of projects in the real estate sector, a consumer of long products, will also not help. Sales in the real estate sector declined 10% in the 12 months to December 2018, according to a report by Kotak Institutional Equities Research.

The impact can be mitigated by sustained public spending in the infrastructure sector. However, low demand conditions in key user industries remain a challenge. In addition, higher prices for other raw materials such as coking coal exacerbate profitability concerns, especially if cost increases are not fully passed on.