Investments in steel headed to fall

by Mahesh Vyas

In fiscal 2016-17, new investment announcements into steel increased smartly. At Rs.1.17 trillion these were higher than the new investments witnessed in any year since 2009-10.

JSW Steel’s Rs.500 billion Dhinkia Steel Plant in Odisha was the biggest contributor to this surge in new investments in the year. JSW has been aggressive on steel investments in the state. Reportedly, it plans to set up the plant at the site that POSCO vacated as it abandoned its plans in India and, it has even asked the state government to transfer to it, the approvals that were obtained by POSCO. The company plans to set up a ten million tonnes per annum plant in two phases. The company proposed the plant in August 2016 and state government cabinet approved the same in June 2017.

Tata Steel, that started its efforts to set up a steel plant in Odisha around the same time that POSCO began, succeeded in setting up a three million tonnes per annum at Kalinganagar. In December 2016 the company announced that it would expand this to 8 million tonnes. The expansion is expected to involve an investment of Rs.210 billion. In June 2017, the project received the Terms of Reference from the Ministry of Environment and Forest and Climate Change.

The third large steel project announced in 2016-17 is the Meramandali Integrated Steel Plant Expansion Project - Phase IV. This project could be under the cloud because it is promoted by Bhushan Steel which is one of the 12 stressed accounts identified by the RBI that need to be referred to the Insolvency and Bankruptcy Code. The company is reportedly in default to the tune of Rs.445 billion. The Meramandali steel project entails an investment of Rs.199 billion. The project was announced in April 2016.

These three projects collectively account for 78 per cent of the total new steel projects announced during 2016-17. If we discount Bhushan Steel because of its current problems associated with its debt overhang, then the surge in investments is essentially the story of two steel giants trying to fill in the vacuum caused by the exit of POSCO from Odisha.

POSCO’s 12 million tonne steel plant was classified as abandoned only in April 2017. But, the company’s decision to withdraw is likely to be known to inner circles much earlier. And, its imminent exit is likely to have spurred Indian companies to fill the gap. The two new proposals though will add 15 million tonnes against POSCO’s 12 million tonnes.

The remaining new investments do not add up to much. Some of them could also be dubious.

New steel investments have not picked much steam during the April-June 2017 quarter either. Only nine new projects were seen with a total investment of Rs.134 billion.

Steel industry has been in difficult times.

Five of the 12 companies identified by RBI as stressed accounts are from the steel industry. Government has extended help to the industry. It did this directly by first raising import tariffs twice in 2015, notifying minimum import prices and imposing safeguard duties and anti-dumping duties in 2016. In May 2017, it issued a notification that provided preference to locally manufactured steel in government procurement. In response to this GAIL is reported to have cancelled its tender for procurement of steel for its Jagdishpur-Haldia pipeline in June. China was the lowest bidder for most of the steel requirement.

Protection against imports and an earlier increase in steel prices (till December 2016) had raised expectations investments would increase.

However, the CapEx database shows that this is not true, yet.

In the last three years steel projects worth Rs.1.18 trillion have been abandoned; another Rs.1.65 trillion worth of projects have been shelved or stalled and Rs.2.74 trillion worth of projects have vanished without a trace of any information. Totally, steel projects worth Rs.5.57 trillion were lost during these three years. In comparison, only Rs.2.1 trillion worth of new projects were announced. We can add another Rs.750 billion to this as steel projects that were revived. Yet, the total addition of projects to the stock is only Rs.2.85 trillion against a loss of Rs.5.57 trillion.

This trend is not changing. Fiscal 2016-17 began with a total outstanding investment in steel projects at Rs.13 trillion, and it ended with a lesser Rs.12.8 trillion. By the end of June 2017, this goes down further essentially because of the exit of POSCO.

And, RBI’s action against the 12 companies can reduce this further. These companies have five steel projects worth Rs.880 billion under implementation.

Unemployment Rate
Per cent
5.8 -0.0
Consumer Sentiments Index
Base September-December 2015
92.6 +0.2
Consumer Expectations Index
Base September-December 2015
91.9 +0.3
Current Economic Conditions Index
Base September-December 2015
93.7 0.0
Quarterly CapeEx Aggregates
(Rs.trillion) Mar 17 Jun 17 Sep 17 Dec 17
New projects 4.06 2.14 1.22 1.12
Completed projects 1.96 0.86 1.05 0.92
Stalled projects 0.74 2.67 0.67 0.93
Revived projects 0.86 0.30 0.29 0.23
Implementation stalled projects 0.33 0.69 0.73 0.58
Updated on: 23 Feb 2018 9:20AM
Quarterly Financials of Listed Companies
(% change) Mar 17 Jun 17 Sep 17 Dec 17
All listed Companies
 Income 10.2 9.7 7.9 11.9
 Expenses 11.9 10.0 9.0 12.9
 Net profit 16.4 -19.7 -16.8 -12.3
 PAT margin (%) 6.0 5.3 5.7 5.0
 Count of Cos. 4,472 4,460 4,439 4,279
Non-financial Companies
 Income 11.8 10.3 7.7 12.7
 Expenses 15.6 10.6 7.5 11.8
 Net profit -2.2 -25.2 -4.2 13.3
 PAT margin (%) 6.1 5.2 6.4 6.6
 Net fixed assets 6.9 9.2
 Current assets 2.7 78.8
 Current liabilities 8.9 11.0
 Borrowings 4.9 10.5
 Reserves & surplus 6.1 5.2
 Count of Cos. 3,455 3,444 3,418 3,326
Numbers are net of P&E
Updated on: 23 Feb 2018 9:20AM
Annual Financials of All Companies
(% change) FY14 FY15 FY16 FY17
All Companies
 Income 10.0 5.4 1.5 6.8
 Expenses 9.9 5.5 1.7 7.1
 Net profit -2.5 0.3 -12.9 22.1
 PAT margin (%) 3.1 3.1 2.8 5.3
 Assets 12.3 9.5 10.1 8.3
 Net worth 9.7 8.5 11.7 7.4
 RONW (%) 6.1 5.9 4.9 7.9
 Count of Cos. 24,633 24,657 22,529 10,919
Non-financial Companies
 Income 9.7 4.6 0.6 6.7
 Expenses 9.4 4.8 0.0 7.6
 Net profit -3.1 -8.1 13.2 15.9
 PAT margin (%) 2.2 2.0 2.5 4.9
 Net fixed assets 11.7 13.3 17.4 7.2
 Net worth 8.3 6.9 12.4 5.4
 RONW (%) 5.0 4.7 5.1 8.5
 Debt / Equity (times) 1.1 1.1 1.0 0.8
 Interest cover (times) 2.0 1.9 1.9 2.7
 Net working capital cycle (days) 69 67 65 52
 Count of Cos. 19,858 20,066 18,861 8,566
Numbers are net of P&E
Updated on: 21 Feb 2018 10:31AM

Data added for HPI at Assessment prices and HPI at Market prices