How China is helping Indian Steel Sector? Does China's decreased production present an investment opportunity in the steel sector?

While all the major steel producers saw a decline in production in CY 2022, India grew its production by 8%. India is the world’s second-largest steel producer and steel companies have experienced a significant upsurge in the past 2 years. On other hand, China, the world's largest steel producer, has been in turmoil. China has suffered major headwinds, causing a reduction in output and opening the door for other exporters. What were the reasons that led the global giant to reach this point? Let's start with the cause and then move on to the opportunity to gain a better understanding of the scenario. China’s real estate index has fallen more than 40% in the past 2 years, which shows the indirect impact on the steel industry.  The below chart shows the movement of 2 indexes managed by MSCI.

Many people are aware of China's real estate problem; the volume of new home sales in China plummeted 27% year on year in the January-June period. July sales in 100 major Chinese cities fell 13% from June and 27% from a year ago, according to real estate research firm China Index Academy.

According to an Economic Times study, the real estate sector represents 29% of the overall gross domestic product (GDP) and 30%-40% of total bank loans. China nearly avoided a recession in the second quarter, increasing by just 0.4%. Big property developers are suffering a major cash shortage, pulling down the sector, house prices, and demand. The desire for new homes has already decreased. The real estate industry is one of the most important industries in the Chinese economy. Furthermore, property accounts for 70% of Chinese household wealth. This slowdown in the real estate market directly impacts the steel makers as the demand takes a major hit. The ripple effect of such scenarios has started showing signs in the data put out by worldsteel.org. The chart below shows the % change in production annually by the top 10 steel producers across the globe.

Steel mills used to be at the vanguard of China's economic growth. However, situations have now deteriorated to the point that many businesses are on the verge of closing due to a lack of takers. To make matters worse, a heat wave in several regions of China forced energy rationing. This resulted in the recent temporary suspension of many Chinese steel plants. Around 20 steel factories in China's southwest regions have shut down.

            The drop in production by China should be seen as a significant issue as it can produce approx. 1100 MnTPA [Million Tonne per annum] as compared to India’s capacity of approx. 120 MnTPA, which is the second-largest producer of steel across the globe. This huge gap shows how big an opportunity size is available for the exporters of steel. Below is the chart mentioning the production in Million Tonne [MT] by the top 10 players across the globe.

As observed above, the total production by 9 [excl. China,] of the top 10 steel producing countries, is approx. half of China’s production in the period mentioned. The dependence on China for catering to the steel demand is high; hence when production drops – there will be a significant gap that needs to be filled. Let’s look at the export-import data [AK1] [AS2] to understand the extent of export dependence on China and the dependent countries. Below is the chart mentioning the export-import by the top 10 players across the globe.

The above data shows the net export volumes and net import volumes. This explains that China, which has a capacity of 1100 MnTPA, exports just 39 MT on a net basis while India exports 14.5 MT with a capacity of just 120 MnTPA [approx.]. According to an Axis Securities analysis, Indian businesses have profited from fewer Chinese exports as a result of China's decarbonization policy and higher European energy costs. Additionally, the capital expenditure cycle of Indian steel companies is taking place currently, which will ensure an increase in capacity as well as readiness for future export opportunities. However, even Indian steel markets were impacted due to policy changes which resulted in lower exports in the past few months. The inflationary prices of steel resulted in high domestic prices and higher costs of the building resulting in increased property rates across the country.

The tax on iron ore exports was recently raised to 50% to increase local supply, while the tariff on a few steel middlemen was raised to 15%. The export tax on iron ore and concentrate has been raised from 30% to 50%. The current rate of "Nil" has been increased to 15% for stainless-steel bars and rods, angles, forms, and sections, as well as flat-rolled stainless-steel items (width > 600 mm). This step was aimed to reduce steel costs for the domestic market and keeping inflation under control. Customs tax cuts for iron and steel intermediates and raw materials, according to Indian Finance Minister Nirmala Sitharaman, will slash their prices. The chart below shows the production trend of the Indian steel industry monthly-

As we can observe in the chart above, production dropped after the announcement of the tax on exports[AK4] [AS5] . However, in the investor meeting, JSW Steel management affirmed its view on this tax; it believed that these levies are temporary and will be removed once the domestic prices stabilize. The expansion plans of JSW Steel, the industry’s highest exporter, [AK6] [AS7] align with the PLI [Profit Linked Incentive] scheme announced by the government. JSW Steel would invest Rs 48,000+ crore in CAPEX over the next three years, according to CMD Mr. Sajjan Jindal. According to its Annual Report of FY 22, Tata Steel completed a CAPEX of INR 6288 crores in the Financial Year 2022 and plans of spending INR 12000 crores in FY 23. Also, maharatna SAIL intends to increase its crude steel manufacturing capacity to 35 million tonnes per year by 2030-31. Jindal Steel & Power [JSPL] has an approved proposal to increase the capacity of its Angul plant to 25 MTPA by 2030. The capacity expansion is planned to raise JSPL's investment in Odisha from Rs 45,000 crore to approx.  Rs 1,25,000+ crore. The top 4 listed players mentioned below operate a total capacity of 68 MnTPA which is approx. 58% of India’s total capacity.

            Additionally, domestic production capacity would further get a boost by new investments by other global players like Arcelor Mittal and Nippon Steel. Arcelor Mittal Nippon Steel India (AM/NS) had purchased Essar Steel's 10 MnTPA integrated steel mill in Hazira in a bankruptcy auction for 42,000 crores. AM/NS is a joint venture between two of the world's leading steel firms, ArcelorMittal and Nippon Steel. "We are accelerating investment in India," Takahiro Mori, executive vice president at Nippon Steel, told Reuters. "In terms of steel, India is regarded as the only market that will grow significantly." Yearly output capacity at the Hazira factory in western India will be increased to 14-15 MT by constructing new blast furnaces, he added, without specifying the amount of the new investment or any other information.