Overview of Steel Industry – Challenges and Strengths of RINL, VSP

Steel may be the most widely used input material in manufacturing sector. This is mainly due to its excellent mechanical properties, resistance to corrosion and low cost. It is used in many industries and varied applications. In general, the demand of steel is cyclic in nature. When the economy is in upward trend, steel demand increases and drops down during economic down turn. Towards the end of 2014, China started oversupply of steel and this caused the steel price drop to the lowest ever. Global steel scenario analysis from 2016-17 to 2019-20 along with Indian Economy and status of Indian Steel Industry as well as strategies adopted by RINL for success during the period from 2016-17 to 2019-20 were analysed and described in detail in this paper. In this paper authors made an effort to present the overview of global Steel Industry, the status of Indian Steel Industry during 2016-17 to 2019-20. The paper also highlights the strategies adopted by RINL, Visakhapatnam Steel Plant to face the challenges during the said period.


Introduction
Undoubtedly, steel is the most widely used input material in manufacturing sector due to its excellent mechanical properties, resistance to corrosion and low cost. Steel industry contributes about 2% to the GDP of India. Apart from this direct contribution, the effect on Indian economy is 1.4 times with an employee multiplier of 6.8 X. It is understood from World Steel Association that for every two jobs created globally in steel industry, ancillary industries create 13 more jobs [1]. increase in steel production and caused depression in steel sector fundamentals. The same is shown in Figure. 1 [2].

Figure 2. Relation between GDP and steel production increase.
Fig 3 indicates that world steel production and consumption were almost matching till 2018. Since then, consumption has remained the but capacity increased significantly. This indicates excess capacity built up. It can be observed from Chinese steel production and consumption (Fig 4), there is always significant gap in production and consumption levels throughout. This excess steel is being dumped all over the world by China causing severe instability in steel prices.

Source: World Steel Association
As per World Steel Association, steel was the foundation for the last 100 years of progress and termed the steel as equally essential to meet the challenges of the next 100 years to come. Global crude steel production improved from 734 MT in 1991-92  As far production and consumption are concerned (Fig. 6), the gap started widening since 2015. The gap has been further widened from 2017 onwards. This is purely on account of excess capacity developments in all the Indian steel plants as well as production from secondary steel makers. The main impact was from depreciation in currencies of steel exporting countries like Russia and Turkey. Since Russia is self-sufficient in raw material, the depreciation in currency has not impacted them and helped them to export Steel at cheaper prices. The Russian Steel companies are making profits even after reduction in export prices from USD 543/t as on 01/04/2018 to as low as USD 347/t in Oct'19, a reduction to the extent of as high as 36%. [5] Year wise analysis of global trends: In

Rebar Prices Iron Ore Prices Coking coal Prices
In the year 2018-19, according to World steel association SRO released in April 2019, apparent steel consumption increased by 4.9% during 2018 and China achieved a growth of 7.9%. It was projected that the growth rate may be reduced to 1.3% and 1.0% in 2019 and 2020 respectively, due to the expected deceleration in Chinese steel consumption to 1.0% and -1.0% respectively. Slowing global economy, China's reduction in steel consumption, ambiguity surrounding trade policies and the political situation in many regions suggest a possible restraint in business confidence and investment. [6] Indian Context: Today, the steel industry's contribution towards GDP of the country is about 2%. This is regarding direct contribution and it also contributes immensely towards indirect contribution due to the dependence of other sectors on steel. Steel industry employs nearly half a million people directly and two million people indirectly. According to World Steel Association, globally, for every two jobs created in the steel industry, 13 more jobs are created across the supply chain.  On the back of continued domestic demand, Indian steel industry seen robust growth in the last 10-12 years. Since 2008, domestic steel demand increased by 80% and growth of steel production has improved up by 75%. Production capacity also augmented in tandem, and the resultant growth has been fairly gradual [5]. ▪ Enhancement of Steel-making capacity to 300 million tonnes per annum by 2030-31. ▪ Subsequently Crude steel production to reach 255 million tonnes by same period, at 85% capacity utilisation. ▪ Finished steel production to reach 230 million tonnes, assuming a yield loss of 10% for conversion of crude steel to finished steel -that is, a conversion ratio of 90%. ▪ Steel consumption to reach 206 million tonnes by 2030-31 and net exports are expected at 24 million tonnes. ▪ With this steel production levels, the per capita steel consumption is expected to increase to 160 kg by 2030-31 from the present level of 74.3 in 2019-20. ▪ An additional investment of INR 10 lakh crore is envisaged [8].
According to Joint Plant Committee data, India produced 110.9 million tonnes of crude steel by the end of 2018-19 [5]. In order to reach 255 million tonnes of crude steel production by 2030-31, CAGR of about 7.2% is needed in steel production [9]. The target decided by government is achievable because in 2018-19, crude steel production grew by 7.6%. Thus, the growth target charted by the government is in sync with the industry's growth trajectory [10]. The approximate sector-wise demand for steel is shown in Fig 9: [3] It is expected that India will become the world's third largest construction market by 2025. The real estate sector in India is growing at a CAGR of over 4% and the affordable housing and smart cities initiative of government will drive growth in this sub-segment. Some of the major government initiatives, both ongoing and planned, are as follows: ▪ Provision road connectivity through the Bharatmala programme. ▪ Port connectivity through the Sagarmala programme. ▪ In the oil and gas sector, the Urja Ganga Gas Pipeline Project. ▪ Under urban infrastructure, 100 smart cities will be developed further. ▪ Development of National Investment and Manufacturing Zones (NIMZs) [11].
Capital goods: The Indian capital goods sector contributes around 15% of steel demand. However, it has several sub-segments, such as machinery and equipment are the most prominent and these two sub-segments alone accounts for about 23% of total manufacturing and about 4% of India's total gross value added (GVA) [14].

Consumer durables:
This sector contributes about 5% of India's steel demand. India is a consumption-driven economy and traditionally this sector has witnessed robust growth [3].
Intermediate products: Intermediate products sector accounts for the remaining 6% of India's steel demand and this sector is closely connected to the auto and oil and gas sectors, in addition to industrial activity.

Challenges facing the Indian steel industry
The Indian steel industry is often regarded as uncompetitive globally. National Institution for Transforming India (NITI) Aayog [15] report explains that an additional cost component of about USD 80-100 is making Indian steel non-competitive in international market. The breakup of this additional cost is mentioned below: ▪ Logistics and Infrastructure requires additional cost of 25 -30 US$ per ton ▪ Cost of power adds to the overall cost by around 8 -12 US$ ▪ Import duty on coal costs additionally about 5 -7 US $ ▪ Clean energy cess is about 2 -4 US$ ▪ Taxes and Duties on iron ore incur an additional expenditure of 8 -12US$ ▪ Financial cost on borrowed capital is around 30 -35 US$ Source: NITI Aayog

Indian Economy 2016-17:
In the financial year 2016-17, GDP growth was around 7.1%, which was slower than the 8% recorded in 2015-16 Fig 10a. During the year 2016-17 the Gross value added (GVA) growth was 6.6% and in Q4 the same was 5.6%, compared to 7.9% in 2015-16 and 8.7% in Q4 of that year as shown in Fig 10b. [16] Figure 10a. Indian GDP rate. Figure 10b. Indian GVA rate.

Indian Steel Scenario 2016-17:
As per JPC report, apparent consumption of steel saw a moderate growth of 2.6% while production for sale increased by more than 10 % (10.7%) in 2016-17 (Fig 11). As per JPC report, capacity utilization in the country has been showing decline trend in the past few years due to aggressive capacity additions in the country coupled with sluggish market conditions as shown in Fig 12. Source: JPC.
Steel sector in the country witnessed high degree of volatility during 2016-17. The recovery in prices was lower, in case of Long Product segment, where RINL is operating. The TMT Rebar prices crashed by 15% during April to August 2016 before recovering thereafter mainly on account of surge in imported coking coal prices as per JPC reports (Fig 13).
Domestic prices of Iron Ore Fines followed a similar trend as there was a fall of 21% between April 2016 and June 2016 period which started firming up in Q3. There was an increase by about 17% in prices of Iron Ore from Apr'16 to Mar '17 as depicted in Fig 14..   The average increase of TMT rebar prices is 21% in the year over corresponding period last year (CPLY). The prices in Mar'18 were higher by 29% compared to CPLY levels. These price variations are shown in Fig 17. 78

Indian Economy 2018-19:
Indian GDP growth was at 6.8% in 2018-19 against 7.2% in 2017-18 as shown in Fig 20a. The overall GVA growth was 6.6% for the year 2018-19 against 6.9% in 2017-18, the GVA was continuously reducing from 7.7% in the 1 st Quarter to 5.7% in the 4 th Quarter as depicted in Fig 20b. However, GVA in Manufacturing and Construction sectors registered higher growth rate of 6.9% and 8.7% respectively, during the year as shown in Fig 21 [  In case of non-flat steel category, the reduction in exports was even higher at 69%. During second half of 2018-19, steel prices softened significantly as shown in Fig 23. However, the raw material costs ruled high and thereby, impacting the financials.   Though the prices improved in Q4, the trend was short lived as the global markets started feeling the impact of spread of COVID-19 even before the imposition of National Lockdown in the country from 24 th March,2020. RINL's Perspective: In the last quarter of every running year, SWOT analysis is performed and strategies will be prepared for next year. Accordingly, SWOT analysis of 2016-17 with few strengths and weakness of RINL are mentioned below: Strengths & Weaknesses:   Greater production potential ✓ State of the art Secondary metallurgy facilities for production of High-End Value-Added Steels Threats ✓ Higher competition. ✓ Sluggish market conditions ✓ Volatility in supply and prices of raw materials such as iron ore and coking coal ✓ Lone iron ore supplier. ✓ Higher competition from secondary steel making sector in long products. ✓ Declining margins due to increasing cost of production ✓ Oversupply in India due to slowdown in other economies Financial analysis will be performed in comparison with previous year and further strategies will be finalised for next year.

Expenditure (Net of Inter Account Adjustments)
The cost of material consumed including that for trial run production is Rs.

Initiatives taken by the Company:
RINL is putting all efforts, apart from focusing on value added steel production, to explore internal drivers for cost reduction and the various cost reduction initiatives being undertaken are reviewed and additional cost rationalization measures have been identified in the areas pertaining to raw material, generation of green energy and improvement in operational efficiency, etc. The salient initiatives to reduce operating cost like Improvement in Labour Productivity, Leveraging Technology, Benchmarking, Maximization of captive power generation from Power Plant-2, Cost reduction initiatives, Substitution with cheaper raw materials, Improvement of realisations through Value Added steel, Improvement of realisations through optimum market mix etc.

Initiatives taken by RINL:
RINL has completed modernisation of all the major units with the commissioning of Blast Furnace-2 in Oct'17 and accomplished 17% growth in saleable steel production. Further, RINL pursued various cost reduction measures such as improvement in labour productivity, leveraging technology, benchmarking, maximization of power generation from waste energy, cost reduction initiatives, substitution with cheaper alternative raw materials, improvement of realisations through Value Added steel production, Improvement of realisations through optimum market mix, Optimisation of borrowings, Tax incentives etc.

Outlook for the company in 2018-19
With the buoyant global prices and recovering domestic demand, positive growth is expected in the steel sector in 2018-19.  Initiatives taken by the Company: RINL has completed modernisation of major production units and accomplished 11% growth in saleable steel production. Further, RINL pursued various cost reduction measures viz. improvement in labour productivity, leveraging technology, benchmarking, maximization of power generation from waste energy, cost reduction initiatives, substitution with cheaper raw materials, improvement of production of Value Added steel etc.

Outlook for RINL in 2019-20
India is projected to maintain a growth of 7.1% in 2019, which is the highest among the major steel producers of the world. The thrust being given by the Indian Government for infrastructure development and manufacturing sector would have positive impact on steel industry in general and RINL in particular. The company would further gain from productivity and efficiency improvements in 2019-20. Some of the thrust areas for RINL in this direction are: ▪ Achieving rated capacity of 6.3 Mt as early as possible ▪ Enhancing production of high end Value Added Steel ▪ Improving sales in high NSR region ▪ Maximizing the production of finished steel ▪ Commencing the commercial production from Forged Wheel Plant ▪ Purchase of coke to be minimised to reduce cost of production by improving PCI usage and commissioning of Battery-5

Road ahead
RINL Visakhapatnam Steel Plant is the only shore based Integrated Steel Plant in the Country. It is well connected with Port and Railways for transportation of Raw Materials and Finished Goods. The Plant has a rated capacity of 7.3 million tons per annum Liquid Steel production. It has huge land bank for expansion of its capacity up to 20 million tons.
As India is marching towards becoming a manufacturing powerhouse through policy interventions like Make in India, since the metal industry has strong forward linkages to many important sectors such as automotive, construction, infrastructure and manufacturing, immediate measures to improve these sectors will drive demand for steel. The Indian steel industry has the potential to help regain its positive trade balance in steel and also drive the export manufacturing capabilities of India. The immediate requirement is to improve the competitiveness of the steel industry. To make the indian steel more competitive, cost reduction across the supply chain, development of efficient logistics and reduction in financing costs are some of the issues to be addressed at the earliest.
The evolution of various emerging technologies such as robots, drones and IoT, the much needed transformation is under progress in steel industry and this transformation provides the steel business with valuable solutions. The increased efficiencies and integration of new technologies will help in improving the labour productivity. Subsequently, it will improve the cost reduction and overall profitability in the industry. It is expected that in next 10 years, the digital disruption improve exponentially. The implementation of the emerging technologies is a crucial factor for success in future. 25 Steel contributed enormously towards economic growth of India. This is obvious from the similar growth patterns of GDP and steel production in India, which also indicates that the economy's dependence on production of steel. India's finished steel consumption increased from a mere 6.5 MT in 1968 to 100.72 MT in 2019, whereas GDP (at constant price, 2010) improved from USD 0.25 trillion in 1968 to USD 2.7 trillion now.

Conclusions:
Owing to China's over steel production, its export market improved substantially and resulted in dumping its excess inventory in all other countries wherever possible. Conversely, some major producers (such as those in Europe and the United States) ceased their manufacturing operations internally to compensate for these cheaper imports from China to minimize their operational costs.
Consequent to the trade actions, many steel companies' world over are under severe stress. However, unlike 2014, this time, the impact is not from excessive or cheaper exports from China. The domestic prices in China went down to the levels of 1,600 yuan/tonne in 2015, but remained above 3,300 yuan/tonne, this time. As a result, the raw material prices also remained higher. The Imported Coking Coal prices which reduced to the levels of USD 75/t in 2015, remained above USD 200/t till Jun'19.
The main impact was from depreciation in currencies of steel exporting countries like Russia and Turkey. Since Russia is self-sufficient in raw material, the depreciation in currency has not impacted them. In fact, it helped them to export Steel at cheaper prices. The Russian Steel companies are making profits even after reduction in export pricess from USD 543/t as on 01/04/2018 to a low of USD 347/t in Oct'19, a reduction of 36%. The global steel prices have become so low that China started importing from the global markets, including from RINL.