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JSW Steel and Tata Steel splurge to prepare for post-COVID demand

India's largest steelmakers begin to rebound despite subdued domestic demand

JSW Steel and Tata Steel plan large capital expenditures over the next few years because they see global demand rising as the pandemic recedes. (Source photos by Reuters)

MUMBAI -- JSW Steel and Tata Steel plan to spend around 850 billion rupees ($11.4 billion) on projects over the next few years, expecting global demand to pick up as the pandemic recedes.

India appears to be emerging from a second wave of infections that has killed thousands and stymied business activity. Despite the disaster, the country's steelmakers have been buoyed by demand from the U.S. and Europe. There is also hope that a government investment focus on infrastructure will bring the shine back to the domestic steel market.

JSW Steel, India's largest private steelmaker, plans to spend around 251.15 billion rupees over the next few years to expand its capacity and modernize plants across the country.

"We are now embarking on the next phase of growth with the newly approved capex plan of 251.15 billion rupees," Chairman and Managing Director Sajjan Jindal said in late June.

Jindal said the plan is to increase crude steel capacity at Vijayanagar in south-central India by 7.5 million tons. JSW Steel also expects to "enhance and digitize our mining capabilities and infrastructure in Odisha" and to set up a state-of-the-art color-coated facility in Jammu & Kashmir, Jindal said.

With the expansion, Jindal went on, JSW Steel's combined output would expand to around 37.5 million tons by the financial year through March 25. The company spent 480 billion rupees over the past three years to increase its capacity by 50%.

Although large stimulus packages around the world have revived steel production and consumption, much of the pickup has been one-sided as China in 2020 accounted for 56% of global production/consumption. But other economies are now waking up, and Indian companies intend to be aggressive in capturing the ensuing demand.

Large stimulus packages by governments around the world are lifting global steel production and consumption.   © Reuters

On Tuesday, Tata Steel said it will spend 500 billion to 600 billion rupees in the next five years, averaging 100 billion to 120 billion rupees. Its capital spending in the financial year through March 2020 fell 55% as it attempted to conserve cash amid the pandemic, it said.

"Strengthening the balance sheet continues to be the enterprise strategy of the company," said Koushik Chatterjee, executive director and chief financial officer of Tata Steel Group. Despite India's COVID crisis, "we are focused on completing the cold rolling mill complex and the pellet plant in Kalinganagar in the next 12 months."

Chatterjee said that as the company carries out its spending plans, "we aim to strike an optimal balance between capital expenditure and debt repayment."

According to Union Budget documents released in February, the government-run Steel Authority of India has raised its capital expenditure target for the current fiscal year to 80 billion rupees from an earlier target of around 40 billion rupees.

The companies' spending plans are expanding thanks to the capital expenditures from previous years being carried over and the government's production-linked incentives for companies enhancing domestic manufacturing and reducing dependence on imports.

The Financial Express reported that India's cabinet is considering 63.22 billion rupees for steel industry incentives.

This could further lift an industry that is already rebounding. Steel producers in the past year began using more of their capacity as exports made monthly gains and despite domestic demand remaining below pre-COVID levels.

"We expect that increased infrastructure spending, rising demand from automotive and construction, together with a revival of private capex and consumer demand will continue to drive steel consumption," JSW Steel's Jindal said.

According to S&P Global, India was a net exporter of steel from April 2020 to March, with its shipments coming to 10.78 million tons, up 29.1% from the previous fiscal year. Imports fell 29.8% to 4.75 million tons.

"Platts Metals Trade Review showed that so far in 2021, India had largely switched its 'swing supply' focus to Europe. Northern European HRC [hot-rolled coil] prices were around USD 65/ton higher than Indian domestic HRC prices in early January," S&P Global said in a note. "As of April 12, they were USD 300/ton higher. India has already exceeded its EU quota by around 40,000 tons this year but hopes the steel will be allowed in quickly given the coil shortage in Europe."

Metal coils at the Tata steel plant in Ijmuiden, Netherlands. India is hoping to export more steel to Europe, where there is a coil shortage.   © Reuters

Care Ratings, meanwhile, reckons that in the current financial year crude steel production will grow 8%-9% to 112-114 million tons, with demand supported by an economic recovery, enhanced liquidity and government spending. In the Union Budget for 2021-2022, the government increased its own capital expenditure allocations by 34.5% to 5.54 trillion rupees as it attempts to jump-start the economy, the agency said.

"Therefore, enhanced outlays for key sectors like defense services, railways, and roads, transport and highways would provide impetus to steel consumption which is expected to grow by 10-12% in financial year 2022 to cross 100 million tons for the first time ever," Care Ratings said in a note in April. "An upcycle in steel prices is expected to continue in financial year 2022."

Care Ratings also cited the absence of China from the world export market and higher steel demand in China as major factors elevating steel prices. "Continued higher demand from China on the back of stimulus packages and the country's desire to bring down production levels in 2021 to reduce CO2 levels will be an important factor that will strengthen steel prices," the agency said, adding that a global demand-supply imbalance will present Indian steelmakers with export opportunities.

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