By MADHUMITA MOOKERJI
Keeping the government’s vision of 300 MnT per annum of crude steel production capacity by 2030-31 in mind, and a growing secondary steel manufacturing sector, demand for scrap will rise tremendously. And, with the implementation of the vehicle scrappage policy, local supply of ferrous scrap will increase substantially. However, India would still be import-dependent, says Raj S. Vaidhyanathan, Group Director (Commercial), Indicaa Group, Dubai. He has played a pivotal role in setting up sourcing locations across geographies like Africa, Europe, Middle East & North America for both ferrous and non-ferrous metals and has been the driving force behind Indicaa’s vast procurement network worldwide. Excerpts from an interview:
Q. How has the scrap industry scenario improved since the lockdown was eased in India?
The lockdown had affected production and consumption of steel substantially due to restrictions on movement. The first lockdown made the regulators, people and businesses realise that it was not sustainable from the economic point of view. Industry in India has taken a big hit. The lockdown completely restricted movement which brought the industry to almost a grinding halt. India’s production went down during the COVID-19 lockdown to 65% as against the US’s 32% and Germany’s 11%. There was delayed purchasing by consumers, delayed capital expenditure plans from companies. Construction and infrastructure development came to a halt, impacting demand for steel. This, in turn, resulted in less consumption of scrap too. Imports of ferrous scrap during January to July, 2019 amounted to about 4.5 million tonnes (MnT) as compared to 3.1 MnT in January-July, 2020. India’s crude steel production for January-August, 2020 was 61.1 MnT as compared to January-August, 2019’s 75.2 MnT, down 23%.
The situation has improved after easing of the lockdown. Prices have rebounded in most markets to the pre-pandemic levels. The production and demand sides of India are witnessing early green shoots of recovery from the second quarter (Q2). This is due to easing of restrictions on mobility. All the primary steel manufacturers are expected to register a healthy comeback in Q2. The capacity utilisation is increasing, bolstered by an increase in steel prices and tepid input costs.
In the July-September, 2020 quarter, domestic steel production surpassed the average capacity utilisation level of 77%. Demand for automobile, capital goods and white goods has also picked up. Automobile sales for September, 2019 were about 204k and for September, 2020, these were at 275k for passenger vehicles alone. Housing construction has also picked up substantially. Export markets for billets, CRC and HRC also boosted demand. Indeed, the increase in steel prices in India indicates a growing demand.
Q. Going forward, how do you expect the scrap story to unfold in India by 2030?
Given that the steel vision of the government is 300 MnT per annum of crude steel production capacity by 2030-31 and with a growing secondary steel manufacturing sector, demand for scrap will grow tremendously. Scrap is considered environmentally friendly as compared to the iron ore route of steel-making.
India’s crude steel production was about 111.2 MnT in 2019. Given the data, 55% of steel is manufactured in India using the EAF/IF route. India has been growing at 9% year-on-year (y-o-y) for the last two years. Excluding the year 2020, we should be at 250 MnT/annum by 2030, considering there are no COVID-19-like situations.
Accordingly, the scrap requirement by 2030 should be close to 100 MnT per annum. This will be catered to by domestic steel scrap supply of 38-39 MnT by 2025 as predicted by the Ministry of Steel, and imports. Otherwise, this vision of 300 MnT capacity will not be possible. The per capita consumption in India is low and is going to go up. Secondly, the GDP growth expected 2022 onwards is 7.5%. So, a humongous amount of steel is expected to be produced in the country over the next 10 years. Iron ore volumes being the same, scrap generation in India will definitely grow but still how will the mills manufacture the balance steel unless scrap is imported?
If the scrappage policy is implemented, then the local supply of steel scrap will increase substantially. However, we should still be import-dependent in my view.
Q. At the peak of the lockdown, containers of imported scrap piled up at ports. What were the rates at which these bookings had been done? To what extent has the situation eased?
The market collapsed in terms of demand due to the pandemic. Most of the mills had production cuts and some of them even shut down their plants. The work force went back home. With demand at its lowest and no work force, this was bound to happen. Prices were booked at earlier market levels.
The pandemic caused a collapse of prices and the lockdown forced buyers not to book any further cargo as there was uncertainty regarding the future. The pandemic was declared a force-majeure and some of the buyers in various countries used force-majeure as a reason to renege on contracts. This was further amplified by the restrictions placed on movement across red, green and orange zones, leading to complete breakdown in the supply chain logistics. This created problems for those who genuinely wanted to clear the cargo and resulted in a huge number of containers piling up in various ports across India.
The bookings at pre-pandemic levels in February 2020 were at around US 300/MT levels for HMS to India. Record bookings happened during this month. The government announced the lockdown in March 2020. No bookings were made through March, April and May. Container clearance started from around end-May and beginning of June as the lockdown was being eased. Starting June and July, the import bookings started again and picked up momentum in August, 2020. August bookings are back to pre-pandemic levels of US 300/MT cnf India for HMS. Now the ports have almost eased out and buyers are able to take delivery of their cargoes with no delays.
Q. Imported prices had declined during the lockdown. Please give us a price outlook? What factors will influence the trends?
No prices were offered for import bookings by steel manufacturers during the pandemic as factors like supply chain, workforce and market uncertainty did not permit them to do so. At present, prices are firm for reasons of scarcity of scrap and the growing demand for steel in India. The scarcity in scrap has arisen because of supply chain problems at sourcing countries which has restricted supply, coupled with protectionist mechanisms in some of the countries. As explained earlier, the prices are now at pre-pandemic levels for scrap and expected to remain firm.
During lockdown the bookings just did not happen and therefore there is no price to speak of. February prices were at USD 300/tonne (MT) for HMS to India and by August the prices were at similar levels. The only reason bookings did not happen was lack of demand and restrictions on movement. As the lockdown was eased and all old containers cleared, the markets started picking up.
Till March 2021, the important factor would be the expected second wave of COVID-19, which could affect prices. If it happens then governments will surely look at lockdowns to control the spread and this will affect demand and prices.
Another factor would be the political disharmony between countries which will surely affect demand, and hence prices. For markets to stabilise, the uncertainty has to end.
Q. What are the challenges the scrap industry faces in India?
The first challenge is that the segment is not recognised as an industry in India. Recycling has no industry standing and hence scrap continues to be an unorganised sector. Data collection in the scrap industry is very difficult and, therefore, planning and strategising to organise and improve the trade still remains difficult.
Secondly, India is still an import-dependent market. If, for any reason, the import volume goes down, local scrap prices increase, and this makes the input cost higher for secondary manufacturers.
Thirdly, protectionist trade mechanisms in some countries are another challenge. Recently, the United Arab Emirates (UAE) banned exports of scrap metal, although temporarily. Such protectionist measures make it difficult for India in terms of reduced supplies and quick deliveries.
Fourth is the duty structure, which is another drawback in scrap imports. Since India is import-dependent, removal of the 2.5% scrap duty would help secondary manufacturer to stay competitive. Quick shipments help in better working capital management, especially when liquidity is an issue.
Q. What can be the enablers?
The enablers are primarily to push for usage of domestic steel. Implementation of infrastructure projects will help demand to remain firm.
Government support in terms of stimulus would be of great help. There is a need to understand the importance of the recycling trade and its contribution to the environment and economy as a whole and to provide it industry status.
The scrappage policy should be implemented as early as possible.
The duty of 2.5% on scrap imports should be removed. Export incentives to steel exporters would help demand to stay firm.
Finally, the scrap collection system in India should be looked into. More conglomerates like Tata and Mahindra should be encouraged to be part of the recycling trade, so that scrap collection and processing centres across India become organised, and this would help in nation building.
Q. What are your views on the scrappage policy?
The scrappage policy will help India to be more self-reliant in terms of metal scrap. Given the increasing protectionist attitude of nations, it is important for India to reduce the dependency on imports. If India is to grow as per the National Steel Policy, with the predicted 300 MnT per annum crude steel production capacity, then it is not incorrect to say that without the scrappage policy this vision is not possible. Also, the policy will help the recycling sector to become more organised and environmentally friendly too.
The livelihoods of many transport companies and single owners are being considered here and this is causing the delay in implementation. The government is working on a via media solution.
Q. What are the global dynamics that are likely to play out in the imported scrap space?
The continued trade war between the US and China would be the most important factor to worry about. The protectionist mechanisms of countries would also be a factor to look into. Many countries are contemplating banning exports of scrap. South Africa’s tightening of export permits and the UAE’s banning of exports are a few examples which are a cause for worry.
Also, the current political tension with many countries in terms of territorial waters and land is a big cause for concern.
If COVID-19 continues, this will affect the scrap space a lot as countries might opt for lockdowns again and the supply chain logistics may break.
Q. Many organised players are entering the scrap generation space. How will the domestic scrap landscape change because of this?
This is very welcome. Indian conglomerates like Tata’s and Mahindra’s getting into recycling space shows how important the sector is becoming. This is a clear sign of this trade getting into a bigger space. Such players will bring technology, professionalism and structure to this trade and recycling will become more organised. The domestic scrap industry will see a major change when such big companies enter. Processing of scrap will become more organised and efficient. Small companies may have to merge with bigger ones. Because, over a period of time, they may lose relevance against new technologies and equipment coming into scrap processing.