~By SHUBHAM RAI
As the global pandemic, COVID-19, grows, manufacturers are quickly changing their practices and priorities. Demand for stainless steel goods from traditional consumption sectors was completely mute during the first quarter. However, stainless steel manufacturers got support from exports, but still they say their first priority is the domestic market. The government’s focus on self-reliance is expected to help revive demand and boost India’s economy. While the anti-China sentiment is high across the country, especially for made-in-China products, Indian industries are expected to gain due to a vacuum created by the absence of Chinese goods in the market. Manufacturers are hoping to reach full capacity utilisation in the second half (H2) of financial year 2020-21 (FY21). Vijay Sharma, Director, Jindal Stainless Limited (JSL), tells Steel360 that demand for stainless steel will recover from the third quarter of the current fiscal and sales volume are expected to improve further.
Excerpts from an interview:
Q. How badly has the demand for stainless steel been hit by the global pandemic, COVID-19? To what extent overall production and sales got affected from April to June?
A. COVID-19 has posed unparalleled challenges in every aspect of our lives. The scale and threat of this pandemic, along with the uncertainties associated with it, have impacted businesses across the globe and the domestic stainless steel industry has been no exception. Similar to the effects observed in our industry, Jindal Stainless faced disruption in the supply chain and production planning. Hence, production in April was completely ceased. From May onwards, as the lockdown was partially eased, there were signs of recovery. Our sales volume by the end of May was approximately 30%. Subsequently, the month of June was even better than predicted and we were able to double our sales volume. There was an uptick in demand from certain segments like automobile, specifically two-wheelers, and healthcare infrastructure, induced by COVID-19. Coming to July, we are witnessing a revival in demand from traditional consumption centres which were hit during the lockdown period. We expect sales volumes to improve further.
We were able to ride through these difficult times due to the strong customer relationships that we have build over the years. Despite a multitude of challenges and weak demand in the domestic market, we were able to capitalise on export opportunities in the months of May and June. We are expecting our exports volume to normalise to pre-COVID-19 levels by July. However, I would like to re-iterate that our first priority is the domestic market, followed by exports.
Q. Can a bounce-back be expected from H2 of FY21?
A. Seeing the promising trend, we estimate that demand for stainless steel will recover from the third quarter of the current fiscal. Assuming that there would be no further abruptions in the economy or unexpected lockdowns in future, we expect our operations to touch full capacity utilisation and sales volumes to touch pre-COVID-19 levels, starting from the second half (H2) of financial year 2020-21 (FY21).
Q. How do you think consumption of stainless steel will be in the post-COVID-19 days?
A. The government’s focus on self-reliance is expected to help revive demand and boost India’s economy. The recently-announced National Infrastructure Pipeline, Railways and Railway infrastructure, along with the augmented push for construction of roads and highways, are expected to keep the demand of stainless steel stable in the next few quarters. As per the new government guidelines, life cycle costing approach is being considered in infrastructure projects and this is expected to help stainless steel emerge as the preferred metal in the domains of inland waterways, coastal infrastructure and public utilities. The government’s thrust on reviving the MSME ecosystem will also act as an enabler for improving the overall manufacturing ecosystem in the country. We are also fairly confident that the Indian industry would gain due to the vacuum created by the absence of Chinese goods in the market.
Q. How was JSL’s performance during the pre-COVID-19 months?
A. Jindal Stainless’ performance was slightly muted in the fourth quarter of 2019-20 (Q4FY20) and this can be attributed to several factors. First, the overall GDP growth during the quarter slipped on account of weak market sentiment, owing to the outbreak of COVID-19 in India in the last week of February. Parallelly, demand from consumer-facing industries using stainless steel, like auto and kitchenware, was subdued in the last few quarters. Moreover, stainless steel has a direct co-relation with the raw material prices. Fall in nickel prices during Q4 over Q3 negatively impacted our inventory valuation, which further affected profitability.
One of the major concerns in the pre-COVID quarters for the Indian stainless steel industry was surge in imports and circumvention through countries which have free trade agreements (FTAs) with India. The overall import intensity during Q4FY20 amounted to nearly 30% of the entire stainless steel market share, forcing domestic industries to operate at reduced capacities. As a result of these distorted market dynamics, margins were under pressure.
Another reason for the net loss in Q4 was the exceptional mark-to-market forex loss, though operationally, the company remained profitable.
Q. India has entered phase II-III of the ‘Unlock’. Now, what are the new challenges for stainless steel manufacturers in this scenario?
A. With unique challenges and opportunities in India, COVID-19 will mark an inflection point in most industries, including ours. Given the diverse nature of our country, both MSMEs and large corporates in India need to be highly agile. Indian stainless steel producers are already manufacturing highly sophisticated, globally benchmarked products. With Industrial Revolution 4.0 slowly kicking in, this trend is only going to rise. The domestic industry needs to focus on four areas: better data analysis; more process-oriented innovation and automation; greater awareness of stainless steel at user and influencer level; and a level-playing competitive ground against foreign players.
With phase II of the ‘Unlock’ mechanism, several of the rising challenges remain the same irrespective of the nature or size of the business. Our experiences over the last two months have made us realise that compliance with regulatory requirements for operating in the times of COVID-19 are essential for the safety of our people on the one hand, and operationally challenging to ensure, on the other hand. MSMEs are especially caught in the cross-hairs in this situation. Apart from operational challenges, including less automation, MSMEs have been hurt due to cash flow issues. Fear among employees who are reluctant to re-join work is also a hurdle in conducting smooth operations. The MSME portion of the stainless steel industry is labour- intensive and, presently, labour availability is a challenge. Subdued demand due to weak economic sentiment is adding further uncertainty to the business outlook.
Any reasonable forecasting for a clear roadmap is nearly impossible at the moment, and profitability and cash flow constraints are damaging most industries. A new normal with new standard descriptions will be the future for any industry. Primary stainless steel manufacturing activity in India will have opportunities as demand from sectors like auto, pharma, and medical equipment will be emerging hereon. Over and above this, the industry will have the opportunity to tap markets within and outside the country that will be vacated by Chinese players and Chinese goods, as stated earlier. Our company and, in fact, the entire stainless steel sector in India, is more than prepared in terms of capacity and capability to fill this void as it emerges.
Q. How do you see the stainless steel price trend in India? Do you expect prices to firm up in H2 of FY21?
Stainless steel prices are dynamic and are a factor of the demand-supply dynamics. Since various factors have an impact on the prices, it is difficult to estimate the direction of the price trend as of now. However, let’s discuss the significant price determinants.
First, our business has some cyclicality. However, presence in different segments helps us minimise the cyclicality impact. For example, if there is weak demand for stainless steel in the architecture building and construction segment, then it is usually balanced by other segments like automobiles, railways and transport. Hence, we believe that the overall demand for stainless steel should remain strong.
Secondly, as indicated earlier, stainless steel demand has a direct correlation with the GDP growth of the country. So, factors like overall market sentiment and economic activity act as determinants of stainless steel prices.
Thirdly, competition and dumping of goods into the country also sometimes act as pricing determinants.
Last, but definitely not the least, raw material costs (input costs) govern stainless steel prices to an extent. Nickel is one of the key raw materials and nickel volatility has an impact on our business. The nickel consumed in our operations is largely through import sources, which have a lead time. This combination of price volatility and lead time is always associated with a price risk. We closely monitor our nickel exposure and try to minimise it.
Q. When it comes to stainless steel manufacturing, how do you see India compared to its global peers?
A. To answer this question, we need to understand the impact of global dynamics on Indian industries. Business activities across the globe are usually intertwined and interdependent. For a while, global trade activities have been in a state of VUCA: volatile, uncertain, complex and ambiguous. Therefore, subdued international trade flows have been impacting the business ecosystem in our country.
However, across industries in both B2B and B2C environments, unethical behaviour of some companies and a few countries has aggravated trade wars. Unfair practices like excessive expansion, non-WTO compliant support by way of subsidies and rampant dumping of products have distorted the global level playing field. In 2018, the US imposed a 25% duty under Section 232 on most countries, followed by the EU applying safeguard quota, and even China imposing anti-dumping duty (ADD) on Indonesia. Similar actions were taken by many other countries.
Today, in the category of stainless steel, out of the sum total of on-going or initiated Trade Remedial Cases, 60% are post-2018. Interestingly, China appears in about 70% cases and the newcomer in stainless steel, Indonesia, in about half the cases. Due to the alleged role of China in the current pandemic situation, global economic and trade sentiments have turned against China, Chinese products, and Chinese investments. As a result, many countries are flexing their muscles to impose additional trade barriers to create a level playing field.
Being a developing market, India has been an attractive dumping ground of goods. Hence, India has always been struggling against unfair imports of stainless steel, despite having adequate and underutilised capacities and capabilities to produce practically every stainless steel flat product. There is always the argument of the so-called uncompetitive nature of Indian manufacturers. However, it’s interesting to note that the uncompetitive factors actually sit outside the manufacturing units. Merely two cost elements – cost of capital and cost of logistics – comprise a difference of 10-12% in comparison with countries against which Indian manufacturers compete. In fact, Indian stainless steel products are acknowledged in advanced and developed economies like North America and the European Union (EU).
With all of these factors affecting the domestic industry, it is safe to say that Indian stainless steel manufacturing is at par with its global peers in terms of quality, but struggling gravely due to external factors affecting profitability and competitiveness. The situation is more severe now as Indian stainless steel manufacturers, MSMEs in particular, struggle to re-start operations, while our competitors in China and Asia have already moved ahead in the COVID-19 curve. The FTA arrangements and circumvention of duties by Chinese goods are adding to the injury. Our industry needs immediate relief and has appealed to the government for imposing suitable tariff and non-tariff barriers.
Q. To what extent have domestic MSMEs been impacted by COVID-19? What kind of support can they expect from Jindal Stainless in the near future?
A. Micro, small, and medium enterprises (MSMEs) constitute over one-third of the manufacturing GDP in India. In fact, they account for about 40% of the total stainless steel flat production in India. Hence, their role and relevance in all sectors of the GDP is critical. We have already discussed the challenges being faced by them in some of the previous answers, hence, let’s come to the way forward for MSMEs in India. The government’s recent Atma Nirbhar package (‘Atmanirbhar Bharata Abhiyan’ or ‘Self-Reliant India Mission) is expected to provide relief to the MSME sector by way of collateral-free automatic loans, subordinate debts with 20% credit guarantee, and funds for equity infusion, among others.
For Jindal Stainless, incubating, handholding, and growing MSMEs has been a business philosophy since inception. As the industry leader, we consciously foster ancillary industries. For instance, in Hisar (Haryana), several MSMEs have emerged around our plant area. Taken together, their annual capacity is that of 1.75 lakh tonnes, which translates into an annual turnover of approximately INR 3,000 crore in value terms. We have handheld MSMEs to meet demand for segments like stainless steel tubes, utensils, fabrication segment, and auto parts. In and around Jajpur (Odisha), with government facilitation, we expect an even more organised and successful growth story.
To support our partners during these volatile times, we have relaxed performance obligation terms in our memoranda of understanding (MoUs) with customers. This has been done in order to assure customers that we understand the market situation and will take care of their profitability as far as possible. However, to encourage them to push sales, we have augmented performance-based incentives. Further, we have supported their cash flow by liasioning with our channel finance partners to extend credit limits under schemes from three to six months.
In order to reduce inventory carrying costs for customers, we are stocking more material at our yards to make deliveries available just-in-time. We are in regular communication with varied customer groups to understand their requirements and tweak our supply chain accordingly, using our distribution network across India. Despite logistical challenges, including movement of goods across borders, we are coordinating with authorities to ensure last-mile connectivity for order deliveries for our customers.
Q. What is required from the industry and the government to help the Indian stainless steel industry bounce back?
A. Although COVID-19 is a setback in India’s growth story, I believe that a comeback is always greater than any setback. The government has already mooted a bold plan for self-reliance, indicating that the indigenous industry will be prioritised above imports in the post-COVID India. To do that, while also keeping prices competitive for end-customers, the government will need to expedite projects that increase our industries’ competitiveness. Like I said, plans like the National Infrastructure Pipeline will create many opportunities for stainless steel. The health and medical industry, which has long needed revamp, has opened up new avenues for production of equipment and infrastructure. Global companies shifting base out of China can be a blessing in disguise for positioning India as the new ‘manufacturing hub’. As the subsidised Chinese industries of auto components, white goods, pharmaceuticals, electronics etc vacate global markets, the Indian stainless steel industry can more than fill the gap. There is adequate capacity and expertise in the country to do this while meeting existing demand of stainless steel from various segments.
As stainless steel is inherently hygienic and safe, this metal stands to gain immensely from the growth in the health sector. Besides, stainless steel gains over any other material in life cycle costing, which makes it the most economical choice for a lot of major industries. This metal is absolutely aligned with the government’s drive to find ‘sustainable’ solutions. In the post-COVID-19 world, where these factors will assume critical value, stainless steel is bound to emerge as the top choice.