The abrupt introduction of demonetization of higher currency notes on 8th Nov’16 put a full stop to the surge in consumption demand and the blink on the economic activity. A great majority of micro, small and medium enterprises (MSMEs) that form the un- organized sector felt the maximum impact which varied greatly from sector to sector. The sectors which were cash intensive were hit the hardest especially the informal sectors where about 90% of employment is cash based and account for almost half of India’s GDP.

The impact of demonetization was greatly felt in the Steel industry especially by the small and mid size steel manufacturers; the impact on large steel producers seem to be minimal. Steel producers, especially the small & mid-size plants have reported poor sales with significant draw down from the retail side especially in the rural sector. Apart from demand for steel from infrastructure and construction sector, auto sector, a key industry for steel demand has also seen down growth leading to overall decrease in demand. However, going forward, anticipated slow down in the real estate sector on account of the demonetization drive has impacted demand for long steel producers in the immediate term.

Given that, majority of the small to medium-sized secondary steel players in India are positioned in the long product segment, the impact of this slowdown in real estate demand is expected to affect their capacity utilization levels. Whereas, the impact of this slowdown is limited for flat products used by automobile and white goods sector since majority of its consumers are either salaried or fall in medium to high income levels.

According to JPC (Joint Plant Committee) report on crude steel production during December 2016 was about 8.4 mnt, a growth of 15% compared to December 2015 & a growth of 9.1% compared to November 2016. Mainly SAIL, RINL, Tata Steel, Essar, JSW & JSPL produced 4.8 mnt during this period, growth of 29% compared to December 2015 & a growth of 16.8% compared to November 2016. The balance ie 3.6 mnt was contributed by other producers, growing by 0.1% compared to December 2015. The figure has remained unchanged when compared to November 2016.



Does the JPC report show the pink of health of the steel industry? Contrary to this, the ground level situation was different where most of the small producers were reeling under demonetization crack down.

Ground level Impact – A synopsis


Impact on prices is prevalent on most of the products due to demonetization. As cash withdrawal was limited, even the basic functioning of units got choked. Units found it difficult to pay wages and meet expenses for transport. Flat steel manufacturers raised prices in December 2016 & January 2017 but prices were pulled down in traders market over dull demand. There was liquidity crunch in long steel also over weakening demand.

According to one of the secondary manufacturers, “The traders were affected as sales drastically went down. Builders have stopped their projects in the middle. The manufacturers have cut their production post demonetization. Due to the cash crunch, cash transactions are still down and traders are still holding the material.”

Another Trader commented that “Prices have gone up post demonetization mainly due to coking coal. Overall demand has dropped weak especially from trade segment.Prices are likely to fall in the month of March.”


Most MSMEs found demand for their products and services taking a dip. The impact was uneven in rural and urban areas. The rural segment was hit even more badly than their urban counterparts because of greater availability of cash, a sparse bank branch network and rather no digital payment systems. In rural and urban areas, housing and construction account for substantial economic activity. Domestic flat steel demand weakened following which manufacturers started looking for export options. Consumption level has ensued from the real estate sector and near-term demand is affected and due to which there has been pressure on long steel prices. Steel sector’s 30-35% demand come from real estate sector, thus the slowdown in real estate have had negative impact on long steel product prices.

According to recent Care Rating report, Post-demonetization, steel consumption is expected to remain under pressure in the coming few months to a certain extent. This is because it is likely that the demand for steel from the user industries like construction, real estate will take some time to strengthen. However, government push towards infrastructure will compensate for this reduction in demand.


The lack of cash and push for digital payment systems has made a large section of MSMEs nervous. A lot of economic activity is fine dealing with cash because it is easy and free of transaction costs, but the small producers have their own worries if they are made to shift from cash to digital payments. Many of them under-report employment or production to avoid the hassles associated with complying with prevailing laws, rules and regulations. Demonetization and push for digital economy have exacerbated their pain. Especially among the small & medium producers, there is increased inventories, demand for color coated & GP/GC is very bad, trade volume were totally nil for few days and also few plants had gone in for maintenance or production cut.


Large manufacturers raised steel output in Q3 FY17 and most of these large players have major hold in flat steel production, so there was an increase in production. But in the long steel production mostly it is the small producers, as one looks into the region wise impact – Eastern & Central India was largely affected because most of the deals were cash based; in South & North it was a different scenario as they were already dealing in check & online transfers.

Cash Transaction

Domestically, the informal economy is dominated by trade and services, some of which are sophisticated but still mediated through verbal contracts. It runs on cash plus ‘rolling’, trust-based credit and this flexibility in loaning substitutes for the lack of state social protection and so downstream manufacturers still suffer from liquidity problems. But real estate companies have reported big fall in sales – anywhere between 30 and 60% – not surprising given that most transactions have a big element of cash and also because prospective buyers are hoping for a further correction in prices.

A mid size Trader in Central India has commented that “There is huge impact in demand after demonetization. Lot of MoUs have been cancelled on non- performance by traders. Trade volumes have dropped significantly in last 3 months. Also it will remain low till cash availability improves in the market.”

According to Index of Industrial production (IIP), there was a 13- month high growth in November 2016 and industrial production dropped 0.4% in December, reflecting the effect of demonetization. Data shows manufacturing dropped 2% in December, compared with a 5.5% leap in November and already automobile sales recorded the worst monthly performance in 16 years in December’16. Also, the Indian Nikkei Purchasing Managers Index (PMI) survey showed manufacturing activity contracted for the first time in a year in December, while services contracted for a second straight month.

“Tata Steel recorded strong sales in Q3 as the strength of our franchise helped us counter headwinds due to demonetization. While the broader market was affected by lower rural sales and adverse consumer sentiment, we were able to increase overall volumes by 14 percent sequentially and register strong growth across all our target customer segments”, T V Narendran, MD, Tata Steel India and South East Asia quoted as saying.


After demonetization, there was a downward impact on demand but many of the manufacturers feel that it is a temporary impact. December had been worse hit and it is continuing and market participants believe it will start normalizing from next quarter. Most of the manufacturers wanted their margins to be covered and the market is back with 20-30% of liquidity and the flow of the cash is on. But the demand from the end user is still weak. Steelmakers will only be able to partially pass on cost increases, in turn, putting pressure on their operating profit margins in Q4 FY17.

The outcome of demonetization is clearly felt in the secondary steel sector which accounts for almost half the steel produced in India. The hiccups will continue for some time as the rural demand is largely cash-based, so the impact will be both in demand and supply side whether the aftermath for industry will endure beyond the near-term is still debatable; though fall in property prices and related chain effects can be long lasting.


Source: Steel 360 Magazine Mar’17 Issue