Md. Mehedi Hasan, Senior Manager Credit Risk Management - SME
The growth in the production and use of steel is considered as a key indicator of development for any country. Especially consumption of steel directly indicates how fast the infrastructure is developing. Steel industry plays a fundamental role not only in driving economic development but also in other complementary industries like transport, energy, heavy engineering and construction. Over the years, the steel & re-rolling industry of Bangladesh has contributed immensely in the country’s overall infrastructure development by providing long steel products such as rebar, angel, beam and channel. Moreover, selfsufficiency in billet production enabled the industry to go beyond the border and export finished goods.
The Emerging Global Market
World crude steel production for the 64 countries reporting to the World Steel Association was 156.4 million tonnes (Mt) in September 2020, a 2.9%
increase compared to September 2019. World crude steel production was 1,347.4 Mt in the first nine months of 2020, down by 3.2% compared to the same period in 2019. The downward growth in the first nine month caused due to pandemic since some major steel producing countries were under lockdown. However, China has been the largest producer and user of steels for past several years. China produced 92.6 Mt of crude steel in September 2020, an increase of 10.9% compared to September 2019. On the other hand, India produced 8.5 Mt of crude steel in September 2020, a decrease of 2.9% on September 2019.
Bangladesh steel Industry Overview
i) Demand for long steel has increased sharply in
recent years – currently 7.5 million MT which was
merely 2.5 million MT in a decade ago.
ii) The market size of steel is around BDT 450 billion.
The local steel market grew at a rate of 15%-20% in
last two years from 8-10% per year previously.
iii) Per capita consumption of steel stands at 45kg
which was only 25kg in 2012. Lower per capita
consumption compared to global standard
indicates huge industry prospect. However, the
per capita consumption is expected to be 73kg by
iv) The industry employs nearly 1.00 million people
directly or indirectly throughout the country.
v) Among 400 steel and re-rolling mill of the country
only 45 steel mills are the members of Bangladesh
Steel Manufacturers Association (BSMA) who
manufacture over 80% of the steel products in the
vi) The country’s combined present installed capacity
is 9 million MT.
vii) Industry capacity is higher than the domestic
demand. On an average 70-75% capacity utilization
is termed as optimal by the industry players.
Key players in the country
Bangladesh’s steel industry is growing at a rapid pace on the back of increasing steel demand for the mega infrastructure projects lined up in the country in
this decade. In terms of production capacity for both finished and semi-finished (billet) steels Bangladesh is now self-sufficient. However, the country’s steel
industry is turning into a perfectly competitive market from an oligopolistic one. Three big steelmakers BSRM, Abul Khair Steel (AKS) and KSRM had long been continuing their dominance in steel market and controlling more than 50% of the market. However, in last few years small players are also growing aggressively to cater the growth in demand.
In terms of both revenue as well as capacity Abul Khair group is the largest steel producer in the country. The company’s capacity utilization is ratio is roughly 80%. BSRM Group is the pioneer in the steel industry of Bangladesh and currently the second largest in the market. BSRM Steel has decided to set up a BDT 7000 million plant to raise annual MS rod production capacity by another 0.5 million tonnes to meet it growing market demand. To cater to the growing demand in coming days, KSRM has also increased its capacity from 0.45 million MT to 0.8 million MT recently. Another industry player, GPH Ispat has just increased its production capacity by more than 6 times. Moreover, very recently GPH has already exported 25,000 MTonnes of MS billet to China.
Challenges of doing steel business
Availability of raw-materials: Billet is considered as the prime raw-materials for producing steel products among the crude steel products. Due to large investment by major steel manufacturing groups, the billet industry has itself become big along with the finished steel industry. Thus, import of billet has declined sharply in recent years. However, as billet millers in Bangladesh mostly serve as the backward linkage for their own re-rolling mills, some steel makers still import billet. Most importantly, to produce billet, steel companies need to import 90% raw.materials (metal scrap) from US, Canada, Italy, the
UK and Australia which have gone into partial or full lockdown since the beginning of March due to pandemic. In addition, majority of the chemicals
used in the production also need to be imported. Thus, the insufficiency of raw materials in our country and the volatility of raw material prices in
the international market greatly affect the industry. Especially during the lockdown, the industry had
to suffer as there was a major halt in import and export worldwide. On the other hand, only 74 ships were imported in the first six months of this year, a record low in the last six years, while shipbreaking yards at Sitakundo upazila in Chittagong cut away more than 200 ships on an average per year. As per Bangladesh Steel Mills Owners Association, over the last six months, the sector’s losses have amounted to around BDT 6,000 crore.
Availability of power and gas: Uninterrupted power supply and large volumes of gas are mandatory for steel production. Thus, any adverse changes to electricity regulations, shortage of gas supply or high pricing of energy have direct impact on the operation. To solve the problem, the big producers have built their own power plant.
Project inefficiency: As government consumes 40%-60% of the total steel productions, steel makers are expanding their businesses in anticipation of a high demand from the government sector. Thus, smooth and rapid progress of the mega projects is a very important growth stimulator for the industry. It ensures fair working capital projection and consumption. However, if the project does not run well according to their time proposal, delay of a project may affect the company’s financial health.
Changes in regulations and rates: Lack of business-friendly policies such as customs laws, income tax, value-added tax etc. may adversely affect the business of steel companies. A huge amount of working capital that was paid as refundable advance tax (AT) on imports is still being held back by the government. The total amount owed to the steel sector could be over BDT 800 crore which includes the AT and advance tax (AIT) paid by producers for the last.four or five years. This is unnecessarily slowing the industry’s momentum since manufacturers could use this money for their economic activities and
Price Competition: As large companies are capable of price cutting to capture the market sometimes it becomes hard for the relatively small companies to sustain in such highly competitive price war.
Pandemic Impact on Steel Pricing:
The pandemic of COVID-19 has taken a toll on this industry, like all other businesses. The decline in steel demand in the first half of 2020 is predictable but
perhaps more painful as the expected growth is much lower after lockdown ends. Pricing structure of steel product amid the lower market demand are depicted here to understand the scenario.
Scrap Price: In the local market steel scrap price is around BDT 30,000/- to BDT 34,000/- per MT now. However, in international market price is below USD 300 per MT. Though Bangladeshi steel makers ordered 27,000 MT of HMS 1&2 (80:20) deep sea bulk cargo from an Australian exporter at USD 313.5 per MT in October 16, 2020, Steel scrap future price (Month 1) in London Metal Exchange is hovering around USD 286 per MT. To maintain the profit margin on the sales of a steel in current context, Bangladeshi steel makers need to purchase the scrap within USD 300 per MT.
Billet Price: Currently, local ispat mills produce around 6 million tonnes of billet annually, enough to manufacture 5.5m lakh tons of high-quality rods. Around 35 mills make billet by importing scrap. Though steel mills are producing billet for their own consumption, limited amounts are also traded in the market on need basis. Recently, GPH Ispat exported 25000 MT of billet to China on USD 407 per MT price. In local market Billet price is around BDT 41,000/- to BDT 42,000/-.
Finished Goods: From the market survey it is assumed that breakeven price for the quality steel millers is almost BDT 48,000/- to BDT 48,500/- per MT
now (it may vary depending on the financing cost and operating efficiency). However, market shows a downward price pressure after lockdown.In Dhaka and surrounding area price per MT (sold by manufacturers) is BDT 50,000/- to BDT 55,000/-.
Current Market Scenario Analysis
The industry strategically runs on overcapacity. It is seen that the utilization is around 75% of total capacity. In April and May, the industry’s overall capacity
utilization came down to a 40% level, as many were running in a limited capacity, and others had to stop completely due to pandemic. It started to pick-up from the beginning of June with the demand increasing and the return of employees to the manufacturing plants. But the industry is still dwindling because of below mentioned reasons -
i) Yet to start government mega projects in full swing which consumes 4.5 million MT or 60% of total production.
ii) Generally, in rainy season, the demand is comparatively lower than usual which was also intensified by recent flood across the country.resulting in lowest consumption in household sector which consumes 1.88 million MT or 25% of total steel consumption.
iii) This ongoing corona virus crisis caused huge havoc in private sector economic growth resulting in low infrastructure development in commercial buildings sector which consumes 1.13 million MT or 15% of total steel consumption.
iv) Local steelmakers largely depend on international market for their raw material requirements and these companies are now exposed to shocking disruption in global trade due to COVID-19 crisis. If there is a shortage or price hike of raw materials then production cost will increase which could affect profit margin that is already soured. Currently, port facility in Bangladesh is inadequate and for that scrap carrying big vessels cannot enter into the Chittagong and Mongla port.
v) Giant six steelmakers (BSRM, AKS, KSRM, GPH Ispat, Rahim Steel, RSRM) dominate the market providing almost 59% of country’s total demand. Amid the sluggish demand of steel products, GPH Ispat expanded its production Capacity and went for large volume production (640,000 MT out of total production capacity of 760,000 MT) resulting low price for steel products in the country.
vi) Generally, we observed a quicker Cash Conversion Cycle (CCC) in the steel industry of Bangladesh. But during this pandemic, slow collections from receivables converted this shorter CCC into a longer CCC resulting tight cash inflow. Consequently, to ensure cash inflow steelmakers continue clearing stock at lower prices
vii) The sector has suffered losses amounting to BDT 60 billion over the last six months of the outbreak of the Covid-19 pandemic. Meanwhile, sales in the sector have dropped by 60%.
As a resilient nation, people of Bangladesh are adapting fast with the new normal which prevailed after the pandemic had hit the world. Amid the downward
demand and price pressure steel millers still manage to maintain operating margin with the advantage of lower scrap price. As winter is the peak season for
the steel products in Bangladesh, upward demand, as well as upward price adjustment, is expected within next couple of months. However, potential for overall growth in the sector is bright in the near future in terms of increasing demand due to rapid urbanization, Real estate development, Implementation of Government mega infrastructure projects such as Padma Bridge, Metro Rail, Nuclear Power Plant and several economic zones. Recent inclusion of Bangladeshi iron & steel products in duty free access list in the Chinese market also a bonanza for the steelmakers amid the ongoing
pandemic. In order to support the industry, retrieve its losses, the regulators can play a more supportive role now by increasing the repayment tenure for loans from the stimulus packages and industry friendly AIT,VAT policy.
Steel and Re-Rolling industry: fast paced recovery from pandemic on the cards
The Steel and Re-rolling industry, one of the prominent growth drivers of Bangladesh, has had its fair share of hit by the Covid-19 pandemic. This has been reflected on numbers as world crude steel production recorded a 3.2% decline compared to figures recorded in the same time period last year. As a developing nation with increased focus on to infrastructural development and lined up mega projects, Bangladesh sees massive growth potential in the Steel industry. With a market size of around BDT 450 billion the local Steel market employs nearly 1 (one) million people directly or indirectly across the country. The market has been growing at a rate of 15%- 20% for the past 2 years and contributes largely to the country’s GDP. However, the market for steel is turning into a perfectly competitive one from an oligopolistic structure as small players are now gaining efficiency and reaching competitive levels of their larger peers such as AKS, BSRM, KSRM etc. With the growth of the smaller companies, it is safe to say that the challenges that come with surviving in the Steel industry – such as, abundant supply of power and gas, availability of raw materials etc. are being well taken care of.
The Steel industry strategically runs on overcapacity. It is seen that the utilization is around 75% of total capacity which came down to 40% due to the pandemic wave. The prices of raw materials and finished goods are also seen to fall. However, as a resilient nation, Bangladesh is adapting fast to the new challenges that came with the pandemic. And, as we look towards a new normal, companies in the Steel industry must work in collaboration with regulators in order to sustain the growth and maintain the level of efficiency reached prior to the pandemic.
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