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Real estate slowdown takes a toll on domestic steel industry

Poor demand in the housing sector has started taking a toll on the already weak steel sector. The steel-rolling mills of Wada in Maharashtra are a telltale sign of that.

Vipin Agarwal, a steel mill owner in Wada, a steel sourcing hub for the real estate companies in the region, has cut back on production. While the sector is reeling under slow demand and cheap imports, a slowdown in the real estate sector has made things worse.

Two years ago, Wada had 20 steel-rolling mills. While 10 of them have shut shop, others are operating well below capacity. “Demand from real estate has gone down and even larger firms have started to supply to the real estate sector to beat the slowdown in the broader market,” said Agarwal, adding that other factors such as the high cost of power and cheaper chinese imports also forced him to cut down production.

Mumbai today consumes 2,000 tonnes of steel a day compared with 3,000-3,500 tonnes a day a year ago, says Agarwal. More than 35% of steel demand comes from the housing sector, which is reeling under a slowdown and adding to the woes of the steel sector.

According to a recent report by real estate consultancy Knight Frank, new launches in the residential real estate sector have fallen by 68% in the National Capital Region and 48% in Mumbai.

This has affected the demand for steel, which is used most in the initial stages of construction.

The Wada steel hub is not alone in facing the brunt of a flagging demand.

Yogesh Mandhani, president, Steel Re-rollers Association of Maharashtra, says nearly half the rolling mills in Maharashtra have shut shop in the last one year. The other half are struggling to operate at 50% capacity. “The main reason is the lack of demand—infrastructure has not picked up and housing demand is also going down,” Mandhani said.

Steel mill owners from different parts of the country that Mint spoke to estimated that demand from the real estate sector this year has fallen by about 40% when compared with last year. Overall steel demand has been soft as well and grew at a meagre 5% in the April-June period, according to data from the joint plant committee (JPC) of the steel ministry. Even this small rise in demand has largely gone to importers who have flooded the market with cheap imports.

“Most the steel dealer network for TMT sell to either builders or to smaller contractors building houses. If you check all over the country, you will find TMT manufacturing shops are shutting down,” said Kunal Gandhi, a Mumbai-based steel dealer. Thermo mechanically treated steel, or TMT, bars are mainly used in construction and infrastructure like roads and bridges.

The reduction in demand has taken a toll on prices. TMT bar prices for the Mumbai market have fallen by about 12% since May, shows steel ministry data. “The housing segment is very slow and not moving at all; organized real estate is in a bad shape. Individual housing is still doing better,” said A.S. Firoz, chief economist, economic research unit, JPC.

While smaller steel mills are the worst affected, larger ones such as Tata Steel Ltd have acknowledged that the slowdown in the real estate sector is weighing on already weak demand. “Since 2013, demand for steel in the housing sector has shown nominal growth. However, demand, especially from project developers and builders, has been consistently decreasing quarter on quarter,” said a spokesperson for Tata Steel.

Tata Steel sells about 15% of its output to the housing sector, which includes individual houses and housing projects. The company spokesperson said steady demand from Tier III and below cities is helping maintain some amount of growth for this segment.

To be sure, the steel sector is not the only one feeling the brunt of the real estate slowdown. Cement demand too has been impacted. No official data for growth in cement demand are available. “Demand from housing has been down since April, but need to wait for the monsoon season to end to figure the actual impact,” said Sanjay Ladiwala, chairman, Cement Stockists and Dealers Association of Mumbai.

Delhi-based cement dealers that Mint spoke with said that demand from the housing sector was muted or on the decline, but did not give an estimate of the fall in demand.

“The lack of demand from real estate projects can be offset with infrastructure demand. However, if individual housing demand gets hit, it would be difficult to offset that big a demand hit,” said Ladiwala.