This time it’s different! Or, so indicates the way metal companies are responding to the boom in commodity prices versus previous cycles.
Almost 70 per cent of the companies in the metal industry — ferrous and non-ferrous — reported a reduction in their outstanding debt as on March 31, versus a year ago. The total debt — long- and short-term borrowings — of these companies dropped by ₹85,942 crore in the last fiscal against the additional borrowing of about ₹55,000 crore done by the same set of companies in FY20, per the data available for 62 companies (for FY21) on Capitaline database. The deleveraging in FY21 amounts to 20 per cent of the debt of these companies as of FY20.
Out of the total amount of debt reduced, ₹75,764 crore, or 88 per cent, was just from steel companies.
Also, the majority of the companies pruned more than half of their debt only in the second half of FY21, when metal prices started moving northwards, touching new highs.
This is unlike the pattern in the previous commodity upcycles when the firms added debt to their books by engaging in aggressive expansion.
Fuelled by loose monetary policies and fiscal measures to fight the economic slowdown induced by the Covid-19 pandemic commodity prices, especially, industrial metals, have seen a robust recovery since the second half of CY20.
LME prices surge
Base metals such as aluminium, zinc and copper touched multi-year highs with their LME (London Metal Exchange) prices surging 49 per cent, 50 per cent and 84 per cent, respectively, in FY21. Indian steel prices, too, moved up from about ₹38,250 a tonne a year ago to about ₹55,300 in March 2021, per SteelMint.
From H2 FY21, metal companies have seen a turnaround in their operational performance. For instance, the total EBITDA of frontline metal companies such as Tata Steel, JSW Steel, SAIL, Jindal Steel, Hindalco and Vedanta rose 92 per cent year-on-year in FY21.
With higher earnings and better cash flows, the metal companies focussed on deleveraging. For instance, big steel players such as Tata Steel, SAIL and Jindal Steel reduced 28-31 per cent of their debt as of end-FY20, in FY21.
In contrast, in FY08 when the metal prices had a sharp rally, the total debt of the 62 metal companies analysed went up by about ₹65,940 crore, doubling over FY07 levels. Exuberance over a commodity super-cycle drove aggressive expansion plans, then. The total EBITDA of the frontline metal players (as mentioned earlier) shot up by 85 per cent year-on-year in FY08, driven by a combination of better margins and acquisitions.
Lessons learnt
What happened after the aggressive expansion in the previous phase of commodity boom is a lesson not to be forgotten. In the case of steel industry, excess capacity and output from China coupled with contraction in demand, led to steel prices crashing (beginning mid-2011), eroding the profitability of steel makers.
Relatively smaller players which went on an expansion spree between 2005 and 2010, piling on large debt to fund their projects, took a hard knock as the steel cycle reversed, with many of them turning insolvent. Companies such as Bhushan Steel, Bhushan Power and Steel, Essar Steel, Electrosteel Steels and Monnet Ispat & Energy went bankrupt and were all referred by the RBI to the National Company Law Tribunal in 2017.
This apart, even well-established global players like ArcelorMittal and Tata Steel went through a decade of painful adjustments of excess capacity created by debt-fuelled expansion. Tata Steel’s share price for instance, went past its 2008 peak only in 2021. ArcelorMittal’s share price is still only at around 15 per cent of its 2008 peak.
Management commentary from major Indian metal players indicate that this trend of deleveraging is likely to continue and any expansion will be more balanced and not aggressive. With lessons learnt, the sector and especially the large players, appear to be better placed now for any reversal in the current commodity upcycle.
