| Supply |
With trade barriers having been lowered over the years, imports play an important role in the domestic markets.
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| Demand |
The demand is derived from sectors that include infrastructure, consumer durables and automobiles.
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| Barriers to entry |
High capital costs, technology.
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| Bargaining power of suppliers |
The government’s move on railway freight costs and grid power costs would determine the final price of the metal.
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| Bargaining power of customers |
High, presence of a large number of suppliers and access to global markets.
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| Competition |
High, presence of a large number of players in the unorganized sector. |
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FY07 was the fifth consecutive year of impressive performance for the Indian steel industry. Domestic consumption increased by over 12% YoY (nearly 44 MT) from about 39 MT last fiscal. Exports however, registered a growth of 6% YoY. Production growth, on the other hand, was marginally lower at 11% YoY, nearly touching the 50 MT mark. Thus, with the sustenance of the strong performance by the domestic steel industry for the fifth straight year, steel production has grown at a compounded rate of 8% during the period FY03 to FY07.
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Apart from infrastructure activities, demand for steel is dependent on the growth of auto and consumer durables. Both these sectors continued to recorded splendid growth in FY07 after three consecutive years of robust growth. To put things in perspective, for FY07, production of M&HCVs & LCVs recorded an increase of 32% YoY and 33% YoY respectively. Further, the passenger cars/multi-utility vehicles and two-wheelers also continued their robust performances by registering a higher consumption of 22% and 15% YoY respectively. The consumer durables sector also ended FY07 with strong double-digit production numbers in various categories like air-conditioners and refrigerators.
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Domestic steel prices, in line with the international trend, remained buoyant during the year under review. However, there has been significant pressure on margins from increased raw material prices, especially for non-integrated steel players. In fact, sustained performance by steel companies could be attributed to the demand growth and production, leading to gains for domestic steel companies. It must be noted that both the above companies are relatively insulated from the volatilities in input prices owing to the advantage of their backward integration wherein they have their own mines to meet their input requirements.
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The International Iron & Steel Institute (IISI) forecasts global steel consumption to grow by 5.9% in 2007 and 6.1% in 2008, driven by strong demand from Asia, Africa and South America. The apparent steel demand is likely to increase by 65 MT in 2007 and 72 MT in 2008 to reach a level of 1,250 MT in 2008. China is expected to remain the largest market with steel demand likely to increase by 13% (46 MT) in 2007, which represents 71% of global steel consumption growth in 2007.
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However, the concern with respect to new steel capacities cropping up across the globe have become louder, as this development would lead to significant pressure on steel prices going forward. Further, the biggest disruption in the growth pattern could be from an expected slowdown in Chinese steel consumption, which would make available a good amount of excess steel for world consumption. As global companies have realised the threat of excess supply, they are looking at M&A (mergers and acquisitions) option to retain market share and improve margins. On the domestic front, steel consumption is expected to increase to 65 MT by FY10 and over 125 MT by FY 2014-15.
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Also, the domestic steel sector may face threat from cheap imports, now that the import duties on steel in India being amongst the lowest in the world. With the possibility of the developed economies imposing duties on cheap imports from developing nations, the same could find their way to India. Import pressures could consequently lead to pressure on margins of the domestic companies on account of lower steel realisations. However, if the Indian government increases the import duty on steel products, domestic steel industry could get protection to an extent. But since India has already agreed to the WTO norms, it might become difficult for the government to increase duties substantially.
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Going forward, we remain apprehensive about the continuation of the strong performance by steel companies. Though we believe that volume growth would be visible in the years to come, largely due to the continuation of infrastructure spending (including housing), strong demand from the auto sector, which could help in driving demand for value added steel products like CR (cold roll) steel and exports, we expect realisations to come under pressure on account of excessive supplies. However, a sharp fall in steel prices could be prevented if steel producers across the globe take conscious efforts at curtailing production.
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On the exports front, over dependence on the Chinese markets could be detrimental in the medium to long-term. This is because, like the US, Canada and the EU, there is every possibility that anti-dumping duties could be levied on Indian imports into China too, and the threat of this coming into existence would increase with the slowing down in Chinese consumption of the metal and/or the country meeting its requirements internally. This could severely hurt realisations of companies, whose significant chunk of revenues come from exports.
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The government over the last coupe of years has continued to lay emphasis on continuation of infrastructure activities in the country. Increased spending on infrastructure will be a key positive for the steel sector, as the demand for steel will get a boost. The continuance of tax sops to the housing sector is another positive for steel demand.
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