In 2011 India became the fourth largest steel-producing nation in the world with production of over 74 million tonnes (MT). However, it has a very low per capita consumption of steel of around 59 kgs as against an average of 215 kgs of the world. This wide gap in relative steel consumption indicates that the potential ahead for India to raise its steel consumption is high.
Being a core sector, steel industry tracks the overall economic growth in the long term. Also, steel demand, being derived from other sectors like automobiles, consumer durables and infrastructure, its fortune is dependent on the growth of these user industries.
The Indian steel sector enjoys advantages of domestic availability of raw materials and cheap labour. Iron ore is also available in abundant quantities. This provides major cost advantage to the domestic steel industry, with companies like Tata Steel being one of the lowest cost producers in the world.
The Indian steel industry is largely iron-based through the blast furnace (BF) or the direct reduced iron (DRI) route. Indian steel industry is highly consolidated. About 60% of the crude steel capacity is resident with integrated steel producers (ISP). But the changing ratio of hot metal to crude steel production indicates the increasing presence of secondary steel producers (non integrated steel producers) manufacturing steel through scrap route, enhancing their dependence on imported raw material.
With trade barriers having been lowered over the years, imports play an important role in the domestic markets. Currently India is net importer of steel.
The demand is derived from sectors that include infrastructure, consumer durables and automobiles.
Barriers to entry
High capital costs, technology, economies of scale, government policy.
Bargaining power of suppliers
Low for fully integrated players who have their own mines for raw materials. High, for non integrated players who have to depend on outside suppliers for sourcing raw materials.
Bargaining power of customers
High, presence of a large number of suppliers and access to global markets.
High, presence of a large number of players in the unorganized sector.
Overall the global steel industry witnessed steady growth during 2011. The growth in global steel demand was driven by increased demand from key steel end-user industries including infrastructure, construction and automotive, especially in the emerging markets; in spite of financial turbulence in the Eurozone, weak private demand in the United States and events in Japan and the Middle East.
In 2011, the global steel demand is estimated to have increased by 6% to reach a new high of 1,373 MT, 13% above the pre crisis levels in 2007. Global steel consumption grew from 1.302 MT in 2010 to 1373 MT. Emerging nations accounted for 72% of global consumption, at 980 MT in 2011 up from 928 MT in 2010. Growth was led by the emerging economies, notably China (6% up) and India (4% up), where new demand records were set. In the developed economies, demand levels remained 15-25% below 2007 levels. Europe saw steel demand increase by 5% and North America by 9% in 2011, but steel demand in Japan fell by 3%, as the impact of the earthquake and subsequent tsunami was felt on the manufacturing activity.
The growth in 2011 can be segregated in two halves. In the first half of 2011, global steel consumption grew relatively faster, underpinned by infrastructure construction and manufacturing activity. In the second half of 2011, steel consumption was lower than in the first half due to moderate economic growth in China, the United States and Europe.
In 2011, global steel output reached 1.5 billion tonnes, an increase of 7% compared to 2010 and a new record for world crude steel production. All major steel producing countries apart from Japan and Spain showed growth in 2011. Growth was particularly strong in Turkey, South Korea and Italy.
Government delays in allocating coal blocks for captive consumption by steel manufactures is seriously hurting the competitive edge of Indian steel sector. The same story is with iron ore. There are delays in allocating iron ore mines as well as approval for mining licenses. As a result no new investment on the ground in the steel sector is happening to add new steel capacities.
There are delays in land acquisition for Greenfield projects and environment approvals in India. There is thus delay in converting the intent into project on ground especially in the area of expansion and modernisation. This impedes growth of domestic steel capacity creation.
The Indian steel sector may face threat from cheap imports, now that the import duties on steel in India are amongst the lowest in the world. 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.
Looking ahead, global steel market developments are likely to remain generally positive, but with lower growth in 2012 compared to 2011. In the first few months of 2012, apparent steel demand remained muted due to the uncertain economic climate. For 2012 as a whole, global steel demand is forecast to grow by a further 4% to reach 1,422 MT. China, India and other emerging markets will continue to drive demand but recent market developments suggest likely slackening of demand. This is primarily due to the recent changes in the monetary policy in China to reduce bank credit and improve asset quality as well as lower growth forecast in India. While USA and Japan is expected to continue its recovery, steel demand in Europe is expected to fall.
Going forward, we remain apprehensive about the continuation of the strong performance by steel companies. 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 remain under pressure on account of excessive supplies. However, a recovery in steel prices could be sooner if steel producers across the globe take continuous efforts at curtailing production.