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Steel: Demand drivers... - Views on News from Equitymaster
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  • Apr 16, 2007

    Steel: Demand drivers...

    Steel is considered as an important tool for development of any modern economy and the level of per capita consumption of steel is treated as one of the important indicators of socio-economic development and standard of living in any country. The steel production and consumption has increased at a CAGR of approximately 9% and 7% respectively in last six years. What has led to such a robust growth in the sector is buoyancy in the end user industries. Demand for steel is intrinsically related to the economic development of the country. Currently, the booming automobile, consumer durables and construction industries are leading to improved demand for steel. The housing sector has also further boosted steel demand. Having said that, there is still a substantial scope for increased penetration in rural areas for housing, construction and agro-based industries etc.

    In this article, we have discussed factors that have and will continue to be demand drivers for the steel industry.

    Government policies and initiatives: The Government has approved the National Steel Policy (NSP) 2005, whose long-term goal is to ensure that India has a modern and efficient steel industry, capable of standing up to international competition and catering to the growing domestic demand for steel. This in turn has led to sustained growth in the steel sector. On account of the buoyancy in the sector, foreign companies are also showing interest in investing in steel industry in India. The government's thrust on infrastructure, in itself, could emerge as a crucial growth driver in the long run.

    Infrastructure & Construction: It is projected that the Tenth Plan outlay for civil aviation is Rs. 129 billion. For roads it is Rs. 597 billion, for telecom it is Rs. 870 billion and for power, it is Rs. 1.76 trillion. The power sector has enormous potential in boosting demand for steel. Addition of 41,000 MW of power generating capacity between 2002 and 2007 and about 61,000 MW between 2007 and 2012 should drive steel offtake in a significant way. The demand for natural gas is expected to grow in the coming years on account of its cost advantage and availability. This would necessitate laying gas pipelines across the country to transport it from the supply centers to consumption centers. From 25 malls in 2003, India expects to commission more than 600 malls by 2010 (100 million sq ft). This expected investment in infrastructure will create substantial demand for high quality steel products in the market.

    Roads: The thrust on infrastructure spending has seen major improvement, particularly in roadways and highway projects. The government intends to embark on the construction of 48 new projects with a view to four lane about 10,000 kms of roads in addition to the existing ongoing programme of NHAI. With steel intensity in the roads under construction being considerably higher than the legacy infrastructure, the outlook for increased steel consumption on this count appears optimistic. This has not only increased construction activities but has also led to increased demand in passenger and commercial vehicles leading to sustained growth in demand for steel.

    Automobile: In 2004-05, India's auto industry consumed about 2.8 mt of steel (about 8% of India's steel consumption). This is expected to grow at 11% to 12% over the next five years following India's emergence as a global outsourcing hub for the auto industry. The strong growth in the automobile sector could be attributed to domestic demand fuelled by growth in the service sectors, increase in working population, higher disposable income and easy availability of finance.

    Housing: Low interest rates and easy availability of housing finance has resulted in a housing boom; the Housing and Urban Development Corporation intends to add two million houses every year (35% in urban areas), estimated to create an additional annual demand of 0.6 to 0.8 mtpa of steel. Further, as per estimates, there is still a significant amount of unfulfilled demand (40 m) for dwelling units in the country, which would keep the demand ticking.

    White goods: Rising income and the easy availability of low cost finance has started a white goods (refrigerators, air conditioners and washing machines) revolution in India, leading to an increased consumption of steel.

    Industrial Projects: India's industrial growth is encouraging. A number of companies have strong capex plans and this will lead to increased consumption of steel. Infact, the steel industry is expected to emerge as a major steel consumer itself.

    Thus, an ever-increasing investment in infrastructure, construction and urbanisation as well as growth in automobile, white goods and industrial projects, is adding to the optimism within the domestic steel industry. Also, an increase in the number of potential applications for which steel could be used is expected to spur demand for the metal going forward.

    Moreover, India is currently the seventh largest steel-producing nation in the world with crude steel production of approx. 42 MT. However, it has a per capita consumption of steel of around 33 kgs as against 242 kgs in China and an average of over 400 kgs in the developed countries. Therefore, ending with the argument that India's per capita consumption of steel leaves a lot of room for growth lends further credence to the demand story.



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