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Steel Industry: Key Growth Drivers - Views on News from Equitymaster
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  • Jun 3, 2008

    Steel Industry: Key Growth Drivers

    Riding on a booming economy and escalating demand, the domestic steel consumption has grown manifold in the last few years. The Indian steel industry has registered an average growth rate of more than 10% CAGR in output in the last five years. During the same period, steel consumption has also moved in perfect lockstep and has maintained a growth rate of 10%.

    In this article, let us have a look at the key growth drivers of the domestic steel industry and the rate at which the sector is expected to grow over the long-term.

    According to World Steel Dynamics, (WSD) the Indian steel industry has entered into massive growth in steel demand as well as steel making capacities. The key growth drivers for the steel industry and the brief description of each driver are laid out below.

    Construction: The construction industry has been witnessing a growth rate of 12%-14% in recent times. Steel construction is now identified with speed and since India is in need of speedy project implementation, steel is the best alternative for fast track construction. With economy surging ahead and expected increase in income levels of population, it is believed that demand for steel from this sector will continue to grow at current rates if not improve

    Automobile: The domestic automobile industry has also grown at more than double-digit rates in the past five years. The Indian automobile sector is the second fastest growing market after China and has emerged as a prime demand driver for alloy steel. Automobile sector which is experiencing growth and competition is likely to be one of the major drivers for steel consumption in the coming years and most likely, its contribution in the overall demand pie is likely to improve from the current levels.

    Auto components Industry: During the last five years, auto components market has grown at 19% CAGR, led by both robust domestic demand as well as exports. India is fast emerging as hub for auto components. International companies such as General Motors, Ford, Daimler Chrysler, Toyota and Volkswagen are outsourcing auto parts from India as it has cost advantage with regard to forgings and castings. Also, the growing domestic automobile industry, which relies on steel industry for its parts manufacturing, will enhance the demand for steel in India.

    Infrastructure: Infrastructure sector comprises of roads, railways, airports and power. The 11th Five-year plan has lined up huge investments in all the above related sectors of infrastructure. The sector wise anticipated investment are $200bn in power, $80bn in railways, $48bn in roads, $13bn in ports and $9bn in airports. Because of surge in the above activities, the demand for long products of steel will be increasing in years ahead.

    Consumer Durables: The consumer durables sector has also been witnessing robust growth. It has grown at an average of 10% per annum and is expected to grow at double-digit rates for coming years. The share of white goods and utensils is predominant in India. The domestic appliances market which includes spin driers of washing machine, almirahs, thermo ware, water filters, dishwashers, microwave ovens, catering equipments, cutlery, furniture etc have opened new opportunities for steel consumption, thus ensuring a steadily growing trend of steel off take.

    Oil & Gas Industry: Oil & gas sector is the major consumer of steel tubes and pipes. The pipe consumption in oil & gas sector is expected to grow at a rate of 25% CAGR as this sector is set to witness massive capital investment. Apart from laying cross-country pipelines, exploration and production activities are also experiencing strong growth in both international as well as domestic markets.

    Thus, in view of the robust growth expected in all the above mentioned sectors, there is no reason to believe that demand will slowdown in the coming future. Infact, if one were to go by government projections, then the demand is likely to increase at a CAGR of 11% until 2020. What gives us further conviction is the low per capita consumption of steel in India, which at 40 kgs currently is way below the world average of 150 kgs. Thus, the next few years are likely to be very good for the Indian steel manufacturers as far as demand is concerned.

    In the next article, we will focus on supply/production.



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