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Steel: How's supply looking?

Jun 5, 2008

In the last article, we saw the demand for steel in the domestic market. In this article, we will focus on the production/supply of steel in the country. Indian steel industry has come a long way from a negligible global presence to become the world's fifth largest steel producer currently. It produces 53 MT of steel, which accounts for 4% of global steel production. The steel production grew at a CAGR of 10 per cent from last five years. This growth was driven by both capacity expansion (40.4MT in 2002-03 to 56.8MT in 2006-07) and improved capacity utilization (86% in 2002-03 to 89% in 2006-07).

The government plans to raise the capacity to 124MT by year 2011 and 200MT by year 2020, making India the second largest steel producer in the world.

The capacity addition scenario
A host of domestic steel companies are expanding their capacities through greenfield and brownfield projects. For instance, Tata steel is planning to raise its capacity to 35MT by year 2015. Similarly, SAIL is also raising its capacity from 12MT to 25MT by year 2012. International majors like Arcelor- Mittal have plans to setup two 12MT plants and Posco is also setting up 12MT in the country.

The financial arithmetic
Adding capacities of such magnitude will involve a lot of financial outlays and quite expectedly then, the Indian steel industry will receive huge domestic and foreign investments. Assuming that it requires around US $1 bn to setup 1MT plant, the industry will require around US $70 bn by 2011 and US $200 bn by 2020. Arcelor-Mittal has already declared a investment of $20bn for its Indian plants. Posco plans investment of around $12.5bn. Tata steel will invest up to $ 19bn for its three greenfield projects in the country.

Company name Expected capacity
additions (m tonnes)
Project cost
(Rs bn)
Period of
completion
Tata Steel 1.8 45.5 Jun-08
Tata Steel 2.9 91.6 Dec-10
Tata Steel 6.0 156.6 Phase-I of 3MT to be
completed by Dec-10
Tata Steel 12.0 550 NA
Tata Steel 5.0 120 NA
SAIL 10.4 530 In phases by 2010
Rastriya Ispat Nigam 3.1 86 2010
Ispat Industries 2.0 20 Dec-08
Ispat Industries 2.8 67.5 NA
JSW Steel 3.0 53 Dec-08
JSW Steel 3.2 70 2010
Essar Steel 4.0 107.2 NA
Essar Steel 3.9 105 NA
Mittal Steel India Ltd 12.0 400 NA
Mittal Steel India Ltd 12.0 400 NA
Posco 12.0 510 NA
JSW Bengal Steel 10.0 350 NA
Total 106.1 3662.4  
Source: CMIE

Roadblocks along the way
Almost 75 per cent of the steel projects will be commissioned through the greenfield route. These projects, which have the potential to add over 100MT of output, are facing inordinate delays due to issues related to land acquisitions, rehabilitation of displaced people and procurement of mining rights. For example, the Orissa project of Tata steel which was expected to start construction in march 2008 is facing issues related to resettlement and the company is also awaiting Orissa government's approval for iron ore mining leases. Even the other projects of the company in Jharkhand and Chattisgarh have made little progress in terms of land clearances. The mega projects of international steel giants like Posco and Arcelor- Mittal are also facing delays due to land acquisition and other issues.

The prices of key raw materials required for the production of steel are also escalating. Iron ore and coaking coal prices have grown manifold since last two years. While, sixty per cent of iron ore production in the country is exported, leaving little scope for domestic steel industry to bargain, the industry is significantly dependent on import of coking coal for its requirement.

Thus, as we saw, while the expansion plans in the country are indeed heartening, the sooner the roadblocks clear the better it is for the domestic economy as delays in commissioning are hurting the cause of industries that rely on steel for their growth.

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