Indian steel producers have had smooth sailing during the last decade, with demand growth far exceeding supply growth. This was due to easy availability of raw materials like coal and iron ore. As a result, the steel producers enjoyed fat margins. The dynamics of the business are now changing. Falling global demand and rising raw material shortages are posing a threat to the industry.
Coal and iron ore are the two main raw materials used for manufacturing steel. Coal India has reduced linkages to the steel industry in the last few years due to sharply rising demand from priority sectors like power. The situation is likely to get worse. As large scale power capacities are expected to get commissioned in the coming years, Coal India's production is unlikely to keep pace with demand.
Iron ore production is also on a decline. This is due to export ban in Karnataka and increased focus of government agencies in enforcing mining and transportation regulations to curb illegal mining. Production at a number of mines has declined, as they are awaiting renewal of their mining licenses. Exports are also on a decline due to increase in export duty.
The demand for steel was expected to grow at an annual rate of 8 - 10 percent. But it is unlikely to meet that target. In fact, the demand for steel grew only 1.5 % for the April - June quarter. This was due to slowdown in investment in infrastructure sector which is the primary consumer of steel. Also high inflation coupled with high interest rate did not help the situation. Imports also saw a decline of 52 % over the same quarter of last year.
Going forward, the slowdown in demand and rising costs may decrease profitability of steel producers. Smaller steelmakers may have to resort to production cuts. The bigger steelmakers like SAIL, JSW Steel, and Tata Steel will probably slow down capacity additions which were expected to come on stream this year. There is no possibility of price cuts to improve demand as carbon steel is already being produced at cost levels. But steel companies believe that the slowdown in demand is temporary and demand will bounce back in the coming months.