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.
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.
India continues to hold its position as the 3rd largest steel making nation in the World in the current calendar year. During FY 15, domestic crude steel production was 88.1 MT, registering a growth of around 7.9% over the previous year. Further, finished steel production registered a growth of 3.3% in FY15. Due to adverse Global conditions, there has been a large inflow of imports, which surged by more than 70% while overall domestic consumption registered a growth of 3.1% only. In case of carbon steel, the consumption growth remained almost flat at 0.5%. This has also manifested in a series of price cuts for the domestic steel industry during the year, leading to a squeeze on margins earned by steel producers.
China in the last decade built substantial steelmaking capacity to meet its manufacturing growth and consumption requirements. This resulted in, China's share of global steel production to double to 50%. The global steel capacity utilisation continues to remain at around 75%, while, utilisation levels in China remained lower than global average and around 70% of the total global excess capacity resides in China. This coupled with declining domestic steel consumption led to rise in steel exports from China. Chinese steel exports surged to an all-time high of over 100 MT in FY 2015 creating a cascading effect on other steel producing nations.
Steel prices are now increasingly aligning to global export prices as markets strike a balance between imports and domestic demand. China's waning demand and resultant rise in exports poses a risk to leveraging improving domestic demand in South Asia and Europe. Further, movement of currencies against USD would also have a significant impact on the movement of global steel and raw material prices.
How to Research the Steel Sector (Key Points)
With trade barriers having been lowered over the years, imports play an important role in the domestic markets.
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, Imports from China, Russia and FTA Countries such as Japan, South Korea.
Indian steel industry faced several challenges during the year. On the other hand the finished steel imports surge by 70% especially from the surplus economies of China, Korea, Japan and Russia. Korea & Japan enjoys reduced the import tariffs under the Free Trade Agreement (FTA) with India. At the same time finished steel exports from India also decreased by 8.1% YOY to 5.5 MT. Resultant steel trade dynamics, subdued demand and declining raw material prices have driven global steel prices lower and impacted profitability of steel companies.
During the FY 15, the performance of the Indian companies operations was adversely impacted by the regulatory uncertainties in the mining sector. For the first time, several of its critical mines remained closed for varying periods, causing immense stress on operations. This led to supply and production disruptions and impacted the cost structure.
World crude steel production grew at 1% reaching 1,665 MT in 2014, as per World Steel Association (WSA). The global steel industry continues to face problems of large surplus capacity. This meagre demand growth was also recorded only due to some pickup in the demand from the advanced economies. The growth in production is coming mainly from Korea which grew by 7.5%. China's crude steel production increased merely by 0.1% YoY to 822.7 MT in 2013. The EU and US recorded a growth of 1.7% compared to 2013.
Global economic growth indicators are moderately positive, but the volatility in energy prices, currency adjustments, swings in capital flows can potentially impact emerging economies. The IMF forecasts world economy to expand at 3.5% this year and 3.8% in 2016, terming global growth prospects as moderate and uneven in its latest April 2015 World Economic Outlook. The growth in advanced economies, aided by fall in oil prices, is projected to strengthen, for the third year in a row, to 2.4% in CY 2015 compared to 1.8% in CY 2014.
The global steel demand in CY 2015 is expected to increase by 0.5% to 1,544 MnT, while in CY 2016 it is projected to grow by 1.4% to 1,566 MnT. Steel demand in the developed economies is projected to grow by 0.2% in CY 2015 and by 1.8% in CY 2016. Chinese steel demand is projected to record a negative growth of 0.5% in CY 2015 as well as in CY 2016.
Indian steel demand is expected to reflect improving macro-economic environment. Steel end use sectors are expected to perform better compared to previous financial year. Infrastructure projects like dedicated freight corridor etc., are gaining momentum and the steady decline in stalled projects coupled with hike in import duty in both flat and long products should stimulate steel demand. Recent weakness in Indian rupee has also helped competitiveness of domestic steel players. However, steel prices are expected to remain under pressure from Chinese exports and increased domestic competitiveness.
Indian economy is among a few economies globally for which economic growth forecast has been raised by the IMF. The IMF has raised its India GDP growth estimates for FY 2015-16 to 7.5%. In 2015-16, steel demand is expected to grow by 6% to 7%. However, a much sharper than expected increase in inflation and higher than budgeted fiscal consolidation are the key downside risks to the outlook.
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