The Indian steel industry continued to showcase trends of higher consumption of finished steel. Currently, the steel consumption in India is second only to China. However, with the steel consumption in China expected to moderate at around 3%, India is likely to emerge as the fastest growing steel consuming nation. Further, India's current per capita finished steel consumption at 52 kg is well below the world average of 203 kg. With rising income levels expected to make steel increasingly affordable, there is vast scope for increasing per capita consumption of steel.
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.
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.
The world Gross Domestic Product (GDP) is expected to grow by 3.4% in 2014. With advanced economies expected to do well in 2015, the global growth projection for 2015 is 5%. (Source:- IMF & SAIL annual report) This is despite the fact that there was a noticeable slowdown in the emerging market and developing economies during 2013, a reflection of the sharp deceleration in demand from key advanced economies. As such, we reckon that while global prospects have improved but the road to recovery in the advanced economies is still uncertain and volatile.
World crude steel production grew at 3% reaching 1,606 MT in 2013, as per World Steel Association (WSA). The growth in production is coming mainly from Asia, as the crude steel production in all other regions (except Africa) declined in 2013. China's crude steel production increased 6.6% YoY to 779 MT in 2013. However, the EU recorded a negative growth of 1.8% compared to 2012.
The Indian metals and mining sector is currently facing a multitude of challenges like weak macro environment, leveraged balance sheets and heightened regulatory risks. The sector has suffered valuation de-rating since FY12 due to various factors like environmental and regulatory concerns, cost increases, delayed projects and high interest rates.
Government delays in allocating coal blocks for captive consumption by steel manufacturers seriously hurt the competitive edge of the Indian steel sector. Same was the story with iron ore. There are delays in allocating iron ore mines as well as approval for mining licenses. As a result, no new investment in the steel sector is happening to add new steel capacities.
There are trends of demand recovery in the property sector and the demand for infrastructure has also been strong since the Modi government came to power. However, underlying demand in the EU is not expected to improve much in 2014. Overall, steel demand is expected to remain weak due to the continuing economic crisis in the developed countries and the structural shift in the Chinese economy. Moreover the world is reeling under the pressure of large surplus capacity which will remain a serious cause of concern, especially in times of subdued global demand.
GDP growth in India stood in the region of sub 5% in FY14 on account of stalled investment against the backdrop of tightening policies, widening trade and fiscal deficit, high inflation and weak FDI inflows. Further, FY14 was also a year of subdued activity for steel using sectors in particular the auto segment. It is expected that the next fiscal will continue to remain a challenging year for the automotive sector if interest rates remain high. However, decline in fuel expenses (which has been the case recently) may help a bit.
Steel demand in India has remained sluggish so far in 2014 amidst weak activity and poor sentiment; however, activity is expected to accelerate modestly in the coming years. Strengthening domestic consumption and improving external conditions will help underpin the growth of steel using sectors.