Indian Steel Industry Report - Steel Sector Research & Analysis in India - Equitymaster

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Steel Sector Analysis Report 

[Key Points | Financial Year '17 | Prospects | Sector Do's and dont's]

  • 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.
  • In FY17, crude steel production in India was 97.4 metric tonnes (MT), with the total crude steel production growing at a CAGR of 5.5% over the last 6 years. The steel sector contributes over 2% to the GDP of the nation and provides 20 lakh jobs in the country. During April-December 2017, crude steel and finished steel production in India stood at 75.5 MT and 79.3 MT respectively.
  • Further, India was the only major steel consuming market globally, which saw a demand escalation. However, the country suffered from an unprecedented inflow of steel imports from China, Japan, South Korea, and Russia. South Korea and Japan benefitted due to the free trade agreement with India. The result was that the domestic industry was forced to take a series of price cuts, leading to a severe margin squeeze for domestic steel companies.
  • 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 the US dollar would also have a significant impact on the movement of global steel and raw material prices.

How to Research the Steel Sector (Key Points)

  • Supply
  • With trade barriers having been lowered over the years, imports play an important role in the domestic markets.
  • Demand
  • 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.
  • Competition
  • High, presence of a large number of players in the unorganized sector, imports from China, Russia and FTA Countries such as Japan and South Korea.

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Financial Year '17

  • In April - December 2017, consumption of finished steel grew at a rate of 5.2% to reach 64.9 MT as against 54.5 MT during the same period in 2016. In order to reduce imports and boost domestic steel manufacturing industry, the Central Government had extended the minimum import price (MIP) on 19 products till 4 February 2017.
  • In FY 2016-17, the country's steel exports increased by 102.1% year-on-year to 8.2 million tonnes (MT), as compared to 4.1 MT in 2015-16. Further, the country's steel imports fell by 36.6% year-on-year to 7.4 MT, as compared to 11.7 MT in 2015-16.
  • Global steel industry continued to be impacted by large overcapacity especially in China, Japan, and South Korea. Though the steel production decreased in all regions except Oceania during the year, the decline in production was slower than the drop in demand. Exports from the steel surplus countries flooded the global markets leading to severe pressure on supply and demand balance and steel prices.
  • Steel demand in the emerging and developing economies excluding China, which accounts for 30% of world total, is expected to grow by 4.9% in 2018.
  • In order to reduce imports and boost domestic steel manufacturing industry, the Central Government extended the minimum import price (MIP) on 19 products till 4 February 2017. These products included semi-finished products of iron or non-alloyed steel, flat-rolled products of different widths, bars and rods. The minimum import price (MIP) for these products ranged between US$ 643-752 per tonne. Indian Government imposed Anti-Dumping Duty on 47 steel products for five years beginning from August 2016.
  • New National Steel Policy has been formulated by the Ministry of Steel in 2016, which will retain the objectives included in the National Steel Policy (NSP) 2005. Under the policy, the central government stated that all the government tenders will give preference to domestically manufactured steel and iron products. Moreover, Indian steel makers importing intermediate products or raw materials can claim benefits of domestic procurement provision by adding minimum of 15% value to the product. The New steel policy, 2017 aspires to achieve 300 MT of steel-making capacity by 2030. This would translate into additional investment of Rs 10 trillion (US$ 156.1 billion) by 2030-31. New Steel Policy seeks to increase per capita steel consumption to the level of 160 kgs by 2030 from existing level of around 60 kg.

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  • Total finished steel production in India has increased at a CAGR of 8.4% during FY12–17, with country's steel production reaching to 111.3 million tonnes per annum (MTPA) in FY17.
  • The country became the 2nd largest crude steel producer in 2017, as large public and private sector players strengthen steel production capacity in view of rising demand.
  • Moreover, capacity has increased to 128.3 million tonnes (MT) in FY17, which is 5.2% more than FY16, while in the coming ten years the country is anticipated to produce 300 MT of steel.
  • India's comparatively low per capita steel consumption and expected growth in consumption due to growing infrastructure construction, automobile and railways sectors has offered scope for growth.
  • National Mineral Development Corporation is expected to increase the iron ore production 75 million tonnes per annum (MTPA) until 2021 indicating new opportunities in the sector.
  • Domestic players' investments in expanding and upgrading manufacturing facilities are expected to reduce reliance on imports. In addition, the entry of international players would provide benefits in terms of capital resources, technical know-how and more competitive industry dynamics.

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Related Links for Steel Sector
Quarterly Results | Sector Quote | Over The Years

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