Indian steel sector experiencing growth in capacity and value

Indian steel sector experiencing growth in capacity and value

In the past year the Indian steel industry has been experiencing positive growth in terms of both capacity and value. Market sources indicate that this trend has continued during the first and second quarter of the current 2004-2005 financial year. According to figures published in prominent market sources, Indian steel production and consumption experienced healthy growth in the first quarter of financial year 2004-2005. As production increased by 2.8%, consumption recorded a growth of 5.1% compared with the corresponding quarter of the previous financial year, while similar growths were recorded for flat and non-flat products. Production and consumption of flat products increased by 2.3% and 6%, respectively, while non-flat products experienced a 3.7% growth in production and a 4.2% growth in consumption. Domestic steel prices have been moving upwards since the beginning of 2002-2003, mainly in parallel to global steel prices. As SteelOrbis previously reported back at the end of August, domestic steel producers, led by CEO of Tata Steel Ratan Tata, attempted to put a limit on rising prices, as other Indian steelmakers followed suit. The newly elected government in its research found that steel prices were a major factor in calculating the consumer price index, so the upper levels of government urged domestic steel producers to control their prices. Moreover, on August 20, 2004 the government further lowered the customs duties on steel products with the goal of controlling inflation. The customs duty on non-alloy steel other than seconds or defectives was reduced down to 5% from the previous 10% level. Melting scrap of iron and steel other than stainless steel or heat-resisting steel was exempted from the duty compared to the earlier duty of 5%. According to recent news in the market, the cut in the customs duty is expected to affect the operating margins of steel producers. However, the combined impact of the customs duty reduction and excise duties may create a neutralizing effect on steel prices. Despite all these developments in the Indian steel sector, many industry experts believe that the fundamentals of the Indian steel industry appear to be improving in the short and medium term. Increasing steel prices are also playing a crucial role in improving the profits of the steel sector. As SteelOrbis previously reported, the Indian government was expected to release a National Steel Policy this month, but the release of the Policy was recently delayed. The reason for the delay was to set up a committee and put a draft of the document on a public website to seek the views and feedback of steel sector shareholders. India's Steel Minister announced that the draft policy had been prepared by bureaucrats but announced that the opinion of shareholders including the public was also a necessary element to formulate the policy. According to the Steel Minister, it is not sufficient simply to set a target of 100 million tons of steel production annually by 2020 from the current 36 million tons as was incorporated in the draft policy. In order to draft a comprehensive policy other factors such as steel and raw materials exports and imports, as well as public accessibility of steel should also be assessed, the Steel Minister said. The domestic steel industry is set to invest nearly Rupees 250 billion ($5.48 billion) in the next 2-3 years, excluding the proposed investments of more than Rupees 1.000 billion ($219.35 billion) for investment in India's Orissa state which are still in the feasibility study stage. By 2006-2007, based on investment plans announced as of now, the domestic steel industry in India is set to create roughly 10-12 million tons per year in new production capacity, equalling roughly one-third of present capacity of 34 million tons. By 2010, India may have a steel production capacity of roughly 90 million tons per year. While approximately 44 million tons of that figure is scheduled to be invested in Orissa state, other parts of India including Jharkhand, Chhattisgarh and parts of West Bengal will also see substantial investments. Industry sources are optimistic about the demand scenario and believe the domestic market will grow at a healthy rate. With estimated growth of around 8-10% in the next few years and a booming export market, this capacity increase will be absorbed, senior steel industry executives in India have stated. According to industry executives such as Alain Davezac VP of international business at Arcelor, India's key attraction for the global steel industry is its competitive cost structure in comparison to other countries such as Brazil as well as its 9.9 billion tons of high-quality iron ore reserves. Currently India's annual domestic demand of iron ore is approximately 50-55 million tons which is roughly 45% of India's total domestic iron ore production of approximately 115 million tons. According to market sources, iron ore production in India has risen by an average rate of 4.1% in the last six years up to 2003. However, India has yet to capitalize on its plentiful raw materials. For example, in comparison to Korea's per capita consumption of steel of 1'000 kg per year, the US and Japan's 650 kg, and China's 160 kg per year per capita steel consumption, India is far behind at only 29 kg per year. Accordingly, the government is expected to initiate a program to promote the use of steel in infrastructure. In association with the government's efforts to increase domestic steel consumption and solve the economic problem of finding cost-effective housing solutions, the related construction projects in the housing sector have greatly boosted the demand for steel in India.