The fortunes of the steel

Transcription

1 By: Dr P. CHENNAKRISHNAN Dr K. RAJA Dr R. VENKADESH STEEL: India stealing the show After the dramatic slowdown in the economies of the West, the global steel industry has been led by growth in the BRIC countries with China and India playing a key role. Read on to learn more about the prospects of the Indian steel sector. The fortunes of the steel sector are cyclical. Its performance is in sync with the global economy, making the health of the sector a good indicator of a region s economic health. Over the last decade, the sector has grown phe- nomenally, primarily due to growth in the BRIC (Brazil, Russia, India and China) nations, particularly China. Since 2001, the sector has seen both a major rally and a major downturn, but overall global steel production grew at a compound annual growth rate (CAGR) of around 6 per cent, and consumption by a CAGR of 5.5 per cent. Although the steel industry has been recovering since the global financial crisis, the recent Eurozone sovereign debt crisis has created a lot of uncertainty in the market. This uncertain macroeconomic en- IISCO Steel Plant, Burnpur, West Bengal (Image courtesy: December 2012 FACTS FOR YOU 11

2 Table I Major Steel-producing Countries (in MT) During 2011 During 2010 Country Production Country Production China China Japan Japan United States 86.4 United States 80.5 India 71.3 India 68.3 Russia 68.9 Russia 66.9 Table II Top Steel-producing Companies in 2011 Company Production (MT) ArcelorMittal 97.2 Hebei Group 44.4 Baosteel Group 43.3 POSCO 39.1 Wuhan Group 37.7 Nippon Steel 33.4 Shagang Group 31.9 Shougang Group 30.0 JFE 29.9 Ansteel Group 29.8 vironment with distressed financial markets and large government budget deficits has led to countries implementing a number of austerity measures. In fact, certain parts of the world have suspended investment in infrastructure and other industries, altogether. As a result, steel demand has not rebounded as strongly as predicted and growth in steelmaking capacity still exceeds demand. In 2011, steelmaking capacity increased by 80 million tonnes, resulting in an estimated 493 million tonnes of excess capacity. This is putting pressure on the operators profitability. The issue is further complicated as growth in steelmaking capacity is expected to continue at this pace, while political issues are preventing a rationalisation of the sector because governments are under pressure to protect local jobs and their domestic steel sectors. The timeframe for rationalisation will be driven by the political agenda. Apart from over-capacity being the most significant challenge for steelmakers today, there are further problems facing the sector. The growth in global GDP in 2011 is driven primarily by the BRIC nations. For example, China and India were estimated to have grown by approximately 9.5 and 7.8 per cent, respectively, in 2011 and by marginally lower figures in The Indian steel sector is striving to build more capacity to capitalise on this growth. In China, however, there is already significant excess steelmaking capacity. Chinese crude steel capacity is expected to amount to 840 million tonnes in 2012, which would be 22 per cent in excess of the expected 688 million tonnes of consumption. In comparison, the European Union and the United States had a much lower GDP growth of less than 2 per cent in 2011 and are expected to continue at this pace in 2012 too. This weakness in both GDP growth and industrial production has accelerated the shift of steel production and consumption to emerging economies. There has been a structural shift in the demand for steel products during the last decade to emerging markets, where GDP growth is substantially higher than in developed nations. Emerging markets also have a higher steel consumption in relation to their GDP growth. However, it is to be noted that developed countries have not seen much growth in the per capita consumption of steel over the last four decades, whereas the intensity of steel consumption has increased continuously in emerging economies such as China and India during the same period. The global scenario In 2011, the world s crude steel production reached 1518 million tonnes (MT) and showed a growth of 6.2 per cent over 2010 (source: World Steel Association or WSA). China remained the world s largest crude steel producer in 2011, followed by Japan and the USA, with India at the fourth position. The WSA has reported that global apparent steel use increased by 3.6 per cent to 1422 MT in 2012, following growth of 5.6 per cent in In 2013, it is forecast that world steel demand will grow further by 4.5 per cent to around 1486 MT. China s apparent steel use in 2012 and 2013 is expected to increase by 4 per cent in both the years. For India, growth in apparent steel use is expected to be 6.9 per cent in 2012 and 9.4 per cent in Average global per capita finished steel consumption in 2011 was about 215 kg, and 460 kg for China alone. The domestic scenario The Indian steel industry has entered into a new development stage Table III Countries with the Highest Apparent Steel Use, Per Capita in 2011 Countries Steel use (kg) South Korea Taiwan, China Czech Republic Japan Germany Austria China Italy Sweden Belgium-Luxembourg FACTS FOR YOU December 2012

3 from , riding high on the resurgent economy and rising demand for steel. Rapid rise in production has resulted in India becoming the fourth largest producer of crude steel and the largest producer of sponge iron or DRI in the world. As per the report of the Working Group on Steel for the 12th Plan, there are many factors that have the potential to raise per capita steel consumption in the country, currently estimated at 55 kg (provisional). These include, among others, an estimated infrastructure investment of nearly a trillion dollars; a projected growth in manufacturing from the current 8 per cent to per cent; an increase in the urban population to 600 million by 2030 (from the current level of 400 million); and the emergence of the rural steel market, in which current per capita consumption is around 10 kg per annum buoyed by projects like Bharat Nirman, Pradhan Mantri Gram Sadak Yojana, Rajiv Gandhi Awaas Yojana, etc. At the time of its release, the National Steel Policy 2005 had envisaged steel production to reach 110 MT by However, based on the assessment of the current ongoing projects, both greenfield and brownfield, the Working Group on Steel for the 12th Plan has projected that crude steel capacity in the country is likely to be 140 MT by and has the potential to reach 149 MT if all requirements are adequately met. The National Steel Policy 2005 is currently being reviewed, keeping in mind the rapid developments in the domestic steel industry (both on the supply and demand sides) as well as the stable growth of the Indian economy since the release of the Policy in Steel production The steel industry was delicensed and decontrolled in 1991 and 1992, respectively. Today, India is the fourth largest crude steel producer of steel in the world. In Table IV Indian Steel Industry: Production for Sale Pig iron Sponge iron Total finished steel (alloy+non alloy) Melting of steel 12, production of total finished steel (alloy+non-alloy) was MT. Production of pig iron in was approximately 5.78 MT. India is the largest producer of sponge iron in the world with the coal-based method accounting for 76 per cent of total sponge iron production in the country (approximately MT in ). The last five years production of pig iron, sponge iron and total finished steel (alloy+non-alloy) is given in Table IV. Demand-availability projection The demand and availability of iron and steel in the country is projected by the Ministry of Steel in its Five Year Plan documents. Gaps in availability are met mostly through imports. There is an interface with consumers by way of a Steel Consumers Council, which is conducted December 2012 FACTS FOR YOU 13

4 on a regular basis. This helps in redressing availability problems and the complaints related to quality. Steel prices The price regulation of iron and steel was abolished on January 16, Since then, steel prices are determined by the interplay of market forces. Domestic steel prices are influenced by trends in raw material prices, demand-supply conditions in the market and international price trends, among other factors. An Inter-Ministerial Group (IMG) is functioning in the Ministry of Steel, under the chairmanship of the Secretary (Steel), to monitor and coordinate major steel investments in the country. The government also took various fiscal and other measures to stabilise steel prices, like the significant reduction in import duties on steel and other major raw materials, including mineral products, ores and concentrates in the last few years. Also, excise duty for steel is currently at 12 per cent. The government has also imposed an export duty of 30 per cent on iron ore fines and lumps in order to control ad-hoc exports of the mineral and conserve it for long-term requirements of the domestic steel industry. To ensure the quality of steel, several items have been brought under a quality control order issued by the government, with a plan to bring more steel items under this order. Imports Iron and steel are freely importable as per the current policy. The last five years imports of total finished steel (alloy+non alloy) are given in Table V. Exports Iron and steel are freely exportable. The Advance Licensing Scheme Table V Indian Steel Industry: Imports Total finished steel (alloy+non alloy) Table VI Indian Steel Industry: Exports Total finished steel (alloy+non alloy) allows duty-free import of raw materials for exports. The Duty Entitlement Pass Book Scheme (DEPB) was introduced to facilitate exports. Under this scheme, on the basis of notified entitlement rates, exporters are granted due credits, which entitle them to import duty-free goods. The DEPB benefit on the export of various categories of steel items is currently applicable for steel exports. The last five years exports of total finished steel (alloy+non alloy) are given in Table VI. Opportunities for the growth of iron and steel in the private sector The new industrial policy opened up the Indian iron and steel industry for private investment by: (a) removing it from the list of industries reserved for the public sector; and (b) exempting it from compulsory licensing. Imports of foreign technology as well as foreign direct investment are now freely permitted up to certain limits under an automatic route. The Ministry of Steel plays the role of a facilitator, providing broad direction and assistance to new and existing steel plants, in the liberalised scenario. Steel. The liberalisation of the industrial policy and other initiatives taken by the government have given a definite impetus for the entry, participation and growth of the private sector in the steel industry. While the existing units are being modernised or expanded, a large number of new steel plants have also come up in different parts of the country based on modern, cost-effective, state-of-the-art technologies. In the last few years, the rapid and stable growth on the demand side has also prompted domestic entrepreneurs to set up fresh greenfield projects in the different states across the country. With crude steel capacity at 89 MT in (provisional), India has the capability to produce a variety of grades and that, too, of international standards. The country is expected to become the second largest producer of crude steel in the world by , provided all requirements for the creation of fresh capacity are adequately met. Pig iron. India is also an important producer of pig iron. Postliberalisation, with the setting up of several units in the private sector, not only have imports drastically reduced but India has also turned out to be a net exporter of pig iron. The private sector accounted for 91 per cent of the total production of pig iron in the country in (provisional). The production of pig 14 FACTS FOR YOU December 2012

5 Steel coils iron has increased from 1.6 MT in to 5.78 MT in (provisional). Sponge iron. India is the world s largest producer of sponge iron with a host of coal-based units located in the mineral-rich states of the country. Over the years, the coal-based route has accounted for 76 per cent of the total sponge iron production in the country (20.37 MT in ; provisional). Capacity in sponge iron making too has increased over the years and stands at around 35 MT. Official data reveals that total steel production in India in fiscal 2011 grew by 6.6 per cent and steel consumption by 5.5 per cent. The subdued growth rate in steel appears to be consistent with a lower-thanenvisaged GDP growth of per cent and a slower growth in fixed capital formation during the year. In addition, growth in industrial production stood at 3.5 per cent (April- February 2012), as opposed to 8.2 per cent growth in There was a drop in manufacturing output (3.7 per cent in April-February 2012), particularly in capital goods (-1.8 per cent in April-February 2012) and consumer durables (2.7 per cent in April-February 2012). These factors have adversely affected the health of the steel sector. A few steel-intensive segments like LPG cylinders (-8.7 per cent in April-January 2012), drums and barrels (2.9 per cent), diesel engines (6.8 per cent), passenger cars (2.3 per cent) and refrigerators (-12.2 per cent) have consumed less volumes of steel. Imports of 6.8 MT of steel and exports of 4.2 MT have turned India into a net importer, which, in a way implies that physical demand is comparatively robust. Steel imports in are 8 per cent more than the previous year. Interestingly, the imports of finished alloy and stainless steel are 71 per cent more than the previous year, and more than compensate for the slower growth in import of non-alloy steel. Price considerations are one of the major factors for stimulating imports, and Indian producers have to keep a close watch on their cost of production and the pricing of the products if this trend continues in the current year. Maximum import growth has been observed in billets and cold rolled (CR) coils or sheets, which have mostly come from Russia, China, Korea and Japan. High export growth was achieved in HR coils (116 per cent), and bars and rods (65 per cent), which indicates excess capacity. The Indian steel industry is capable of growing at a healthy rate of 6-7 per cent with a corresponding growth in GDP. The caveats are a fixed capital formation at not less than 32 per cent, and manufacturing growth consistent at 7-8 per cent. If the proposed expansion plans are implemented as per schedule, India may become the second largest crude steel producer in the world by The demand for steel in Market Survey the country is currently growing at the rate of over 8 per cent, and it is expected to grow to over 10 per cent in the next five years. However, our per capita consumption of steel is around one third that of the global average. This indicates that there is a lot of potential for increasing steel consumption in India. Immense growth potential in the Indian steel sector As many as 222 Memorandums of Understanding (MOUs) have been signed with various states for a planned capacity of around 276 MT by Investments at stake are to the tune of $187 billion in the steel sector. The increase in the demand of steel in India is expected to be much higher than the global average of 5-6 per cent, due to its strong domestic economy, massive infrastructure needs and expansion of industrial production. The demand for steel will come from industries like infrastructure, construction, housing, automotive, steel tubes and pipes, consumer durables, packaging and ground transportation. A target of $1 trillion worth of investments in infrastructure during the 12th Five Year Plan in projects like the Golden Quadrilateral and Dedicated Freight Corridor will give a boost to the demand for steel in the near future. Projected new greenfield airports and the upgradation of existing ones will keep the momentum going. Increased demand for specialised steel in hi-tech engineering industries such as power generation, automotive petrochemicals, fertilisers, etc will also help to keep demand in this sector buoyant. Dr P. Chennakrishnan is assistant professor in Economics, Thiruvalluvar University, Sekkadu, Vellore; Dr K. Raja is associate professor in Economics, Erode Arts and Science College, Erode and Dr R. Venkadesh is assistant professor, Tamil Nadu Institute of Urban Studies, Coimbatore December 2012 FACTS FOR YOU 15