• Consolidation in China’s steel industry to create world class competitors for Indian steel sector
  
• Projected overcapacity in China to affect steel prices globally
  
• Reduction in import duty on steel pipes and tubes to make imports cheaper
  
• Escation in the cost of Raw materials and Power
  
• Imported coking coal consumption is more than domestic coking coal affecting the competitiveness of steel industry
  
• Antiquated labout laws
  

Top Players Performance

Steel sector has performed very well in Q2FY07 compared to Q2FY06. SAIL, the biggest steel company in the country, has recorded 18 percent growth in sales and 28 percent growth in net profit. Tata Steel, the second biggest player, has shown 7 percent increase in sales and 5 percent increase in net profit. JSW Steel, third largest company in the sector, has witnessed 41 percent growth in sales and 225 percent growth in profits. Sales have zoomed by 70 percent and profits by 85 percent for Welspun Gujarat Stahl Rohren. In the case of Maharashtra Seamless, 67 percent jump was recorded in sales and 119 percent in profits.

Operating Margins

Operating margin, which reflects the efficiency of companies, has shown a healthy trend in Q2FY07 for steel industry. Operating Profit Margin (OPM) of 11.90 percent has been observed in the case of Welspun Gujarat Stahl Rohren. While Maharashtra Seamless has witnessed OPM of 28.60 percent, JSW Steel has noticed OPM of 32.10 percent. Largest player SAIL has shown an OPM of 30.90 percent. But Tata Steel with an OPM of 44.70 percent has recorded the best performance in the sector.

Plans

Mittal Steel, world’s largest steel player, has plans to set up a 12 milion tonne greenfield steel project in Jharkhand and a 12 million tonne greenfield steel plant in Orissa. JSW Steel plans to increase its capacity from 4 million tonnes to 10 million tonnes by 2010 and to 34 million tonnes by 2012. Maharashtra Seamless is mulling to increase its seamless capacity to 0.50 million tonnes in the next 3-5 years. SAIL is in the process of increasing its annual production of 12 million tonnes to 22.5 million tonnes by 2011-12. Its vision is to have capacity of 40 million tonnes by 2020. Tata Steel’s target is to take its capacity to 33-34 million tonnes by 2015 apart from doubling the capacity of Jamshedpur from 5 million tonnes to 10 million tonnes.

National Steel Policy

Government has formulated National Steel Policy 2005 to help the steel industry grow in strength and compete at the world level. The policy is prepared keeping in mind the steel needs for 15 years. The policy aims at not only achieving self sufficiency in steel production but also export 1/4th of its output. Exports are planned to be increased to 25 percent of total output from 11 percent recorded in 2004-05. Globally it is around 30 percent. The policy targets steel output of 110 million tonnes by 2020.

Steel Consumption
India’s per capita steel consumption is on the lower side compared to other countries of the world. India has a per capita steel consumption of 32 kg as against 180 kg in China and 400-500 kg in advanced countries. China made 350 million tonnes of steel compared to India’s 42 million tonnes in 2005. Per capita steel consumption is around 13 kg in urban areas compared to around 2 kg in rural region.

Input Concerns
India has adequate quantity of iron ore reserves but the concern is on the mining front. There is need to have latest technology for mining of iron ore. The country has about 11.43 billion tonnes of haematics and 10.61 billion tonnes of magnetic ores. Out of the total haematics ore, only 8.7 per cent are high grade lumpy reserves.

Coking coal is another area of concern. The country’s coking coal reserves are projected to be 4.5 billion tonnes. Since the quality of local coking coal is not upto the mark for making steel, it has to be mixed with imported coking coal. The steel sector consumes about 7.5 million tonnes of domestic coking coal and 19 million tonnes of imported coking coal. Imported coking coal costs around $68 per tonne compared to $40-45 range for the domestic coking coal.

Productivity of Indian labour is not in accordance with what is witnessed in developed countries. As against Indian steel industry productivity of 80-180 tonnes per man year, advanced countries record 300-500 tonnes per man year.

Imports
The trend of increasing imports has been observed in Indian steel sector. Growth in consumption has forced users to go for imports. While steel consumption has increased at a CAGR of 9.7 percent since 2002-03, production in the same period has increased by 6.6 percent. This has opened avenues for imports. Steel imports have increased from 1.51 million tonnes in 2002-23 to 3.75 million tonnes in 2005-06. Net export of steel, on the other hand, has declined from 4.5 million tonnes in 2002-03 to 4.35 million tonnes in 2005-06.

The sector accounts for 1.3 percent of GDP of the country and 10 percent of excise duty revenues of the government. It provides direct employment to 400,000 people and indirect employment to 600,000 people. About 2/3rd of total crude steel produced in the country is accounted for by integrated players.

Exports of finished carbon steel have decreased from 4.5 million tonnes in 2002-03 to 4.35 million tonnes in 2005-06. Pig iron exports have also declined from 0.63 million tonnes in 2002-03 to 0.30 million tonnes in 2005-06. For April-Nov 2006, finished steel exports accounted for around 3.15 million tonnes and pig iron exports about 0.20 million tonnes. For 2005-06, crude steel output touched 42 million tonnes and consumption 41 million tonnes.

Steel industry in the country is growing at 10 percent as against 6 percent international growth. Steel demand is expected to grow by 9-10 percent and reach around 100 million tonnes by 2012. Exports are to be about 8 million tonnes and imports 6 million tonnes. The sector is witnessing whopping investments of Rs 270,000 crores for adding 100 million tonnes capacity. Worldwide steel demand is projected to increase by more than 4.5 percent for the next 3-4 years. India is expected to show maximum growth in consumption of steel in the near future surpassing the dragon (China).

Auto industry, a key customer, is observing 19 percent growth. Infrastructure sector is pushing the steel demand to a new high with its growth prospects. Other sectors that use steel like consumer goods and housing are growing in double digit. 17 percent increase has been felt in flat steel demand in the last year. Seamless pipes demand will grow by 20-25 percent from the present 0.50 million tonnes. Global capacity of seamless pipes and tubes has been estimated at around 24 million tonnes. Growth in the oil & gas sectors has boosted demand for pipes. The entry of companies like Cairn Energy, Reliance, Niko Resources, British Gas etc. in the oil exploration sector and the discovery of oil by Reliance in Krishna Godavari basin and Cairn Energy in Rajasthan, have further spurred the prospects for pipes.

Steel pipe companies are stepping up investments to cash in on the increased demand for steel pipes, especially from West Asia. Pipe firms are expecting about $2 billion turnover in this fiscal. Indian companies have the advantage of lower cost of production especially freight which is 50 percent of prevailing rates in Europe. Exports are expected to contribute nearly 50 percent of turnover mostly from West Asian region. Transportation of oil through pipelines costs one third of other forms of transport like road, ship or rail.

Construction accounts for 11 million tonnes of steel consumption forming 25 percent of total steel production in the country. Steel output in the country is envisaged to be around 80 million tonnes by 2010 as compared to 42 million tonnes at present. 2020 vision is to take the industry capacity to 180 million tonnes. For the remaining part of the current fiscal, international demand for steel is projected to grow by 9 percent and domestic demand by 10 percent. High growth of the economy puts the steel sector on a high growth path. Middle East and Asian region demand for steel pipes is projected to be in excess of 64,000 kms. Indian market for pipes is expected to be more than 20,000 kms. Replacement market also adds to the demand for pipes. Global demand for steel is expected to grow to more than 1040 million tonnes in 2006 from 970 million tonnes in 2004.

To sum up, prospects are bright for steel sector in the country. Infrastructure development has been prioritised by the government. The resultant demand for steel is huge. Construction is another sector that is witnessing growth which will further fuel the demand for steel. Top gear performance by the automobile sector is adding to the buoyancy of the steel sector. With consumer durables, another user industry, growing at double digit with the increase in disposable income of the people, steel sector can hope for better times. Emphasis on Special Economic Zones (SEZ) and growth in retail sector will boost the outlook of the steel industry. With India finally getting its rightful place under the sun and realizing its potential, steel sector has lot to offer. India’s growth in steel consumption is projected to be more than that of any other country including China. With India becoming one of the growth engines of the world, steel industry is in for happier times. Having Indian at the helm of world steel industry (L N Mittal) and Tata Steel’s attempt to takeover Anglo-Dutch steel maker Corus are symbolic of the Indian steel industry’s potential. We remain bullish on the sector.