Steel Industry :Moderate Growth Predicted as End-User Demand Starts to pick Up
Domestic steel capacity is expected to mirror the growth of end-user industries. The Government plans to unveil a policy that targets 300mtpa in a decade from now.
Indian steel sector enjoys advantages of domestic availability of raw materials and cheap labour. Iron ore is also available in abundant quantities, though the recent mining restrictions have put a strain on its availability. This abundance has been providing a major cost advantage to the domestic steel industry.India already is the third largest producer of steel, with a steel use of 80 million tonnes in 2015 and 86 million tonnes in 2016. It is also expected to be one of the fastest growing areas in steel in the near future. The GDP/capita in India of around 5815 US$ per person (2010 PPP), coupled with urbanisation that is below 35% of the total population and a steel use per person of less than 100 kg per person per year, are all indicating towards an economy that is approaching the structural conditions for rapid acceleration. Steel industry derives its demand from other important sectors like infrastructure, aviation, engineering, construction, automobile, pipes and tubes etc. Thus its intense integration with other important industries makes it a strategic sector for the Governments as well. “There is really only one location that has the long-term potential to pull the global steel market out of its current slump, and that is India. But, and this is the big question, while India has huge unfilled demand and a big economy, when will all this be felt?” says Edwin Basson, Director-General of the World Steel Association, a trade group in an interview with Financial Times.
Total finished steel production in India has increased at a CAGR of 7.45 per cent over FY11–15 to 91.46 million tonnes per annum (MTPA). The country has become the third largest crude steel producer in 2015, as large public and private sector players strengthen steel production capacity in view of rising demand. Moreover, capacity is also expected to increase from 100 million tonnes (MT) to 112.5 MT by FY16 while in the coming 10 years the country is anticipated to produce 300 MT of steel. During FY15, total steel production was 91.46 MT.
Huge scope for growth is offered by India’s comparatively low per capita steel consumption and the expected rise in consumption due to increased infrastructure construction and the thriving automobile and railways sectors • In 2015, India’s per capita consumption of steel was ~60 kg, which is close to one fourth of the international average, indicating strong growth opportunity National Mineral Development Corporation is expected to increase the iron ore production 75 MTPA until 2021 indicating new opportunities in the sector. Increased government and corporate sector focus on using innovative production techniques for enhancing operational as well as financial performance is a positive.
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 knowhow and more competitive industry dynamics.
Domestic Demand: The Growth driver
Demand would be supported by growth in the domestic market where infrastructure, oil & gas and automotives would drive the growth of the industry. India’s per capita consumption compared to International average is still low, the infrastructure & industrial growth will bring the gap closer, thus raising the demand. Demand for steel in the country is estimated at 300 million tones by 2025 India is the world’s third-largest producer of crude steel (up from eighth in 2003); the country is expected to become the second-largest producer of steel by 2016. Easy availability of low-cost manpower and presence of abundant iron ore reserves make India competitive in the global set up. Reforms in the mining sector are set to increase the availability of domestic coal adding further strength to the stell industry.
To achieve steel capacity build-up of 300 million tonnes per annum (MTPA) by 2025, India would need to invest USD210 billion over the next decade. The government has been proactive in this area. 301 MoUs have been signed with various states for planned capacity of about 486.7 MT. In 2015, 4 MOU’s were signed at Dantewada. Ministry of Steel plans to set up Steel Research and Technology Mission in India to promote R&D activities in the sector.
The Government has validated that 100 per cent FDI through the automatic route is allowed. Large infrastructure projects in the PPP mode are being formed so as to boost the demand. National Steel Policy (NSP) is being implemented to encourage the industry to reach global benchmarks. After years of confusion & melancholy, the government has brought in policy clarity and stability expected in respectof mining leases and forest clearances.
Steel Production on the rise
In 2015, crude steel production was 62.39 (April to December) .Total crude steel production rose at a CAGR of 5.54 per cent over the last five years to reach 81.69 MT in FY14. Private sector’s production of crude steel grew at a CAGR of 7.22 per cent between 2010-15. Finished steel production increased 7.35 per cent from 81.68 MT to 87.68 MT in FY14; analysts expect production figures to improve rapidly over the next five years, with the Ministry of Steel forecasting production levels at 115.3 MT by FY17 The steel sector contribute 2% to the GDP of the nation and provides 6 lakh jobs in the country. “Indian steel industry is predicted to grow three folds in the next 10 years - from a capacity of 110 million tonnes (MT) this year to 300MT in 2025.” said chairman and managing director of JSW Steel Ltd Sajjan Jindal
More Demand than Supply situation
In FY15, the consumption of finished steel grew to 76.99 MT while the CAGR increased to 5.74 per cent during FY08-15. Total real consumption of steel grew to 74.1 MT in FY14 against 73.5 MT in FY13; over FY08–14, consumption has expanded at a CAGR of 6.04 per cent Driven by rising infrastructure development and growing demand for automotives, steel consumption is expected to reach 104 MT by 2017. It is expected that consumption per capita would increase supported by rapid growth in the industrial sector, and rising infra expenditure projects in railways, roads & highways, etc. For FY15, per capita consumption of steel in India was 60 kg against the world average of 222 kg.
Demand Supply gap leads to Imports
With growth in demand for steel outpacing growth in domestic production over the last few years, import dependency has increased. India was a net importer of steel till FY13, but turned a net exporter of the same in FY14. In FY15, India imported 9.32 MT of steel while exports declined to 5.59 MT in FY15 from 5.98 MT during FY14.During FY11-15, import of steel grew at a compounded annual rate of 9.01 per cent, whereas, exports increased at a CAGR of 11.32 per cent Total domestic demand for steel is estimated at 113.3 mtpa by 2016-17.
Infrastructure & Construction are the key steel Consumers
A recently released report by Fitch Ratings titled, “2016 Outlook: Indian Steel Sector,” says that increased spending on infrastructure projects, such as housing and smart cities is the key to the revival of India’s steel industry. Construction is India’s largest steel consumer, accounting for 35 per cent of total consumption in FY14. This is not surprising given the heavy use of steel in this sector and soaring construction and infrastructure activity in the country over the past decade Infrastructure and Automobiles are the next largest consumer, with 32 per cent of total consumption.
TRENDS IN THE INDIAN STEEL INDUSTRY
To enhance capacity by 488.66 million tonnes, 301 MOUs have been signed with various states. According to the Industry estimates, potential steel addition capacity would attract an investment of USD83 to USD166 billion. By 2015-16, India is expected to become the second largest crude steel producer globally. Most of the companies in the industry are undertaking modernisation and expansion of plants to be more cost efficient. E.g. SAIL has undertaken modernisation and expansion for its six plants. The planned expansion is scheduled to increase the production capacity of SAIL from 13 MTPA to 50 MTPA in 2025 with the total investment of USD24.88 Billion
International Coal Ventures Pvt Ltd, comprising SAIL, RINL, CIL, NTPC and NMDC, has been set up for acquisition of coal mines overseas. The consortium of SAIL and National Fertiliser Limited (NFL) has been nominated for revival of Sindri Unit of the Fertiliser Corporation of India Limited. RINL, Vishakhapatnam Steel Plant and the Power Grid Corporation of India Ltd (POWERGRID) signed anMoU to set up a joint venture company to manufacture transmission line towers and tower parts including R&D of new high-end products. Attracted by the growth potential of the Indian steel industry, several global steel players have been planning to enter the market.
Technology to match global standards
National Mineral Development Corporation (NMDC) has signed anMoU with Russia’s third-largest steelmaker, Severstal, for a greenfield steel plant in Karnataka Indian steel companies have now started benchmarking their facilities and processes against global standards, to enhance productivity. These steps are expected to help Indian companies improve raw material and energy consumption as well as improve compliance with environmental and pollution yardsticks. Companies are attempting coal gasification and gas-based Direct-Reduced Iron (DRI) production. Other alternative technologies such as Hlsmelt, Finex and ITmk3 are being adopted to produce hot metal. Ministry of Steel has issued necessary direction to the steel companies to frame a strategy for taking up more R&D projects by spending at least 1 per cent of their sales turnover on R&D to facilitate technological innovations in the steel sector. Ministry has established a task force to identify the need for technology development and R&D. Government has adopted energy efficiency improvement projects for mills operating with obsolete technologies.
Move Forward Strategies
Companies in the steel industry are investing heavily in expanding their capacity. Major public and private companies, including Tata Steel, SAIL and JSW Steel, are expanding their production capacity. Steel production is expected to reach 200 mtpa by 2020 compared to 91.46 mtpa in 2015.
India is the third-largest steel producer in the world, and is expected to become the second largest producer by 2016.The government has stepped up infrastructure spending from the current 5 per cent of GDP to 10 per cent by 2017, and the country is committed to investing USD1 trillion in infrastructure during the 12th Five Year Plan. Considering 15 per cent as steel component in the total investment, the initiative has a potential to generate an additional demand for steel of 18.75mtpa The Ministry of Steel is encouraging R&D activities by providing financial assistance from Steel Development Fund (SDF) and Plan Scheme of the Central Government. Furthermore, the government has allowed 100 per cent FDI through the automatic route in the Indian steel sector so as to achieve a long term perspective i.e. to build up a manufacturing capacity of 300 mtpa by 2025.
Steel companies are strengthening their position through cross border mergers and acquisitions with a focus to improve existing technology to upgrade production process and develop new value added-products. In 2014, Arcelor Mittal along with Nippon Steel & Sumitomo Metal Corporation acquired ThyssenKrupp Steel USA. Notable deals include EssarGlobal’s acquisition of Canada-based Algoma Steel.
In the last few years, rapid and stable growth in demand has also prompted domestic entrepreneurs to set up fresh greenfield projects in different states of the country. Mittal Steel announced two 12 mtpagreenfield steel projects, one each in Jharkhand and Orissa.
MAJOR INITIATIVES TAKEN BY THE MINISTRY OF STEEL
Export duty on iron ore has been increased to 30 per cent ad valorem on all varieties of iron ore (except pellets), to preserve iron ore resources for domestic use.
• As per the government’s decision, the Government of India’s 51 per cent shareholding in Eastern Investments Company Limited (EIL), under Bird Group of Companies, was transferred to RINL.
• New Research and Development policy for the steel sector have been finalised/adopted for Implementation.
• New techno-economic benchmarks have been evolved on international patterns to improve performance of steel PSUs; implementation is being monitored closely.
• The Steel Ministry is preparing a feasibility report to merge all the small PSUs. Feasibility study is under preparation for the merger of MSTC* and Ferro Scrap Nigam Limited, Bhilai (FSNL).
• Under the Ministry, the Joint Plant Committee (JPC) studied 300 districts, 1,500 villages, 4,500 manufacturers and 8,000 retailers spread over India’s 28 states and 7 union territories to assess steel demand in the rural areas and examine the potential to increase steel consumption levels.
• The Ministry of Steel set up the Steel Innovation Council to promote innovative ideas in the steel sector.
• The National Steel Policy 2015 for the forthcoming years is under finalization.
• To lead the research in the steel sector, Ministry will be setting up Steel Research and Technology Mission of India (SRTMI) with an initial corpus of USD33 million.
• Government has initiated Project Monitoring Group(PMG) constituted under the Cabinet Secretariat in order to fast track various clearance issues that results in the delay in investments in the steel industry.