| Supply |
With trade barriers having been lowered over the years, imports play an important role in the domestic markets.
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| Demand |
The demand is derived from sectors that include infrastructure, consumer durables and automobiles.
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| Barriers to entry |
High capital costs, technology.
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| Bargaining power of suppliers |
The government’s move on railway freight costs and grid power costs would determine the final price of the metal.
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| Bargaining power of customers |
High, presence of a large number of suppliers and access to global markets.
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| Competition |
High, presence of a large number of players in the unorganized sector. |
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FY08 was the sixth consecutive year of impressive performance for the Indian steel industry. Domestic consumption increased by over 11% YoY (nearly 49 MT) from about 44 MT in FY07. Moreover strong demand from domestic markets made imports to register a record growth of 46% YoY. Production growth, on the other hand, grew at 6% YoY, nearly touching the 53 MT mark. Thus, steel production has grown at a compounded rate of 9% during the period FY03 to FY08.
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Apart from infrastructure activities, demand for steel is dependent on the growth of auto and consumer durables. Both these sectors continued to perform well in FY08. To put things in perspective, for FY08, production of LCVs recorded an increase of 13% YoY. Further, the passenger cars/multi-utility vehicles continued with its robust performance by registering a higher consumption of 14% YoY respectively. The consumer durables sector also ended FY08 with nearly double-digit production numbers in various categories like air-conditioners and refrigerators.
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Domestic steel prices and the international steel prices remained buoyant during the year under review. However, the domestic prices are lower than the global prices due to control of government over the prices to curb the inflation. Thus there has been significant pressure on margins from increased raw material prices. In fact, sustained performance by steel companies could be attributed to the demand growth and production, leading to gains for domestic steel companies. It must be noted that integrated steel companies are relatively insulated from the volatilities in input prices owing to the advantage of having their own mines to meet their input requirements.
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The International Iron & Steel Institute (IISI) forecasts global steel consumption to grow by more than 6% in 2008 and 2009, driven by strong demand from Asia, Africa and South America. The apparent steel demand is likely to increase by 500 MT to reach a level of 1,750 MT in 2016 a growth of 4% CAGR over the consumption level of 2007.
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However, the concern with respect to new steel capacities cropping up across the globe have become louder, as this development would lead to significant pressure on steel prices going forward. Further, the biggest disruption in the growth pattern could be from an expected slowdown in Chinese steel consumption, which would make available a good amount of excess steel for world consumption. As global companies have realised the threat of excess supply, they are looking at M&A (mergers and acquisitions) option to retain market share and improve margins. On the domestic front, steel consumption is expected to increase to 65 MT by FY10 and over 125 MT by FY 2014-15.
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Also, the domestic steel sector may face threat from cheap imports, now that the import duties on steel in India being amongst the lowest in the world. Import pressures could consequently lead to pressure on margins of the domestic companies on account of lower steel realisations. However, if the Indian government increases the import duty on steel products, domestic steel industry could get protection to an extent. But since India has already agreed to the WTO norms, it might become difficult for the government to increase duties substantially.
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Going forward, we remain apprehensive about the continuation of the strong performance by steel companies. Though we believe that volume growth would be visible in the years to come, largely due to the continuation of infrastructure spending (including housing), strong demand from the auto sector, which could help in driving demand for value added steel products like CR (cold roll) steel and exports, we expect realisations to come under pressure on account of excessive supplies. However, a sharp fall in steel prices could be prevented if steel producers across the globe take conscious efforts at curtailing production.
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On the exports front, over dependence on the Chinese markets could be detrimental in the medium to long-term. This is because, like the US, Canada and the EU, there is every possibility that anti-dumping duties could be levied on Indian imports into China too, and the threat of this coming into existence would increase with the slowing down in Chinese consumption of the metal and/or the country meeting its requirements internally. This could severely hurt realisations of companies, whose significant chunk of revenues come from exports.
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The government over the last couple of years has continued to lay emphasis on continuation of infrastructure activities in the country. Increased spending on infrastructure will be a key positive for the steel sector, as the demand for steel will get a boost. The continuance of tax sops to the housing sector is another positive for steel demand.
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