Steel Sector Analysis Report 

• India is currently the fifth largest steel-producing nation in the world with production of over 65.6 million tonnes (MT). However, it has a very low per capita consumption of steel of around 51.7 kgs as against an average of 203 kgs of the world. This wide gap in relative steel consumption indicates that the potential ahead for India to raise its steel consumption is high.
• During the period from 1997-98 to 2000-01, steel production witnessed a marginal CAGR growth of 3%. However during 2001-02 to 2010-11, owing to boom in the infrastructure and automobile sectors, the industry witnessed a sharp turnaround and registered a steep hike of 8.6% CAGR.
• Being a core sector, steel industry tracks the overall economic growth in the long term. Also, steel demand, being derived from other sectors like automobiles, consumer durables and infrastructure, its fortune is dependent on the growth of these user industries.
• The Indian steel sector enjoys advantages of domestic availability of raw materials and cheap labour. Iron ore is also available in abundant quantities. This provides major cost advantage to the domestic steel industry, with companies like Tata Steel being one of the lowest cost producers in the world.
• However, Indian steel companies have to bear additional costs pertaining to capital equipment, power and inefficiencies (low per employee productivity). This has resulted in the erosion of the edge they would have otherwise enjoyed due to availability of cheap labour and raw materials.
• India is likely to add 30 m tonnes of new steel capacity over the next 18 months, of which 21 m tonnes will be added by top five players. This will make India net exporter of steel from the current net importer.

• Supply
• With trade barriers having been lowered over the years, imports play an important role in the domestic markets. Currently India is net importer of steel.
• Demand
• The demand is derived from sectors that include infrastructure, consumer durables and automobiles.
• Barriers to entry
• High capital costs, technology, economies of scale, government policy.
• Bargaining power of suppliers
• Low for fully integrated players who have their own mines for raw materials. High, for non integrated players who have to depend on outside suppliers for sourcing raw materials.
• Bargaining power of customers
• High, presence of a large number of suppliers and access to global markets.
• Competition
• High, presence of a large number of players in the unorganized sector.

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• Steel being at the core of economic activity witnessed an unprecedented downturn in 2009. The global steel production which had declined on account of the intervening global financial crisis, showed a sharp pick-up in 2010. All the major steel-producing countries and regions showed double-digit growth in 2010.
• World crude steel production clocked an impressive output growth of 6.5% against a negative growth of -0.5% in 2009. World steel production reached a new height during 2010 at 1,414 m tonnes as against 1,223 m tonnes in 2009. The EU registered the highest growth in production of crude steel by registering a growth of 24.5% over 2009. However, UK and Greece continued to decline over previous years. Asia posted the second highest growth followed by CIS countries. Most of the international steel companies witnessed a bounce back in their production level, however in many cases could not reach their pre-crisis production levels.
• Global steel consumption also witnessed a bounce back and grew 13.1% to 1,283 m tonnes in 2010. Steel consumption in emerging and advanced economies grew 9.1% and 25% respectively in 2010.
• The natural disasters in Japan and Australia have caused some uncertainty over raw material prices and short term steel demand. In particular, the automotive and electronic industries may face shortages in supply where they are relying on Japan for manufacturing components.

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• Coking coal and iron ore are the two main raw materials used for making steel. Both are in short supply. India's coking coal imports surged 39% in FY11 alone. Further government delays in allocating coal blocks for captive consumption by steel manufactures is seriously hurting the competitive edge of Indian steel sector. The same story is with iron ore. There are delays in allocating iron ore mines as well as approval for mining licenses. As a result no new investment on the ground in the steel sector is happening to add new steel capacities. The prices of these raw materials are also touching new highs which are further putting pressure on steel makers globally and they are showing no signs of coming down.
• There are delays in clearances for mines, land acquisition for Greenfield projects and environment approvals in India. There is thus delay in converting the intent into project on ground especially in the area of expansion and modernisation. This impedes growth of domestic steel capacity creation.
• The Indian steel sector may face threat from cheap imports, now that the import duties on steel in India are 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.
• Going forward, we remain apprehensive about the continuation of the strong performance by steel companies. 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 remain under pressure on account of excessive supplies. However, a recovery in steel prices could be sooner if steel producers across the globe take continuous efforts at curtailing production.
• 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 continuation of tax sops to the housing sector is another positive for steel demand.

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Related Links for Steel Sector
Quarterly Results | Sector Quote | Over The Years