Steel Sector Analysis Report 

• India is currently the fifth largest steel-producing nation in the world with production of over 54 million tonnes (MT). However, it has a very low per capita consumption of steel of around 46 kgs as against an average of 198 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.
• 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.
• The government reinstated basic customs duty on steel imports in order to protect India from dumping of cheap steel products. It has also provided series of benefits to auto, housing and real estate sector in order to counter the slowdown in the economy.

• Supply
• With trade barriers having been lowered over the years, imports play an important role in the domestic markets.
• Demand
• The demand is derived from sectors that include infrastructure, consumer durables and automobiles.
• Barriers to entry
• High capital costs, technology.
• Bargaining power of suppliers
• The government's move on railway freight costs and grid power costs would determine the final price of the metal.
• 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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• The steel sector witnessed a mixed performance in FY09 wherein during the first half it experienced an extraordinary spurt in demand backed by expansion of key consumer sectors. However, the second half experienced a significant demand contraction on account of the global financial crisis. Thus overall, India’s crude steel production grew by 1.2%YoY to 54.5 MT. While the global steel industry continued to reel under the recessionary trends in the developed economies, domestic steel demand remained less affected, mainly steered by growth in semi urban and rural areas. Also, the various monetary and fiscal packages announced by the government helped the domestic steel industry to counter the slowdown and thus the demand started reviving upwards from the fourth quarter onwards.
• Domestic steel prices and international steel prices experienced a divergent trend in FY09. While during the first half, international prices touched an all time high levels backed by robust demand, the second half witnessed more than 50% fall in the prices on account of significant contraction in demand due to the global credit crisis. Raw material prices like iron ore and coking coal also experienced a similar trend. It may be noted that most of the domestic steel players entered into an annual contract for coking coal in June-July 2009 when prices were at their peak. Hence the industry experienced a severe pressure on the margins.

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• As per the World Steel Association’s forecasts, global steel consumption is projected to decline by around 14.9% in 2009 led by US (-36.6%), Europe (-28.8%), CIS (-23.7%) and Japan (-20.4%). Also, the world’s largest steel producer China is projected to experience a decline of 5% in steel usage. However, India is the only country that is projected to witness a growth of around 2% in 2009. The global steel industry is expected to recover in 2010 on the back of government stimulation packages, the continued stabilisation of financial systems and a return of consumer confidence.
• 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.
• 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 continuance 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