Challenges in the steel sector

Wed, 13 Mar Pre-Open

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Overcapacity is an anathema to any sector. And steel is no different. It is not that there is any dearth of demand. Infrastructure investment has been given a lot of thrust in the 5 year plans. And hence the demand for steel, the basic building block, seems strong in the future. However, it is the supply constraints that we are worried about. There is availability issue with respect to basic raw materials for the industry notably iron and coal. On one hand, there is the mining ban that has limited the use of iron ore reserves. Again we do not have enough coal to take care of even power generation. Thus, we wonder how the needs of steel industry will be met with these raw material constraints.

As of now, the country occupies fourth slot in steel production. Compare this to China that claims to be the top steel producer. While we are just three slots behind, we produce just 71 MT as compared to 600 MT by China. The Government aims to capture the second slot by 2020. Needless to say, even if we get there, we will still be lagging behind the dragon nation by a huge margin. China is not just overproducing, but is exporting its steel. Also, since focus in China is to maximize revenues (to earn more taxes on higher production) than profits, steel prices have come down. So, the challenge in front of us is to get adequate raw material supplies and produce low cost steel that can be globally competitive. We wonder what capacity expansion at this stage will bode for the sector.

While it is good to be ambitious and expand steel production, there is a simultaneous need of ensuring adequate raw material. And also take into account the demand. There is no doubt that infrastructure is the key theme in the future. However, we may be a little over optimistic as far as execution part is concerned. As of now there are a lot of policy issues that are keeping infrastructure projects on hold. Unless these are resolved, setting up capacities in the steel sector will not be accompanied by a similar growth in demand. It will instead lead to overcapacity leading to a slowdown in the sector.

In such a scenario, only the steel companies that will focus on cost cutting measures, quality enhancement and competitiveness will be able to survive. With the slowdown in the economy and huge debt, perhaps steel companies should review their expansion plans. Indeed, before setting ambitious targets, we should take a look at the ground realities and proceed in a rational manner.