Laggard steel production diminishes India's growth

A key reason why India’s economic growth has halved from 9 per cent to 4.5% is due to the fact that core sector is in inertia; in order to curb illegal mining activity, all legitimate mining activity is put on hold necessitating India’s which is the third largest exporter of iron ore, importing iron ore of at least 1 million metric ton per month to meet the demand of steel of which sponge iron is an intermediate product. India’s iron ore was directed at world’s largest consumer China. This action resulted in invaluable foreign exchange loss; second, lower growth in the core sector resulting in infrastructure and manufacturing sector being underdogs in producing growth. The present halt in mining of iron ore and coal, which has world’s biggest reserves, has made India a deficit nation in respect of these two critical raw materials, making us import them at high costs. The non availability of sponge iron has dampened the steel industry, a core sector, which has affected the automobile industry (which is in the manufacturing sector). We need to balance the needs of Production with availability so that there are no constrains in the availability of raw materials which are primarily economic drivers. If we need to go in for higher production, we should not torch the house to kill a rat. Illegality should invite deter punishment while legal acquisition should be allowed to function without any breaks. We have lost valuable time during which time the dented growth levels increased poverty which resulted in checking economic growth. We need legislatures to draft Laws and the Executive to design Policy. Judicial activism should be restricted to look at the imperfections in the Law and not to deter business development caused by delays, which are crucial, detrimental to the Rule of Law and the well being of the Economy. No attempt should be made to hurt growth, while any form of illegality should be dealt with sternly and impartially. It is time, we understood the weaknesses, and put in a system in place where legitimate business activity does not suffer from legal impediments. Otherwise, there will be flight of capital, businesses will migrate, making India’s economy restive. The Supreme Court recently lifted the complete ban and permitted a maximum annual excavation of 20 million MT from Goa mines. This will be a great relief to the beleaguered domestic steel industry. However, the order makes it specific that the iron ore is not exported. Global demand forecast for steel to grow faster by about 3.30 % in 2014. India currently has about 95 million tonnes of installed steel capacity and 13-15 million tonnes is expected to be added within 2014-15. In fiscal 2012-13, growth in domestic steel demand is expected to be around 5.5 percent. Total demand is expected to be around 75 million tonnes, up from 71 million tonnes in 2011-12. In 2013-14, demand is expected to be higher at around seven percent. The demand for steel in India is expected to rise 7 percent in the next financial year beginning April 1 as compared to the sluggish 5.5 percent projected growth in 2012-13, India was expected to emerge as the second largest producer of crude steel in the next two years. With the ongoing Greenfield and brown field expansions India is expected to become the world's second largest producer of crude steel in the next two years. India is currently the world's fourth largest producer of crude steel after China, Japan and the US. Demand expected from investment in both infrastructure and manufacturing sectors. India, Brazil, Russia and MENA to experience faster steel demand growth. But despite the optimism, today’s tough economic conditions have led to a reassessment of risks, strategies and operations at each stage of the steel value chain. “Steel producers should test the vulnerability of their business models and the resilience of their strategies to ensure sustainable growth” according to a Global Steel dealer. According to the government data, steel production is expected to reach 200 million tonnes by 2020 as compared to 71 million tonnes recorded last year. In steel production, India is expected to leave behind USA and Japan in a couple of years. However, it will substantially lag behind China that produces almost 700 million tonnes of steel per year. The government's recent measures to ease infrastructure investment rules and push forward economic reform measures would boost steel demands in India. Formation of the cabinet committee on infrastructure for single window clearance for mega projects will generate activity in the power and roadways sectors, among others. The government has reiterated its commitment towards investment of $1 trillion in infrastructure during the XII Plan. This auger well for the steel industry. The expected lowering of interest rates by RBI in the near future will provide impetus to the manufacturing and consumer durables sectors, among others. The full impact of all these will be felt in 2014-15. The larger story of India on the steel sector remains intact. In fact, India would see the next phase of expansion, which will take our capacity to 50 million tonnes by 2025. In the next 3-4 years, India is set to emerge as the second biggest consumer and producer of steel. SAIL, a unit of the Government of India, has come up with a huge Road map to invest around Rs 72,000 Cr for modernization of its Plans for better capacity utilization. It has also envisaged spending Rs 6,500 Cr on Pollution, abetment and waste energy systems. SAIL has also purchased coal mines in United States, Mozambique. It proposes to set up overseas mining projects with SAIL’s technical knowhow in Afghanistan. All these will result in increased growth of the Navaratna’s growth status. 2014 will change the Steel environment for the better, both in exports and domestic production and consumption as signs of recovery are already evident. There has been a pick-up in exports and some of the products which had experienced a demand slump are experiencing a demand growth. At the global level, 2014 should see recovery of demand in Europe and the U.S. It is projected that world steel consumption could grow at around 3 per cent and India’s at around 5 per cent, signaling a demand recovery. India’s steel production which was around 71million tones in 2012-13 while it was on an average 20 million tones every quarter during the current fiscal. This was due to the fact that the glut in Indian economy which expanded around 5% during the current and last fiscal, accounting for decrease in new investments. Eight core industries (base 2004-5) have a combined weight of 37.90% in the Index of Industrial Production (IIP). The cumulative growth of steel production recorded between April-Feb 2014 was 2.6% while it recorded a significant growth of 4.6% in February 2014 over Feb 2013. The third largest user of the alloy is by steel consumers. The sluggish growth in the automobile sector which waned amid an economic slowdown contributed to a lower consumption of steel in India. The worst is over for the economy as well as the steel sector. The steel sector expansion plans are based on the prospect for the sector in India defined over medium- to long-term. There is little reason to revisit that because of temporary sluggishness in the market. The draft Steel Policy has pegged Country’s steelmaking capacity in the range of 244-281 million tons by 2025-26. The Indian economy holds enough promise for the future. In steel usage, for instance, consumption is only 59 kg per capita per annum as against the world average of 225 kg.. However, while there are signs that the outlook for demand is slowly improving, excess capacity remains the biggest threat to the steel sector. While some capacity is expected to be removed over the next decade, the announced addition of capacity by steelmakers out to 2020 shows that investment is still increasing rapidly. To counteract the increasing levels of investment in steelmaking capacity, it is estimated that about 300 million tons of steelmaking capacity needs to be closed over the next decade for the industry’s profit margin to reach a sustainable level, and raise capacity utilization rate for the sector globally from below 80% to more than 90%. Steelmakers are addressing numerous challenges such as volatility, shifting demand centers, complex supply chains, productivity and cost efficiency. As steelmakers increase their ability to survive in tough times, we will see increased market competition in nearly all products especially as there is a focus shift to high-value, higher margin steel products. Increasing market competition will also result from the flatter marginal cost curve in the sector. With little difference between the positions of steelmakers along the cost curve, small changes in the operating environment, such as increased productivity or changes in cost of capital, can produce swift changes in positions, competitiveness and ultimately survival. Steel companies who monitor and constantly create new sources of value are likely to be more successful. As a highly geared sector, with limited access to capital, there will be increased pressure for 10%–15% of steelmaking capacity to close over the next two to three years. The knock-on effect will be: • An increase in M&A activity as stronger operators acquire their weaker competitors with the aim of rationalizing the sector • Early refinancing as steel companies seek to take advantage of low interest rates ahead of potential rate rises • Portfolio optimization as steelmakers assess their assets for value creation • The complex dilemma of where to allocate capital– whether capital should be invested upstream for raw material security or downstream to capture a greater share of the value chain The speed and degree of changes in the global economy and the increasingly complex interplay of factors influencing a more globally integrated steel business make horizon watching essential. To succeed, steelmakers must determine how to optimize and create a new product mix and decide whether they are prepared to take the plunge to invest in new geographic markets. As demand continues to shift to developing nations, the steel sector is directed toward China, with some focus on Brazil, Russia and India. As Africa becomes increasingly urbanized, it may be that the future scramble for African demand could completely shift the landscape in years to come. When steel sector grows stealthily, India’s core sector’s dynamics will alter the GDP growth to double digits. This will also help in the manufacturing sector performing rather fairly due to the cost of production coming down due to steel prices coming down. Iron ore prices is likely to come down from $ 100/ton to $ 75/ton making a large difference in the pricing of steel. 2014-15 looks buoyant for the Indian steel industry.