Steel: Riding the price curve
While a broadbased economic slowdown may moderate the rate of demand growth, it is unlikely to significantly influence the demand-supply equation over the medium term.
Going from strength to strength.
C. N. M. Lavanya
India's rapid economic growth is built on a frame of steel and its consumption is taken to be a barometer of economic development. While steel continues to have a stronghold in traditional sectors such as construction, housing and ground transportation, special steels are increasingly used in engineering industries such as power generation, petrochemicals and fertilisers. The importance of steel can be gauged from the fact that for each Rs 1 lakh worth of steel outp ut, the economy is said to derive an output of Rs 2.36 lakh; and 0.69 man-years of employment is created.
India occupies a central position on the global steel map, thanks to establishment of new state-of-the-art steel mills, acquisition of global scale capacities by players, continuous modernisation and upgradation of older plants, improving energy efficiency and backward integration into global raw material sources. So where does the sector stand now in terms of demand, supply and prices?Demand-Supply dynamics
Global steel demand has been robust in recent years, attributable to the rapid pace of urbanisation and industrialisation taking place in China and India. Global steel production has grown at a compounded annual growth rate (CAGR) of 8.3 per cent over 2002-07. The global steel market is projected to cross 1.5 billion tonnes by 2009 and to 2 billion tonnes by 2015-20. The demand for steel from infrastructure, real-estate and automobile sectors has been growing rapidly in India, China and other emerging economies such as Brazil, Russia and West Asia. The Olympics in China has given a further boost to the demand for steel.
China (36.4 per cent), Japan (8.9 per cent), US (7.3 per cent), Russia (5.4 per cent) and India (3.9 per cent) were the world's top five steel producers in 2007. About 34 per cent of the world steel consumption comes from China and the Chinese trade equation reveals that the country has made substantial imports of steel too, though it remains a net exporter.
While demand growth has been robust, supply has been tight in recent years. Apart from structural issues pertaining to capacity augmentation, temporary constraints at a global level, such as floods in Australia and Indonesia, snowstorms in China, and floods in Jharkhand and Orissa at a domestic level, have curtailed the supply response. The demand-supply mismatch has led to a spurt in prices.
Steel production in India has increased by a compounded annual growth rate (CAGR) of 10.03 per cent over the period 2001-02 to 2006-07. Going forward, growth in India is projected to be higher than the world average, as the per capita consumption of steel in India, at around 46 kg, is well below the world average (150 kg) and that of developed countries (400 kg).
Indian demand is projected to rise to 200 million tonnes by 2015. Given the strong demand scenario, most global steel players are into a massive capacity expansion mode, either through brownfield or greenfield route. By 2012, the steel production capacity in India is expected to touch 124 million tonnes and 275 million tonnes by 2020. While greenfield projects are slated to add 28.7 million tonnes, brownfield expansions are estimated to add 40.5 million tonnes to the existing capacity of 55 million tonnes.
Delays pertaining to land acquisitions are the irritants in the process of greenfield expansion and this is causing time-overruns in the implementation of the projects. This may strengthen prices over the medium term.Rising input costs
While the demand scenario is strong, the hike in input costs of iron ore, metallurgical coke and freight has also exerted upward pressure on the prices of steel. Iron ore prices have risen by 65 per cent and those of coking coal by 210 per cent in FY08.
Pressures on iron ore prices continue, with iron ore producers Rio Tinto and BHP Billiton recently negotiating an upward revision of up to 85 per cent and 96.5 per cent for iron ore fines and lump iron ore, respectively, with Baosteel, as a representative of the Chinese steel industry.
As regards coal, the PSUs have been falling short of production targets and issues such as environmental clearance and Resettlement and Rehabilitation (R&R) are acting as impediments for private companies in opening new mines. Soaring oil prices are also getting translated into higher transport costs for the companies.
This cost-push phenomenon is unlikely to subside in the near future on account of the higher contract prices for key raw materials.
Companies have been actively integrating backward to manage these challenges. Tata Steel's strategic investments in Oman (Uyun limestone), Ivory Coast (Nimba iron ore), South Africa (ferro-chrome plant), Australia and Mozambique (coal) are a pointer to the fact that the issues of raw material security and backward integration have gained paramount importance.Pricing
Global steel prices continue to rise on account of both cost-push and demand-pull factors. The 'commodity super-cycle' has entered its fifth year. Indian prices have more or less tracked global trends until this February. From February to April, both the international and domestic prices of steel rose sharply, though Indian prices did not match the global price increase. Price trends have since then diverged.
While Indian prices have trended down, global steel prices continued their climb. Periodic intervention by the Government in asking steel producers to tone down prices has resulted in Indian prices tapering off since May. On a year-to-date basis, Indian steel prices have thus lagged those in most global markets.
In May, in response to a government plea, steel producers agreed to hold their price line for three months. The pressure on producers to hold prices was accompanied by policy measures to curtail input costs and restrict exports of specific steel products.
The Government removed export duty of 5-15 per cent on flats and hiked it from 10 to 15 per cent on longs. As the longs are used for construction and flats for automobiles and white goods, it may be viewed as an attempt to disincentivise the construction sector and encourage other sectors. The government has been exploring the possibility of imposing a ban on export of flats and iron ore, in a bid to increase their local availability.
The specific duty on iron ore exports has been replaced with a uniform ad-valorem rate of 15 per cent on all iron ore exports. The companies that have a major chunk of their output in the form of exports are likely to be affected by this move. In response to these measures, steel pipe-makers have cut their prices by 10 per cent. Steel producers introduced Maximum Retail Price (MRP)-based pricing for Hot-Rolled, Cold-Rolled and galvanised products, so that dealers do not take undue advantage of supply shortage.Declines shortlived
Prices appear likely to increase further not only from the view of increasing demand but also due to soaring input costs. On the policy front, the Government has stated that it has no power to control prices. This suggests that prices may go up in August, once the three-month moratorium on steel prices draws to a close. The economic slowdown is now an accepted fact and this could translate into a slowdown in offtake of steel from user segments in the near to medium term.
The construction sector is witnessing a slowdown, with a concomitant lower demand for steel. By the same token, the automobile sector is witnessing a decline due to the hardening interest rate scenario. While a broad-based economic slowdown may moderate the rate of demand growth, it is unlikely to significantly influence the demand-supply equation over the medium term.