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Tuesday, Feb 03, 2004

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`More consolidation in steel sector imminent'

Shyam G. Menon

"Indian costs are too high upstream, reduce it by 20-25 per cent. That is also the best protection against future imports.''

Mumbai , Feb. 2

EVEN as steel prices rise with an increase in input costs alongside, there is much consolidation waiting to happen in the sector globally, industry observers feel.

"Only about 20 per cent of the required industry mergers have happened, while 40 per cent of the necessary strategic alliances are perhaps in place,'' Mr Carlo Caiani, Director, Caiani & Company, a boutique global strategy practice, said.

Those producing low and medium grade steels were most likely to feel the cost pressures. Manufacturers of high-end steels would be better placed, possessing as they do uniqueness to products or skills capable of guarding price distinction thereby.

From this perspective, Mr Caiani argues the future is not altogether easy for the Indian steel industry, given the plethora of players it has, particularly towards the lower end of the market, he said.

In recent years, steel consumption has been driven by demand from China. But the projects that are currently on in that country and which are devouring global steel, are bound to taper off at some point of time in the future. Currently, China's own huge steel production does not spill over much into the global market courtesy the feverish domestic consumption.

By 2016 or even earlier by 2012, Mr Caiani sees low and medium grade steels from China beginning to flow in a big way into international markets.

This could coincide with the ascent of India as a major steel consumer, the country is already spoken of as the next major candidate for entering steel's autocatalytic consumption stage.

If so, the same argument of geographical proximity, which has got Indian steel producers currently eyeing the booming Chinese market, could operate in favour of the Chinese.

And with their low labour costs and huge capacities, the Chinese can compete on the price front in steel. An equally strong if not stronger contender for the same is Korea.

Given this, Mr Caiani says, it is essential that low and medium grade steel producers in the country get their act together and consolidate where possible.

China's massive steel making apparatus is also similarly splintered, but the number of relevantly big sized players is also higher, Mr Caiani said. "They have 10-12 large integrated steel companies which you don't as yet find here,'' he added.

Equally important for Indian players is to bring down the overall costs and enhance productivity. "Indian costs are too high upstream, reduce it by 20-25 per cent. That is also the best protection against future imports,'' Mr Caiani said.

Interestingly, he does not subscribe to the insecurity in parts of the global steel industry caused by severe increase in raw material costs. Finished steel faces competition from aluminium, titanium, plastics and even manganese, he said.

"Titanium production cost has been falling,'' he pointed out, illustrating the market's ability to make competition work and regulate finished steel cost.

Highly competitive users, such as automobile manufacturers, will never allow unchecked rise to input costs. And as finished steel eventually struggles to pass on its input costs, steel manufacturers will, in turn, restrict the appetite of input providers for higher prices. "Over time, supply always adjusts to meet demand,'' Mr Caiani said.

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