Set to roll along

Indian steel makers are on an expansion spree, and the next 19 months will see the cumulative steel production capacity leapfrog by 50 per cent. What is the motivation behind this expansion drive and the odds of this bet paying off?

It has not been smooth sailing for domestic steel manufacturers in recent times. Although Indian steel production was up 8.6 per cent in the first three months of 2011 and estimated consumption keeping pace with supply, flat steel prices remained under pressure during this period owing to early signs of Chinese efforts to cool their economy and the receding of quantitative easing measures undertaken in US.

Prices of HRC in certain geographies are down by as much as 15 per cent over the last two months. The violent 40 per cent spike in coking coal prices have added to the pressure on margins in the last two quarters. Despite the current difficulties faced by steel makers, the capacity additions suggest that they are bullish on the long-term prospects. This could stem from the robust demand outlook for some end-users of steel.

AUTO SECTOR NEEDS

Only half of India's annual automotive steel requirement of four million tonnes in the form of bearings, hot rolled coils or welded tubes is met by domestic producers. The other half is high-strength cold rolled steel used in body panels of automobiles. These are imported and currently supplied by Nippon, Posco among others.

While these specialised automotive grades of steel may account for barely 3-4 per cent of the overall steel volumes, they enjoy realisations which are at a 30-40 per cent premium to hot rolled coils, owing to the high quality of steel required and more processing. With the automobile segment expected to clock a moderate growth of 10-12 per cent a year over the next few years, there is good scope to capitalise on this demand.

This potential is also what lures several Japanese steel producers to offer their hard-earned technological competence to Indian producers in exchange for a slice of this lucrative and growing pie. Tata Steel has firmed up plans to build a 600,000 tonne per annum plant with Nippon Steel at Jamshedpur to cater to this requirement. JSW, Bhushan Steel, Essar and SAIL are all in various stages of negotiations to improve their prospects in this segment.

CAPITAL GOODS

Another lucrative niche is the capital goods segment which consumed between 10-12 per cent of the steel produced in 2010-11.

With roughly 74,000 MW of thermal power capacity expected to be commissioned during the 12th Five-Year Plan, there is likely to be greater demand for variants of steel such as Cold-Rolled Grain Oriented steel.

Domestic steel producers also have a fair chance of supplying to at least half the upcoming power projects, with BHEL and combines such as Toshiba-JSW, Bharat Forge-Alstom bagging half the 12th Plan power capacity. At stake here for local steel players is an estimated Rs.166,500 crore of orders which would include steel pipes, boiler plates and transmission equipment.

One estimate by a SAIL official suggests that there may be Rs.1,500-2,000 crore worth of opportunities in niche space's such as CRGO steel every year. RINL recently announced its intention to set up a 100,000 tonne per annum plant to cater to this niche sgement. Tata Steel through its European arm owns Cogent Power which produces 'electrically efficient' grades of steel, whether they leverage this competence to compete domestically remains to be seen.

LONG PRODUCTS

The bragging rights which come with producing high grade steel do little to take away the promise of sheer volumes that old-fashioned long steel products, used in the construction segment, offer. Steel re-bars and structural products remain the proverbial bread and butter of the industry accounting for 60 per cent of Indian steel consumption.

Value-added ‘long' products such as rail lines and structural products remain the stronghold of SAIL, Tata Steel and Jindal Steel and Power. SAIL intends on spending over Rs.10,500 crore to eliminate less-than-desirable segments such as semis (intermediate steel products) and improve the proportion of the product mix to directly benefit from the12th Plan outlay.

SAIL, Jindal Steel and Power and Tata Steel are three major listed participants in this segment who are adding 75 per cent more to their current capacity over the next two years.

Cumulative domestic capacity will be rising by roughly a third over the next two years with RINL, Bhushan Steel, Essar Steel among others adding to their current capacity.

One part of the long-product demand is fuelled by private demand for construction of residences, commercial real estate, office space and so on. Estimates by Cushman Wakefield indicate that over the next four years demand across Bangalore, Mumbai, Delhi, Pune, Chennai, Hyderabad and Kolkata will drive demand for 2.5 million units of housing, 192 million square feet of office space and just under 30 million square of retail space.

These numbers paint a buoyant picture in terms of demand for certain long steel products.

INFRASTRUCTURE SPENDS

The second component of long product demand is predicated by government spending. Infrastructure spending to the tune of Rs.40 lakh crore on bridges, ports, rail roads and roads by the government in the Twelfth Plan is expected to be a driver for construction material.

The long-overdue infrastructure drive that will result in more roads, bridges, rail-lines, ports and so on is a crucial aspect in driving demand for all those cars, bikes, trucks, ships and autos which will drive the expected 12 per cent growth for steel. However it needs to be borne in mind that government projections for the Eleventh Plan spending on roads, railways and ports were revised lower by 12, 23 and 50 per cent respectively. That calls for a tempering of demand growth from this segment.

In a nutshell, the government needs to stick to its planned Rs.40 lakh crore of spending over the next six years to justify the 13-14 per cent growth projected over the same period for the domestic steel capacity. The demand for long-steel products is directly dependent on this and some of the user industry's growth is dependent on rapid improvement in infrastructure facilities in the country. Execution delays in infrastructure projects can impede improvements in the ‘per-capita' consumption of steel.

India's per-capita consumption of steel of 51 kg is quite low at around a third of global levels and at a fraction of those in infrastructure-spending intensive China. In India's case, the ‘per-capita' estimates for rural areas are said to lie in single-digits. This implies that there is potential to scale up demand substantially. But, for Indian's to consume more steel, the government needs to step-up its spending in projects that enable higher consumption of steel. Till that point comes, justifying demand keeping up with even the modest 14 per cent supply growth over the next four years is likely to be a challenge.

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