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Steel industry - India is steeling up
By Dr. Uday Lal Pai
Exclusively for InvestorIdeas.com
posted August 14, 2006
A booming economy and a strong growth in demand in sectors such as real estate, infrastructure and automobiles translate into the buoyancy in steel industry. The steel age is very much around.
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A non-resident steel tycoon was in the news recently. India-born British billionaire Lakshmi Mittal, whose family owns Mittal Steel, has gained 92% control of Luxembourg-based Arcelor spending more than Euro 25 billion.
The merged entity, to be christened Arcelor-Mittal, would control 10% of the world's steel making capacity that is currently estimated at 1,000m tonne a year
Mittal is bullish on India. India is a market of opportunity because of its population and low per capita steel consumption, says the global steel tycoon.
Destination India
Mittal Steel plans to invest US$ 9 billion in a 12-million-tonnes-a-year steel plant in Jharkhand. This would be India's second largest foreign investment in the steel sector after South Korean Posco's US$ 12-billion project in Orissa announced in June 2005. Posco is building a plant in the port town of Paradeep.
Obviously, India has finally emerged as a steelmaking location for global players. The global steel industry appears to be in a race to invest in high-growth zones such as India. The amount of activity in the sector has picked up speed in the past few years. The sector has received investments of US$ 5,994 lined up through 102 memorandum of understanding (MoUs) signed by different state governments to add 103 million tones (mt) in steel capacity.
Out of the total investment commitment, about US$ 17.9 billion forms the foreign direct investment component coming from two large steel projects - Posco in Orissa and Mittal Steel in Jharkhand.
The US$ 5.25 billion Russian major Magnitogorsk Iron and Steel Company (MMK) plans to set up a 10 mt greenfield steel plant in Orissa.
US auto and industrial component major Timken Company has said it is looking at setting up a manufacturing facility in India with investments foreseen at around US$ 25-50 million.
Domestic players
To gear up for the competition that might come up with Mittal Steel confirming its India plans and Posco moving ahead with its project, the largest domestic steel manufacturer, Steel Authority of India Ltd's (SAIL) corporate expansion plan of around $7.8 billion was increased to $8.2 billion, says the Minister for Chemicals, Fertilizers and Steel, Ram Vilas Paswan. The public sector steel giant has planned to expand its production capacity from the current annual level of around 14.5 million tonnes to around 22.5 million tonnes over the next 5 years.
Indian steel producers are also eyeing the international markets. The regulatory environment, too, has changed for the better. India's private sector steel giant Tata Steel has been given the green signal by the South African government to start construction on its US$ 103 million ferrochrome steel plant at Richards Bay in the country's KwaZulu-Natal region.
After acquiring Singapore's NatSteel last year, Tata Steel now plans to buy Thailand's Millennium Steel PCL for US$ 400 million as part of its US$ 23 billion expansion program over the next 12 to 15 years.
Vietnam's state-run Vietnam Steel Corporation is seeking to build a US$ 300-million hot-rolled steel mill in the southern province of Ba Ria-Vung Tau, in a joint venture with Indian steel maker Essar Steel Ltd.
The demand perks up
India must aim to enhance its steel production to over 100 million tonne by 2020, as the metal industry showing promises of propelling India on the path of economic growth, says Tata Steel managing director B Muthuraman.
"We are in a position to produce over 100 million tonne steel and we must do it. If China can produce nearly 300 mt of steel every year, why can't India?" Muthuramam asked. With hectic activity in all round development of infrastructure projects including roads, ports, airports, railways, housing etc, India should sustain consistent overall growth rate of about nine per cent, he said.
According to Philip Tomlinson, Director and Managing Consultant of the London headquartered CRU Strategies, a global steel and metal business analysis and consulting company, the upstream integration into iron ore still looks attractive despite an expected fall in iron ore prices in the medium term. With regard to downstream integration, he said value-added niche sectors such as castings, engineering and distribution appear to have an increasing potential.
Indian steel companies would have to put up with the danger of capacity growing faster than demand. "Those who set up downstream units for value-added niche products would be safe. Those who set up downstream units to subsidize their still production will find the going tough," he said.
Tomlinson said Indian steel companies would do well to focus on long products rather than flats. "This is because the volume falls and growth in long products will be faster in view of the increased spend on infrastructure expected in the years ahead," he said.
Consolidation is the new mantra for steel sector. Sajjan Jindal, Vice-Chairman and Managing Director of JSW Steel feels the steel industry has to go through a consolidation. But he won't give away the control of JSW Steel. He states that the management is open to participation with global majors and is looking at potential acquisitions overseas. Moreover, he does not see a major consolidation among Indian steel companies. He believes that Tata Steel and SAIL are potential take-over targets.
Meanwhile, the Steel Authority of India (SAIL) is entering into a strategic partnership with Jaiprakash Associates Limited for joint production of cement in Madhya Pradesh and Chhattisgarh.
The government support
The Government has approved the National Steel Policy (NSP) 2005 whose long-term goal is to ensure that India has a modern and efficient steel industry, capable of standing up to international competition and catering to the growing domestic demand for steel. According to the National Steel Policy, India is poised to add 110 mt capacity to its steel industry in the next 15 years. India should not only be able to meet its own demand for steel in the next one and a half decade but also should be able to export at least 25% of its total production
At the moment both per capita steel consumption and the annual production are low by world standards. Per capita steel consumption in India is 32 kg as compared to 180 kg in China and between 400 and 500 kg in developed countries. In 2005, China produced 350 million tonnes of steel while India produced only 42 million tones. Within India itself there is a vast difference between the consumption of steel in urban areas and in rural areas. The present steel consumption per capita is about 13 kg in urban India compared to around 2 kg per capita in rural areas.
Conclusion
India should be producing 65 million tonnes by 2010 and more than 110 million tonnes per annum by 2020, according to the National Steel Policy. The focus of the policy is to achieve global competitiveness in terms of cost, quality and product-mix, as well as global benchmarks of efficiency and productivity. No doubt, India has the capacity to achieve the target of 110 million tonnes of steel production in the next 15 years, but then it will have to attend to certain urgent issues which have a bearing on the industry.
It is only steel that can gird India's ambitions to become a manufacturing hub like China in the world economy. India hasn't seen the benefit of the steel age as yet to mourn its passage.
Disclaimer
Dr. Uday Lal Pai is an independent columnist for this web site.
Dr. Uday Lal Pai may hold long or short positions in any of the stocks mentioned in this article and those positions can change at any moment. InvestorIdeas.com Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp, InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
Dr. Uday Lal Pai is a freelance writer. Nothing in the articles should be construed as an offer or solicitation or recommendation to buy or sell any specific products or securities. Past performance does not guarantee future results.
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