Steel by factica


•     India is currently the fifth largest steel-producing nation in the    systems and a return of consumer confidence.
      world with production of over 54 million tonnes (MT). However, •      Also, the domestic steel sector may face threat from cheap
      it has a very low per capita consumption of steel of around 44        imports, now that the import duties on steel in India being
      kgs as against an average of 198 kgs of the world. This wide          amongst the lowest in the world. Import pressures could
      gap in relative steel consumption indicates that the potential        consequently lead to pressure on margins of the domestic
      ahead for India to raise its steel consumption is high.               companies on account of lower steel realisations. However,
•     Being a core sector, steel industry tracks the overall economic       if the Indian government increases the import duty on steel
      growth in the long term. Also, steel demand, being derived            products, domestic steel industry could get protection to an
      from other sectors like automobiles, consumer durables and            extent. But since India has already agreed to the WTO norms,
      infrastructure, its fortune is dependent on the growth of these       it might become difficult for the government to increase duties
      user industries.                                                      substantially.
•     The Indian steel sector enjoys advantages of domestic •               Going forward, we remain apprehensive about the continuation
      availability of raw materials and cheap labour. Iron ore is also      of the strong performance by steel companies. We believe
      available in abundant quantities. This provides major cost            that volume growth would be visible in the years to come,
      advantage to the domestic steel industry, with companies like         largely due to the continuation of infrastructure spending
      Tata Steel being one of the lowest cost producers in the world.       (including housing), strong demand from the auto sector, which
•     However, Indian steel companies have to bear additional costs         could help in driving demand for value added steel products
      pertaining to capital equipment, power and inefficiencies (low        like CR (cold roll) steel and exports. We expect realisations to
      per employee productivity). This has resulted in the erosion of       remain under pressure on account of excessive supplies.
      the edge they would have otherwise enjoyed due to availability        However, a recovery in steel prices could be sooner if steel
      of cheap labour and raw materials.                                    producers across the globe take continuous efforts at
                                                                            curtailing production.
•     The government reinstated basic customs duty on steel imports
      in order to protect India from dumping of cheap steel products. •     The government over the last couple of years has continued
      It has also provided series of benefits to auto, housing and          to lay emphasis on continuation of infrastructure activities in
      real estate sector in order to counter the slowdown in the            the country. Increased spending on infrastructure will be a
      economy.                                                              key positive for the steel sector as the demand for steel will
                                                                            get a boost. The continuance of tax sops to the housing sector
    FY09                                                                    is another positive for steel demand.

•     The steel sector witnessed a mixed performance in FY09               KEY POINTS
      wherein during the first half it experienced an extraordinary
      spurt in demand backed by expansion of key consumer                  Supply: With trade barriers having been lowered over the
      sectors. However, the second half experienced a significant          years, imports play an important role in the domestic markets.
      demand contraction on account of the global financial crisis.        Demand: The demand is derived from sectors that include
      Thus overall, India's crude steel production grew by 1.2%YoY         infrastructure, consumer durables and automobiles.
      to 54.5 MT. While the global steel industry continued to reel        Barriers to entry: High capital costs, technology.
      under the recessionary trends in the developed economies,
      domestic steel demand remained less affected, mainly steered         Bargaining power of suppliers: The government's move
      by growth in semi urban and rural areas. Also, the various           on railway freight costs and grid power costs would
      monetary and fiscal packages announced by the government             determine the final price of the metal.
      helped the domestic steel industry to counter the slowdown           Bargaining power of customers: High, presence of a large
      and thus the demand started reviving upwards from the fourth         number of suppliers and access to global markets.
      quarter onwards.
                                                                           Competition: High, presence of a large number of players
•     Domestic steel prices and international steel prices experienced     in the unorganized sector.
      a divergent trend in FY09. While during the first half,
      international prices touched an all time high levels backed by
      robust demand, the second half witnessed more than 50% fall
      in the prices on account of significant contraction in demand
      due to the global credit crisis. Raw material prices like iron
      ore and coking coal also experienced a similar trend. It may be
      noted that most of the domestic steel players entered into an
      annual contract for coking coal in June-July 2009 when prices
      were at their peak. Hence the industry experienced a severe
      pressure on the margins.


•     As per the World Steel Association's forecasts, global steel
      consumption is projected to decline by around 14.9% in 2009
      led by US (-36.6%), Europe (-28.8%), CIS (-23.7%) and Japan
      (-20.4%). Also, the world's largest steel producer China is
      projected to experience a decline of 5% in steel usage.
      However, India is the only country that is projected to witness
      a growth of around 2% in 2009. The global steel industry is
      expected to recover in 2010 on the back of government
      stimulation packages, the continued stabilisation of financial

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