Global Steel 2011

Global steel 2011Paving the boulevard of the great Indian steel dream

January 2011

Anjani K. AgrawalPartner and Sector leader mining & metals, Ernst & Young, India

The year 2010 turned out to be surprisingly better for the global economy compared to forecasts a year ago. Consumer and business confidence is rising in most parts of the world with policy support from governments. Performance of the global economy in coming years, however, will depend upon performance of three economic groupings — big emerging markets, America and the Euro Zone. These three groups reflect different growth prospects and divergent policy responses. Emerging markets, such as China and India, are by far the biggest contributors to global growth.

The steel industry is the backbone of modern industrialization. As a key basic industry, steel underpins growth across several downstream industries and the services sector. Among the emerging markets, the structure of Indian economy, market size, strong resource base and relative cost of production is expected to drive relatively higher growth for the steel sector in India over the next decade. In addition, reforms to meet some of the challenges in the investment environment will create an opportunity that will be leveraged by several global sector players, making India a prime investment destination of choice. The global stakeholders’ dream is to access global mega markets and they should find a footprint in India to make it a dream worth pursuing. It is in this context that this report examines the hypothesis that India will be the next landmark on the global steel landscape. The report also studies the challenges that hinder this dream and provides recommendations that may help achieve this dream.

Ernst & Young, India, working with key stakeholders in the mining and metals sector, has developed deep insights and competencies. The firm provides approaches for a spectrum of sector issues — strategic risk management, mergers and acquisitions, bid advisory, business process improvement, capital raising, financial modeling and feasibility studies, performance management, supply chain, tax and regulatory, technology and talent.

We hope this report provides you with insights on the shifting dynamics in the steel sector in India and globally. Our aim is to equip our readers to effectively address key challenges of the sector and seize the emerging opportunities. We express our deep appreciation to the organizers of Global Steel 2011 for giving us the opportunity to present this report at the conference.

Foreword

Arun Kumar JagatramkaConference Co-ChairmanGlobal Steel 2011 and Chairman and Managing DirectorGujarat NRE Coke Ltd.

Neil J BristowConference Co-Chairman

Global Steel 2011 and Chief Consultant

H&W Worldwide Consulting Ltd.

The global steel industry has been experiencing ups and downs for the last three years: a low in 2007, a high in early 2008 followed by lows at the end of 2008 and in early 2009. The latter half of 2009 and early 2010 have been quite encouraging. Amidst this turmoil, China and India were the two countries who could withstand the turbulence and yet deliver positive growth figures. In fact, in its latest report, the Asian Development Bank has accepted the growing influence of Asian economies on the world at large.

The production of steel worldwide is dominated by Asian countries, and India, with one of the fastest-growing steel industries, is increasingly being considered as a potential steel hub. It is a booming industry with ever-growing demand, fueled by continuous growth in the automobile, infrastructure and real estate sectors. In fact, it is the Indian Government’s aim to raise steel production capacity to 300 million tonnes by the end of 2020.

Hence, the theme chosen for Global Steel 2011: “Paving the boulevard of the great Indian steel dream” seeks to attain the 2020 goal. The Global Steel 2011 forum will therefore aim to debate and deliberate the best strategies needed to discuss this opportunity and achieve this dream.

This report focuses on the current status and future trends of the global iron and steel industry: the raw materials scenario, supply-and-demand dynamics, and the outlook on key elements like coal, met coke and iron ore. We also identify the major bottlenecks and the key recommendations for ensuring sustainable development of the steel sector in the future.

We do hope that the stakeholders will immensely benefit from this report.

ContentsExecutive summary ........................................................................... 3

Introduction ....................................................................................... 7

1. Global steel industry .................................................................... 9

Recovery in global steel demand — largely driven by emerging markets ...................................................................... 11

Outlook for 2011 — cautiously optimistic for the global steel sector ................................................................................ 14

BRIC (Brazil, Russia, India and China) demand and production ........................................................................... 15

China ......................................................................................... 16

Brazil ......................................................................................... 17

Russia ........................................................................................ 19

Raw materials ............................................................................ 21

Other challenges for steel manufacturers ..................................... 23

2. Indian steel industry .................................................................. 25

Why India will be the next landmark on global steel landscape ....... 25

The competitive landscape .......................................................... 28

Strong domestic demand drivers ................................................. 29

Raw material availability — sufficient in iron ore but deficient in coking coal ............................................................................. 35

Outlook for the Indian steel industry ............................................ 36

Challenges and issues ................................................................. 37

Strategic accelerants .................................................................. 41

3 Global steel 2011 Paving the boulevard of the great Indian steel dream

Executive summary

Global steel — a steady recovery, but sustainability will be tested as the stimulus package effects fade away

The year 2010 appears to have been a stable year for the global steel industry compared to the volatility in steel and raw material prices experienced during the financial crisis. Consumption and utilization rates have picked up in most major economies, with consumption surpassing its pre-crisis highs in some countries. The production and consumption levels have improved across the globe, but excess supply has prevented steel prices from rising in tandem with raw material prices.

The timely support by the governments of major economies through stimulus packages provided the base for global recovery of the steel sector. But sustainability for the sector remains unclear as it is dependent on the global steel industry’s reaction when the effects of stimulus packages fade away.

BRIC countries — the biggest contributor to global steel growth

Demand from BRIC countries, particularly China, has been a key driver in growth over the last decade. The World Steel Association recorded Chinese crude steel production of 568 million tonnes in 2009, an increase of 13.4% year on year, with an increase of around 11% expected in 2010. India has also registered strong demand in the last five years. However, there has not been a significant increase in Indian steel production in the last few years due to stringent mining and land allotment laws, making the country a net importer of steel. Brazil and Russia also recovered strongly from the economic crisis and offer an avenue for higher steel production in the medium term. Apart from China, per capita steel consumption in the BRIC nations is significantly below the world average, but projected economic growth in these countries indicate a strong demand for steel going forward.

4Global steel 2011 Paving the boulevard of the great Indian steel dream

A new era for raw material contracts has begun

There has been a paradigm shift in iron ore negotiation in 2010, with annual contracts being replaced by quarterly contracts. The move to quarterly contracts was driven by the present tight supply of iron ore, which gave miners increased negotiating power. This has not only led to volatility in earnings for the companies, but has also created a scenario where integrated players will have an advantage over non-integrated players in boosting their profits or managing their risks.

Outlook for global steel — cautiously optimistic

The global steel outlook for 2011 is cautiously optimistic as the possibility of a double-dip recession has eased. Growth in developing economies will remain strong and continue to boost total global steel demand. However, the modest recovery in more advanced economies persists on the back of ongoing financial uncertainty and sovereign risk. Demand for raw

material is increasing in line with growth in steel production, but there is a constraint on the supply side of raw material because of the lack of adequate infrastructure and increasingly stringent environmental laws and regulations. Raw material prices in 2011 will likely remain stable with an upside bias due to this supply side tightness.

India — the next landmark on the global steel landscape

Beyond China, there are few other countries with the steel production growth capacity of India, which is why it is strategically placed to be the next landmark on the global steel landscape. Sufficient iron ore reserves, low per capita steel consumption and strong demand for steel due to strong economic growth gives India the competitive edge over other emerging economies. During the recent financial crisis, the Indian steel sector remained resilient due to strong domestic demand emerging from end users in the country. Therefore, in 2009, when the global steel consumption witnessed an 8.5%


decline year on year, steel consumption in India remained flat. India has been a net importer of steel since 2007, and the widening difference between demand and supply will encourage the new capacities to come on stream.

Infrastructure and automobile sectors to drive the steel growth in the region

Construction and infrastructure remain key steel consuming sectors in India, with a share of 61% in total consumption of steel during 2008–09. With approximately US$1 trillion of expected investments in these sectors in the 2012–17 period, there will be a corresponding increase in steel demand. The automobile sector, which grew by 27% during 2009 and 2010, is estimated to see double digit growth in the short term, as the launch of low-cost passenger cars will likely expand the market and hence the demand. In line with economic growth, India will register a strong demand across sectors and, accordingly, the domestic steel demand is expected to grow by around 10%–12% annually over the next two years.

Sufficient iron ore to feed upcoming capacities but challenge on coking coal

To meet expected steel demand, India has sufficient iron ore reserves as the world’s fourth-largest producer of iron ore behind China, Australia and Brazil. India contributed 9.9% to the world’s production in 2009. The country consumed close to 100 million tonnes and exported approximately

110 million tonnes. India, on the other hand, is a net importer of coking coal. It imported 23 million tonnes of coking coal in FY10 to meet its total requirement of around 40 million tonnes. The consumption of coking coal is estimated to increase at a CAGR of 11.6% between 2009 and 2014, whereas the production is estimated to remain relatively flat during the same period.

The platform is ready — Indian steel will witness unprecedented growth in the coming decade

India, which was the fifth largest producer of crude steel in the world in 2009, is expected to become the second-largest producer by 2015–16. Major capacities, which are expected to be operational in the next three years, include projects by Tata Steel (India), JSW Steel and SAIL. Total crude capacity in India is expected to be around 112 million tonnes by 2015, registering a CAGR growth of 9%. The growth potential of the steel industry in the country has attracted many global steel players to India, with some entering into strategic partnerships with Indian steel majors as they feel that greenfield projects will take longer to become profitable and established companies already have an existing customer base in the region. The industry will be further supported by the Government, with policy changes planned in iron ore mining towards competitive bidding and transparent allocation of mineral licenses. The beneficiaries of this policy change will be both Indian organizations as well as global stakeholders.


Some challenges remain

Besides the coking coal shortfall, other bottlenecks for the growth of the industry include inadequate infrastructure in railways, roads and ports. This leads to delays in rake movement, congestion and pile up of inventory at ports. Other challenges include land acquisition delays and environmental clearances which need focus for the accelerated growth of Indian steel industry.

Strategic accelerants to achieve Indian steel dream

The Indian Government needs to support this strategically important industry by increasing the exploration of raw materials and developing the enabling infrastructure. Companies should increase their focus on new technologies to increase productivity, reduce the raw material costs and expand their product footprint. Consensus must evolve around socioeconomic and environmental challenges, keeping in mind the windows of opportunity for growth. The successful model of Ultra Mega Power Projects in India can be replicated in the steel sector through the formation of special purpose vehicles for implementing selected greenfield projects. The Indian steel industry, therefore, requires some structural and policy changes to achieve its strong growth potential in the coming decade.


Introduction

The 2009 global downturn and the subsequent recovery have accentuated the importance of China and to a lesser extent India to the world steel industry. In 2010, recovery in steel demand was far from even and steelmakers have had to work hard at managing their working capital through planning their capacity utilization and production to meet fluctuating demand.

A significant change to raw material contracts — from annual to quarterly pricing — has also provided challenges such as the regular need to renegotiate contracts and the additional earnings’ volatility. Raw material suppliers threaten to increase the amplitude and to shorten cycles: hence, cyclicality and volatility are back. This trend may challenge the revenue model of steel producers: How to transpose the volatility of raw material into the pricing mechanisms for steel products without compromising steel customers?

The increase in raw material prices has also led to the speeding up of backward integration strategies — through either the full acquisition of captive iron ore and coal mines or the taking of minority participation in exchange for off-take agreements to allow the steel producers to hedge the risk of additional margin squeeze, as well as, innovation in both energy efficiency and new products. Financial risk management in the steel industry

“The revolution started by the end of the annual raw material pricing negotiation in 2010 is still a relatively new phenomenon, which the steelmakers are still adapting to, and incorporating in their business model to

manage the implications of this new paradigm. With any period of dramatic industry change, opportunities eventually arise but it takes time to assess its full impact.”

Michel Nestour Director of Transactions Mining & metals, Ernst & Young, UK


with the emergence of steel swaps in addition to the existing OTC contracts is also intensifying. This trend is likely to continue to intensify in the future with the end of the annual benchmarking negotiation.

In 2011, global steelmakers are hoping for a more stable rate of recovery in demand. This will largely be dependent on whether the transition from government fiscal stimuli to increased consumer spending and business investment occurs seamlessly. Due to the sovereign debt crisis of many developed countries, there is a shift from stimuli to austerity measures to mark a slowdown in growth for 2011. Global trade is estimated to grow by 5.7% in 2011, a significant softening from 2010, when global restocking fuelled an 11.5 % increase1.

Most importantly, the future of the developed and the developing world will be governed by different sets of factors. The emerging markets of China and India will continue to witness their steel industry growing on the back of robust demand from industrial production of steel consuming sectors, such as construction and civil engineering, automotive and mechanical engineering. On the other hand, the growth of developed markets will be more dependent on supply-side response and innovative product offerings and substitutions focused on resource and energy efficiency to decouple economic growth from resource and energy use. Further, operating expenses and capital expenditure management will continue to remain the key driving factor for profitability of all steel players.

1 Eurometal, 2010


1. Global steel industry

Recovery in global steel demand — largely driven by emerging markets

The global steel industry has been on a roller coaster since 2007. The booming market of 2004–07 rapidly declined during the global financial crisis. As a result, aggregate global demand from the key steel end-user markets — infrastructure, construction, and automotive — contracted by 7.4% year on year2 in 2009. The extreme lows of 2009 were followed by a steady recovery in demand and associated production as well as a re-stocking period. Indeed, during 2010, global demand for crude steel has rebounded to 2008 levels as investment in infrastructure and other steel-intensive projects increased.

Some of this recovery can be attributed to the timely intervention of the governments of major economies, which provided stimulus packages to arrest the economic crisis and effectively brought forward future steel demand.

Despite this stimulus, steel consumption in developed countries, such as European countries and the US, has not recovered to pre-crisis levels and the majority of the improvement in crude steel consumption emanates from emerging markets such as China and India. Demand for crude steel in Europe and the US is still 28% below what it was in 2008 and 33% and 43% lower respectively than in 20063.

2 Steel statistical yearbook, World Steel Association, 2010 3 World Steel Outlook, ABARE, September quarter 2010


Global crude steel consumption

Growth

Source: ABARE — June quarter 2010, World Steel Association (World Steel), Ernst & Young analysis, 2010

* F: Forecasted

Figure 1. Global crude steel consumption trends

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Source: World Steel Association (World Steel), Ernst & Young analysis, 2010

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Source: ABARE — June quarter 2010, World Steel Association (World Steel), Ernst & Young analysis

Figure 3. Global crude steel production trends

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On the other hand, crude steel consumption in China has grown considerably. In 2009, when consumption in every other country declined, China’s consumption still grew by 15% and has increased by a significant 48% since 2006. India, Brazil, and Korea have all seen crude steel demand increase substantially since 2006 — India and Brazil have both seen crude steel consumption increase by 24% and Korea by 12%.

Economic uncertainty, however, remains a spectre in the industry — particularly in both European and the US markets. As a result, steel distributors and traders in these markets are running very lean, avoiding the big orders of the years preceding the global financial crisis, which could have a positive effect when regional demand recovers.

The World Steel Association estimates that global steel consumption will grow by 5.3% in 2011. There is some debate between steel market analysts as to the extent of demand growth from China. Some foresee slower growth as the Chinese Government tries to moderate its overheating

4 JP Morgan estimates 5 ABARE, September 2010

Recovery in global steel production: largely driven by China

economy. Others think it is just as likely that the Chinese Government will keep its 8% GDP growth target in the medium term, which will mean that both investment in infrastructure projects and private spending will continue.

In the five years preceding the financial crisis, global steel production enjoyed a robust CAGR of 7% to reach 1,329 million tonnes in 2008. Steelmakers responded quickly to falling demand at the end of 2008 by cutting production. Global capacity utilization was cut from 86% in July 2008 to 58% by December 2008. For the first half of 2009, capacity utilization remained around 65% before getting back up to between 70%–80% in the second half of 20094. In 2009, the US and the European Union suffered the sharpest drop in steel production of 44% and 37%, respectively5.

The steady rise in steel demand in 2010 means capacity utilization levels were back at around 77%. Steelmakers are predicting a more stable recovery of demand in 2011 and it is likely that global capacity utilization rates may inch back towards the highs of 2007 and early 2008.


Crude steel capacity Capacity utilization

Source: Time to steel ahead, Ernst & Young, 2010

Figure 4. Global capacity utilization trends

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Steel production recovered in 2010 and crude steel production was estimated to reach a record high of 1.4 billion tonnes. It has not, however, been an even upward trend throughout the year (see figure 5). Some of this can be attributed to the usual seasonal cycles experienced by the steel industry, although the financial instability of the world economy has been a factor in disrupting the evenness of demand.

“The future growth in steel relies upon sustainable steel solutions that will reduce the carbon footprint of steel consuming industries through material and energy efficiency in

order to decouple economic growth from resource and energy consumption.“

Figure 5. Global monthly crude steel production growth

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Source: World steel association, Ernst & Young, 2010

Regional production

A large proportion of global growth in crude steel production is from China. The World Steel Association recorded Chinese crude steel production of 568 million tonnes in 2009, a rise of 13.4% year on year. China is estimated to produce 630 million tonnes in 2010, a rise of around 11% year on year. In early 2010, there were major concerns that as China’s steel production is growing so rapidly, it would put pressure on international steel markets. However, the corresponding growth in Chinese domestic demand has alleviated some of that tension. In addition, the gap between international steel prices and Chinese prices has narrowed, reducing the attractiveness of importing Chinese steel. Chinese production was cut in the second half of 2010 to ensure the attainment of energy-efficiency targets under the Eleventh Five-year Plan and as the Government promotes consolidation in the sector.

Pierre Mangers Executive Director, Ernst & Young, Luxemburg


Source: World Steel Association (1980-2009A), Ernst & Young estimates

Figure 6. Global crude steel production trends by regions

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Steelmaker’s response — what have they been doing in 2010?

1. Restructuring their businesses: To ensure efficiencies, reduce costs and maintain margins.

2. Becoming more adept at idling and restarting blast furnaces (BFs) to meet fluctuating demand: ArcelorMittal changed its hot metal capacity management and has developed procedures to take BFs out of service, cool them and then bring them back on line without permanent damage.

3. Renegotiating contracts to match the change to quarterly raw material pricing contracts: Steelmakers have, where possible, been renegotiating sales contracts to include either an index-based raw material surcharge or to reduce the term of the contract to allow for increased pricing volatility. The top five steelmakers do not have a significant enough market share, which reduces their bargaining power both with raw material suppliers and steel customers.

4. Securing raw materials: As volatility in raw material pricing has increased, steelmakers are acquiring mining operations to secure these supplies. In the first 11 months of 2010, 16 of the 68 steel transactions have been to secure iron ore and coal.

5. Improving product mix: The companies are increasing their focus on the downstream applications and solutions-driven products for their higher value add. In some instances, these products can be competing with their existing customer base.


Steel industry margins under pressure

Prices for steel products are driven by demand, inventory levels at distributors and manufacturers, imports, raw material costs and availability. The steel industry has been characterized by excess world supply, which restricts the ability of the industry to raise prices during periods of economic growth and resist price decreases during periods of economic contraction. After a dramatic slump, from US$873 per tonnes to US$547 per tonnes from 2008 to 2009, the global average hot rolled coil (HRC) price has increased by 56% from January 2009 to September 2010. This price increase was partly the result of the decrease in production by the majority of the developed country producers, thus avoiding the risk of rapidly declining prices. However, HRC prices have not returned to pre-financial crisis levels and are not expected to do so until 20126.

In addition, during 2010, raw materials contracts moved from yearly to quarterly intervals. The rise in raw material prices has been quite substantial in creating a significant amount of margin and working capital squeeze for steel producers as the increase in raw material was not fully passed on to the steel end users due to the low level of real steel demand. For example, coking coal prices rose from US$125/tonnes

Source: CRISIL Research, World Steel Organization, Ernst & Young analysis, 2010

Figure 7. Global monthly steel production and price trends

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to approximately US$214/tonnes (JFY) and iron ore prices rose from US$60/tonnes to approximately US$118/tonnes (Australia JFY), respectively during 2009-107.

Outlook for 2011 — cautiously optimistic for the global steel sectorThe outlook for 2011 is cautiously optimistic, as the likelihood of a double-dip recession has declined. According to Global Insight8, consumer spending and business investment are likely to become key drivers of economic growth, as support from inventory cycles and fiscal stimuli diminish. Strong growth in emerging economies is likely to pull global recovery along in the short term. In many emerging economies, it seems that the recovery has entered a self-sustaining phase, relying on consumption and fixed investment rather than restocking. The modest recovery in more advanced economies remains vulnerable to ongoing volatility, sovereign risk and financial uncertainty. It is, however, predicted that much of this volatility and uncertainty will ease at the beginning of 2011 and there should be an increase in industrial growth by the second half of the year. Overall, the International Monetary Fund (IMF) is predicting growth of 4.2% in the world’s real GDP in 20119.

6 Industry focus: metals and mining, VTB Capital, 8 November 2010, via Thomson Research 7 China Basic Materials Monthly - August 2010 - Stagnant Order, Credit Suisse, 26 August 2010, via Thomson Research 8 Global executive summary - The global outlook is a little brighter, Global Insight, November 2010, via Thomson Research9 World economic outlook: recovery, risk and rebalancing, International Monetary Fund, October 2010


Steelmakers are more positive than they were a year ago but acknowledged that the recovery is likely to be slow. There is hope that the demand for steel will recover more evenly over the next year and as a result global crude steel production is forecast to increase by 7% in 2011.

Figure 8. Outlook for steel production and consumption to 2015

Source: ABARE, Ernst & Young analysis, September 2010

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BRIC (Brazil, Russia, India and China) demand and productionDemand in the BRIC countries, particularly China, has been a key driver of growth during the last decade, with crude steel production in these countries as a percentage of global production increasing from 28.4% in 1999 to 58.3% in 2009, at a CAGR of 12.7%. Steel demand remains strong in China and India and the trend is expected to continue in 2011, propping up the global industry. Although all BRIC regions have shown growth over the last decade, it is China that is really the engine behind the growth in both steel production and demand.

Source: World Steel Association, Ernst & Young analysis

1999 2009

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Figure 9. Steel production by country


China

“China remains the engine for the global steel industry.”

China is presently the largest steel consuming and producing country in the world, accounting for 46% of world steel production in 2009. The country, which was producing 151 million tonnes in 2001 and became the largest regional producer in 2002 with 182 million tonnes, is estimated to produce around 630 million tonnes in 201010, growing at a CAGR of more than 15%. China’s steel production, which was almost flat in 2008 on a year on year basis, picked up strongly to register a growth of around 13.4% in 2009, boosted by the demand arising from the US$586 billion stimulus package, targeted mainly toward the infrastructure development in the region.

Monthly crude steel production growth in China saw a peak in May 2010, before hitting a low for the year of 47.9 million tonnes in September. The decline was primarily due to a fall in steel prices, leading to production cuts by some mills in the region. It is estimated that 30% of the small and medium-sized mills in Hebei Province stopped production during that time11. The decline of 17% in steel prices from April to July, with a lag in iron ore prices, put pressure on margins.

The Chinese Government has, however, made a decision to consolidate the highly fragmented steel industry and thereby rein in steel production and attain energy efficiency targets. To this end, the Ministry of Industry & Information Technology released a new policy that measures steel mills according to four parameters:

1. Emission of sulfur dioxide, dust and waste water

2. Energy efficiency standards

3. Furnace sizes

4. Output capacity

10 ABARE, September 201011 China Steel - Release from the iron maiden, J P Morgan, 10 August 2010, via Thomson Research 12 Nikhil Kumar, “Around the world, miners scramble for coal,” The Independent, 7 December 2010, via Dow Jones Factiva, © 2010 Independent & Media PLC

By implementing this policy on emissions, furnace sizes, energy efficiency and output capacity, the Chinese Government is aiming to close down many of the smaller steelmakers in the sector, many of which have older-style plants, that are emissions-intensive. In another move to reduce the volume of exports from the country, in particular by the smaller steelmakers, the Chinese Government also removed a 9% export rebate on HRC, sections and narrow cold-rolled coil products and hot dipped galvanized products on 15 July 2010.

China is also seeking to consolidate its steel industry — currently the top ten steel producers in China account for 44% of the total steel production.

Resource security remains a major concern for China, especially as it is the largest importer of iron ore in the world and needed to import 36 million tonnes of coking coal in 2009, up almost fivefold from 200812.

Source: China Steel - Release from the iron maiden, J P Morgan, 10 August 2010, via Thomson Research, Ernst & Young analysis

Figure 10. Steel production and consumption in China

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Peter MarkeyMining & metals leader, Ernst & Young, China



Figure 11. China steel industry capacity and utilization rate

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Figure 12. China steel demand breakdown (by million tonnes)

Construction, 55%

Others, 13%

Machinery, 19%

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Oil & Gas, 2%Shipbuilding, 3%

Domestic demand for steel is largely underpinned by the construction, machinery, automotive and household appliances sectors. Construction is showing signs of slowing mainly due to monetary policy tightening in a bid to cool the over-priced property market. The impact of high interest rates will impact key automotive and household appliances sectors and is expected to result in slower growth in 2010 and 2011, leading to possible moderation of growth in Chinese steel production.

“As a major steel and iron ore exporter, Brazil’s production growth continues to climb.”

Brazil

Brazil is the largest steel producer in Latin America and the second-largest steel producer on the American continent after the US. Brazil produced 26.5 million tonnes of steel in 2009 and is estimated to register significant growth of 26.7% to approximately 33.6 million tonnes in 2010, almost equivalent to production in 2007.

Prices in Brazil were expected to remain high in 2010 as the economy appeared to be recovering in the aftermath of the global economic crisis of 2008–09. However, lower prices in other steel producing countries and a strong Real led to an influx of steel imports into Brazil. Steel imports reached a high in the third quarter of 2010 and at times there was up to a 30% difference between the price of imported steel and Brazilian steel. As a result national producers had to adjust their prices to be able to compete. It is forecast that steel imports will decline over the coming months.


Figure 13. Chinese steel end-market demand forecast

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Carlos AssisSouth American Mining & metals leader, Ernst & Young, Brazil


The steel industry in Brazil has important competitive advantages including big iron ore mines with high iron content and modern and competitive steelmaking capabilities.

Brazil plays a major role in iron ore production as the world’s third-largest producer after China and Australia. Its domestic consumption remains fairly low in comparison to its production, making it the second-largest iron ore exporter after Australia. It presently holds 27% of the market share in iron ore exports. This is expected to grow with producers, such as Vale, investing in the world’s largest iron ore carriers (400,000 tonnes) or so called “Chinamax carrier.” Delivery of the first of more than 30 such carriers is expected in the first half of 2011. The expectation is that these ships will halve the shipping premium from Brazil, when compared to their Australians competitors, from US$15 to US$7 per tonne 13.

When compared with other countries, Brazil’s steel industry is one of the most efficient with good productivity indicators (steel tonnes per man-hour). Moreover, production equipment and environment control methods are state-of-art in the main steel plants.

The logistics configuration (plant-railway-port integration) also gives Brazil a competitive advantage, as it facilitates important access to consumers of finished products in Latin America and semi-finished products in the US. There are, however, some weaknesses in the Brazilian market. There is a significant amount of idle capacity — in 2009 there was 26.5 million tonnes of production versus 40 million tonnes of capacity. The exchange rate also impacted unit cost indicators (US$ per tonne) which diminished competitiveness to a certain degree. Moreover, the industry deals with some traditional Brazilian business constraints. Brazil has one of the highest tax rates in the world, as well as logistics bottlenecks in a domestic market where costs are increasing. As a result, Brazilian steelmakers are struggling to stay competitive with lower cost steel imports. The Brazilian steel industry is investing in increasing its competitiveness by implementing programs to increase innovation and reduce costs. In the long term it is expected that these measures will help companies achieve a greater level of profitability.

The industry is also investing in all the stages of production and the supply chain. This includes backward integration into mines

13 “Vale’s mega ships to stall maritime recovery for years,” Reuters News, 10 December 2010, via Dow Jones Factiva, © 2010 Reuters Limited

and energy generation as a way to hedge costs, to forward integration into logistics and cold lines (mills) to be closer to clients, while retaining the hot lines (blast furnace to slab). The steelmakers are also offering value-added service with products, e.g., just-in-time deliveries and technical assistance.

Source: ABARE, World Steel Association, September quarter 2010

Figure 14. Steel production and consumption trends in Brazil

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The Brazilian steel industry has significant growth potential as it has low per capita consumption of steel of 103kg in 2009 versus the global average of 190kg. Brazil’s steel production has grown at a CAGR of only 1.8% between 2001 and 2010. However, production in 2009–10 increased by around 20% year on year, while consumption increased by more than 30% during the same period, due to the smaller base in 2009.

Source: World Steel Association, 2010

Figure 15. Net trade of Brazil

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Brazil exported 33% of its total steel production in 2009, with major export destinations being Asia (48.1%), Latin America (25.2%) and North America (9.1%).14

Outlook for Brazil

Brazil’s steel industry should achieve strong growth in the next few years due to the rise in demand from the domestic economy as well as the low cost of production of steel due to strong raw material linkages of the local steel players. Steel sales in Brazil recovered rapidly following the recession due to the robust real estate sector, and increases in vehicle sales and consumer durables. The macroeconomic factors are positive and hence the demand from these end-user sectors should sustain in the short term. The imports meet 20% of the apparent steel usage and are expected to increase in line with economic growth of the country.

Russia

“Post-crisis recovery and expected WTO accession boost domestic and export demand for Russian steel.”

Russia is the fourth-largest steel producer in the world, producing 60 million tonnes in 2009, and the second-largest exporter of semi-finished and finished steel products during the same period. Following the global financial crisis, Russia’s steel sector is now recovering aided by the Government’s support of steel-intensive industries, such as automotive, manufacturing, machine building, oil and gas, and energy. This has created higher steel demand in the domestic market and Russia should surpass pre-crisis production levels in 2011. Steel producing companies in Russia are better placed for raw material integration compared to their global peers. Companies such as Severstal is 100% self-sufficient in iron ore and coking

14 Steel — 2009, Brazil Steel Institute, 2009 15 World Steel Association, 200916 Russian steelmakers, Aton LLC, 25 October 2010, via Thomson Research

coal, Novolipetsk Steel (NLMK) is 100% self-sufficient in iron ore and 80% self-sufficient in steel scrap and Evraz is 91% and 84% self-sufficient in iron and coking coal respectively16.

Source: World Steel Association, ABARE, September quarter 2010

Figure 16. Steel production and consumption trends in Russia

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Russia is a major exporter of steel and it is estimated that 47% of the country’s total output in 2010 was destined for international markets. In 2010, there has been a steady recovery in steel production but it still remains below its all time high. Consumer spending is expected to increase in the country, in line with the expected economic growth, which should, in turn, increase the domestic demand for steel products.

Future mid-term growth is well supported by export appetites of the Russian oil and gas industry. Gazprom and Transneft megaprojects assume investing US$25 billion in the construction of new pipelines connecting Eastern Siberian deposits with Asian markets. Additional Russian steelmaking capacities will be utilized as a result of an expected boost in exports after Russia accesses the World Trade Organization (WTO). According to Russian Government officials the accession to the WTO is expected to occur during 2011 that will bring gradual removal of antidumping tariffs imposed by 28 countries on Russian steel.

Evgeni Khrustalev CIS Mining & metals leader, Ernst & Young, Russia


Domestic future demand for steel will also be supported by an anticipated increase in industrial construction and infrastructure development mainly in the Russian Far East, Eastern Siberia and Polar Urals as a result of foreign direct investment improvement after Russia’s accession to the WTO. This is accompanied with over US$100 billion investments in expansion and modernization of metallurgical sector assumed by Russian Ministry of Industry and Trade in its strategy until 2020.

Figure 17. Steel production and exports

Source: Russian steel, ING, October 2010, via Thomson Research

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Different approaches for different markets

As steelmakers operate in many different markets, the difference in outlook for a developed economy and an emerging economy will mean that steelmakers will have to take into account different considerations depending on where their production facilities are based. Some of these include:

Steelmakers in both developed and emerging countries will need to seek cross-border opportunities to manage the input costs of iron ore and coking coal. Strong balance sheets are required to make acquisitions so steelmakers may need to look for less obvious targets or smaller deposits in which they can either partially or fully participate. Steelmakers will also have to apply discipline to increase their management of working capital needs and hedging the new paradigm of indexed raw material pricing.

Developed markets Emerging marketsEstimating future end user demand, sizing the business correctly and taking into consideration the right product mix: long versus flat, semis and tubes.

Continuing to take advantage of demand growth and matching production capability to the growing local market demand.

Protecting the top line by moving away from production-led companies to new customer-centric companies by reorganizing the commercial function and gaining a better understanding of what customers want and value. It is also possible to either move distribution centers or service centers to emerging markets or make acquisitions to gain market share where demand is growing or for vertical integration.

Harnessing the technological know-how of the producers from developed countries to maximize production, step into value-added product spectrum and increase energy-efficiency.

Hedging increasing power costs. Managing increasing power needs which also compete with other growing industries.

Table 1: Strategies for different markets


Raw materialsIron ore and coking coal are the most important raw materials needed in Basic Oxygen Furnace (BOF) route of steel making.

Iron ore

In 2009, 1.7 billion tonnes of iron ore were produced. Almost 80% of this production came from only four countries; Australia, China, Brazil and India. In terms of exports, Australia, India and Brazil contribute approximately 80% of total global exports in the industry. On the other hand, China is the world’s largest importer, importing a substantial 628 million tonnes in 2009, over 65% of all global imports.

The emergence of China as a major commodity producer, as well as consumer, has lead to paradigm shifts in the iron ore markets. Although China has around 20 billion tonnes of iron ore reserves, the quality of the ore is poor (20%–30% iron content). The country has used up almost all of its iron ore reserves with more than 50% iron content, making it dependant on Australia and Brazil to meet its requirements. Australia, which boasts of large quality iron ore reserves, is presently the dominant player in the global iron ore market, and its access to ports gives it the required edge over other exporting countries. In contrast, both Russia and Brazil struggle with the lack of sufficient infrastructure to get increasing amount of iron ore to market. Last year, more than 90% of the Brazilian exports exited through the ports owned by Vale and CSN, with small iron companies struggling due to a lack of infrastructure to support their exports.

Figure 18. 2008–09 iron ore production and reserves

Source: U.S. Geological Survey, Mineral Commodities Survey, Raw Materials Group, Stockholm, www.rmg.se, January 2010

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There was a structural change in the pricing of iron ore in early 2010, with steelmakers agreeing to the demand of mining majors to exchange the annual benchmark negotiations with quarterly contracts. The quarterly prices are determined such that upcoming quarterly prices are the average spot price for the previous quarter. Going forward, this volatility in quarterly pricing of raw materials might lead to convergence of quarterly contracts to monthly contracts, which ultimately finally lead to spot pricing of iron ore.

The move to quarterly contracts was driven by the current chronically tight supply of iron ore, which gave miners increased negotiating power. For March 2011, contract prices for 62% iron ore content (Free on Board, Australia) are estimated to be approximately US$137 per tonne, which converts to an average price of US$132 per tonne in Japanese Fiscal Year 2010 (JFY), registering a rise of 119% year on year.

This iron ore shortage and resultant high prices has led steel producers to increasingly seek captive iron ore supply to boost their self-sufficiency and remove this volatility from their business. In the first 11 months of 2010, 16 of the 68 steel transactions were to secure iron ore and coal supplies. Over the next 5–10 years, ArcelorMittal, Usiminas and Gerdau plan to be self-sufficient and not rely on third-party iron ore.


Outlook iron ore

Based on current scenario for 2011, prices are likely to remain stable with an upward bias, while supply will still be tight. Beyond 2011, the market is expected to remain relatively tight and prices are likely to ease only in 2013 and 2014 when significant new production is due to come on stream.

Coking coal

Coking coal, which forms a major part of raw material costs in the steel value chain, may remain in deficit due to supply side infrastructure constraints. Japan remained the biggest importer of coking coal and China the second-largest net importer in 2009, with the coking coal market expected to tighten further. The main reason being that steel production growth during the year was higher than coking coal, with its quality continuing to deteriorate as a result of the depletion of high-quality coking coal reserves. Besides Japan and China, the European Union and India remain the major importers of coking coal. Imports from India are expected to increase further as some of the sector’s largest companies need to source coking coal to fulfil their requirements, with their needs expected to increase further in the near future. On the supply front, Australia remains the biggest exporter of coking coal, whose exports may not rise in line with the global coking coal demand due to the lack of infrastructure to support growth. Australia and Queensland, in particular, supplies more than 60% of global metallurgical coal needs. Although many ongoing projects will expand capacity, it may not be sufficient to support increasing global demand.

The price for high-quality hard coking coal for December 2010 quarter was settled at US$209/tonne, a 7% decline on the previous quarter. Further growth in demand from Asian steel companies is expected to underpin a tight market for the next few years. Australia will remain the largest exporter of coking coal, accounting for more than 60% of forecast world trade in 201117. However, there are new countries appearing on the world coal map with large ambitions such as Mozambique and Mongolia.

China’s import demand for coking coal is sensitive to changes in domestic production. China’s emergence as a net coking coal importer in 2009 has changed the demand-supply scenario of the coking coal industry. China, which imported only 7 million tonnes in 2008, imported 36 million tonnes in 2009, driven by rapid steel production growth. There are a number of factors affecting China’s import demand, including the relative production costs of overseas and domestically produced coal, the relative costs of international freight and domestic transport, and infrastructure support in China.

Outlook for coking coal

Prices of coking coal will remain firm on the back of strong demand from China and India. However, India, which historically did not produce coking coal domestically, will see brownfield expansions becoming operational within a year, thereby increasing supply to some extent. While the World Steel Association predicts a slowdown in steel production growth in China during 2011, in absolute terms, China will remain the world’s leading steel producer. To feed this production, China will need to import around 45 million tonnes of coking coal per year18.

17 ABARE, September quarter 201018 The New World Economy & the Global Met Coal Market, Massey Energy Company, 2010


Other challenges for steel manufacturers Infrastructure

Iron ore and coking coal, which were regional plays a couple of years ago, are now major export objects in the seaborne trade. Over the last decade, mining countries with reserves in coastal areas and proximity to China have gained significantly. However, infrastructure remains the key concern for further growth. Although Australia is arguably in the best position to export its raw material, it lacks the infrastructure to increase its exports. Brazil has also not been able to increase its production over the last couple of years due to logistic bottlenecks, despite having one of the best mining resources in the world. However, recent investments, such as Vale’s Chinamax carrier, may help in improving the logistical bottleneck in Brazil.

Among BRIC countries, where the future of the steel industry lies, Russia has abundant resources but its facilities are too far from ports to make the export profitable. India, which exports more than 100 million tonnes of iron ore, may not be able to increase it much further due to infrastructure issues and, moreover, the raw material demand in the country is expected to remain high enough to consume any increase in production. The North American region, one of the largest untapped reserves in the world, will require higher iron ore and coal prices to make it viable enough to extract the minerals and export them. The lower increase in steel prices as compared to the rise in raw material prices has put pressure on the margins of steel players. Raw material prices are expected to remain firm due to infrastructure supply constraints whereas steel prices may not rise much on account of oversupply in the China region, leading to margin squeeze of steel players, especially the non-integrated producer19.

19 Global Metals and Mining Sector - Infrastructure is the key, Deutsche Bank, October 2010, via Thomson Research

Table 2: Coking coal trade

Coking coal imports ( million tonnes) 2008 2009 2010FEurope 73 41 46Japan 66 66 73China 7 36 45Korea 20 16 18India 24 23 27Brazil 16 13 14Others 28 26 29Total imports 234 221 252Coking coal exports ( million tonnes) 2008 2009 2010FAustralia 137 131 148Canada 26 22 22US 39 34 47Russia 13 11 17Others 19 23 18Total exports 234 221 252

Source: The New World Economy & the Global Met Coal Market, Massey Energy Company, 2010


Regulatory environments and mining laws

During 2010, the Australian Government was working towards the imposition of a resource rent tax on iron ore and coal miners. This is in line with many other countries imposing similar resource taxes or increasing royalty burdens on mining companies. The higher tax or higher royalty payments burden on companies has resulted in a further slowdown in investment in mining assets, which may in turn push up prices of iron ore and coking coal. Moreover, environmental clearance has become a key challenge for the expansion of mining companies, especially in India. The Indian Government has come up with a proposal that the mining companies should share 26% of their profit with the local residents, displaced or affected. This law, if passed, along with the new provisions of Forests Rights Act (FRA), will constrain the growth of the mining industry in the country. Although FRA provides a legal recognition of the rights of traditional forest communities, it

may curtail the growth plans of mining companies and also deter further foreign investment into the mining sector in India.

The price recovery

Global steel output reached its highest monthly production of 125 million tonnes in May 2010. Since then, output has declined mainly due to a slowdown in Chinese production to reach 114 million tonnes in November 2010. However, the average global capacity utilization remains below 80%, giving a view that the world has an installed capacity to produce around 150 million tonnes of steel per month. This excess capacity could pose a risk to the recovery in steel prices in certain markets/products categories. Any recovery in prices will tempt the steel producers to restart idle capacity, and again affect the supply-and-demand balance, provided the increase in production is purely on account of price dynamics and not on the basis of a rise in demand.


2. Indian steel industry

“India will be the next landmark on the global steel landscape. The Indian steel dream is one shared by global stakeholders – with leading producers, investors and suppliers keen

to participate.”

Anjani K Agrawal Partner and Sector leader mining & metals, Ernst & Young, India

We expect India to be a dominant player in the global steel sector. With its large steel industry and robust economy, it has the strong foundation to become a leading force in the global arena. India is expected to register a sustained GDP growth of 8%–9% for years to come which would make it a significant contributor to incremental growth of the global economy.

In a growing global economy, the steel industry is the backbone of modern industrialization. As key amongst the basic

industries, the steel industry triggers growth across several downstream industries and the services sector.

Why India will be the next landmark on global steel landscapeThe global steel outlook is optimistic, with 7% growth expected in 2011. The BRIC countries are tipped to drive the majority of the growth in the sector. Of the emerging markets, the structure of the Indian economy, its stage of evolution, market size, growth rate, cost base and potential resource base should drive unprecedented growth in the Indian steel sector over the next decade. Reforms made to the investment environment should attract several global players, thus making India a prime destination for investment in steel.

The Indian steel industry has witnessed robust growth during 2005–10, with production (crude steel) and consumption (finished steel) registering a Compound Annual Growth Rate (CAGR) of 7.05% and 8.50%, respectively. India was the world’s


fifth largest producer of crude steel in 2009. This growth has been driven by capacity expansion and improved capacity utilization. Even in 2010, the steel sector witnessed steady growth and has exceeded the pre-crisis level. As per World Steel Association, the monthly average production of crude steel up to November 2010 stood at 5.5 million tonnes which, when annualized, gives a production of 66 million tonnes for 2010.

Over the past few years, consumption has been primarily driven by the continuous increase in infrastructure-related investment, leading to higher demand for steel. During the recent financial crisis, the Indian steel sector remained resilient due to strong domestic demand from Indian end users. Consequently, in 2009, when global steel consumption witnessed a year on year decline of 8.5%, steel consumption in India remained flat. However, the country’s per capita consumption is still one of the lowest in the world, presently standing at around 60kg per capita versus 430kg for China and a global average of approximately 190kg.

Figure 19: Finished steel consumption (2005–2010)20

Source: Annual report 2009–10, Ministry of Steel, Government of India

*Data annualized untill December 2009

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Capacity additions not keeping pace with rising demand

The Indian steel industry faces a supply deficiency as capacity increases have lagged increases in consumption. Large greenfield projects have not been set up in India over the past few years due to regulatory, social and infrastructure bottlenecks. Capacity additions in the short term are primarily brownfield projects by existing players.

India imports steel as supply lags demand

India has been a net importer of steel since 2007 and the demand/supply gap is expected to widen over the next five years. India imported 2.1 million tonnes of steel during the April-June 2010 period, giving an indication that imports during 2010 may be higher than the last year. Over the next three years, around 20 million tonnes of brownfield expansions are expected to become operational, which may reduce steel imports in the medium term. In the long term, due to the difference between demand and supply, India may still remain a net importer of steel as most of the planned greenfield expansions have been delayed due to land allotment laws and environmental clearances issues.

Figure 20. Capacity, production and utilization numbers (2005–2010) for crude steel

Source: Annual report 2009–10, Ministry of Steel, Government of India.

* Data annualized untill December 2009

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Figure 21. Net export/import for finished steel

Source: Annual report 2009–10, Ministry of Steel, Government of India

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The competitive landscape The resilience of the Indian steel industry and its competitive position is summarized in the following five forces analysis:

Low to moderate threats from new entrants

The steel industry is capital-intensive, and hence the first barrier for new entrants is the financial outlay involved in setting up a steel plant. The set-up period in India is also extended due to the challenges of land acquisition and other regulatory procedures. These issues have been a barrier to entry for many global steel producers in the past, and many are now undertaking joint ventures with established Indian groups.

Low degree of internal competition

Industry competition is minimal as the Indian steel sector is a supplier’s market. About 47% of crude steel production can be attributed to four major players: Tata Steel, JSW Steel, SAIL and RINL. These companies are expected to contribute to the majority of new capacity through their brownfield projects. Demand in the sector outpaces supply, and this excess demand is met by imports. However, several multinational steel companies are keen to enter the Indian steel market. Once they set up their operations, there will be greater

competition for resources, talent and market share, which will reinvigorate competition.

Minimal threats from steel substitutes

A number of innovations have given aluminum and plastic properties that are comparable to steel. Materials such as carbon fiber, plastic and aluminum alloys have replaced steel in the automobile industry. However, usage of these substitutes is not cost-effective and lacks some of the inherent qualities of steel. It seems unlikely that these substitutes will replace steel in some key end-user segments in the short to medium term.

Vertical integration

The major players in the industry, such as Tata Steel and SAIL, have vertically integrated to secure raw materials. For example, Tata Steel is self-sufficient in iron ore and coking coal supply, and SAIL is self-sufficient in iron ore but imports most of its coking coal requirement. The rest of the players in the Indian steel industry have varying degrees of self-sufficiency and

Figure 22. The state of India’s competitive steel environment

Source: Ernst & Young analysis

New entrants—low to moderate

Limited number of new players asindustry is capital-intensive

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Substitutes—low

Steel industry faces a threat from aluminium and plastic industry

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Internal competition—low

Currently the competition among players is low because it is a supplier’s market.

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Entry of global players will intensify competitive landscape.

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Suppliers—moderate to high

The coking coal suppliers have considerable power

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Demand is high and currently outpaces supply.

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Price adjustments barely reflecting cost increase

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depend on raw material suppliers to meet their requirements. Iron ore miners, such as NMDC and Sesa Goa, represent around 35% of the iron ore production in India. Though iron ore production exceeds domestic demand, its pricing is impacted by influential global majors. On the other hand, coking coal suppliers have considerable influence on the steel industry as India has a shortfall of coking coal and imports more than 70% of its requirement.

The cyclical and volatile nature of prices for both commodities is a major risk to non-integrated steel players.

Fragmented customer base drives pricing

Demand for steel depends on the needs of end-user industries. Currently, supply cannot keep up with industry demand and India is importing cheaper steel from China and special steel from South Korea and Japan. The construction and infrastructure sector constitutes more than 60% of the demand for steel in India. The supply side being more consolidated than the end user segments generally have a greater influence on the pricing decision.

Strong domestic demand drivers The key variables for steel consumption in any country are the growth rates of sectors such as manufacturing, consumer durables, construction, capital goods and services. The demand drivers in India continue to be strong and indicate far higher consumption of steel in coming years.

Infrastructure: the key driver of steel consumption in India

The construction and infrastructure sector is the largest consumer of steel in India, accounting for 61% of total steel consumption in 2008–09. According to Planning Commission projections, total investment in the infrastructure sector in the Eleventh Five-year Plan (2007–12) is around US$450 billion and the Twelfth Five-year Plan (2012–17) expects investment of approximately US$1 trillion, indicating that demand for steel from the sector will remain strong. In FY10, an expenditure of around 7.2% of GDP was spent on infrastructure and the Government aims to increase this to around 9% of GDP by 2014.

Figure 24. Investment in infrastructure

Source: Neha Kapur, Indian Economy: Update, August 2010, Ernst & Young

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Figure 23. Steel consumption

Source: Steel products annual review, CRISIL Research, July 2009

Construction andinfrastructure, 61%

Auto, 8%

Capital goods, 11%

Consumer durables, 3%

Packaging, 5%

Others, 12%Figure 25. Investment in infrastructure (percent of GDP)

Source: Juggernaut is starting to roll...with a few links missing, India: Construction: Infrastructure, Goldman Sachs via Thomson Research, 11 October 2010

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Primary demand is expected to come from ports, oil and gas, power and construction in the near future. Mega investments in infrastructure by China have been a prime driver of steel consumption for several years, and India’s huge investment in infrastructure should further fuel this demand. In addition, it is expected that urbanization will further increase the demand for steel.

The current power deficit will drive capacity additions in India. During the Tenth Five-year Plan (2002–2006), demand for power increased at a CAGR of 6.2% and availability by 5.8%, thus widening the deficit. The Government of India envisaged

Sector Key opportunities

Power Government targets adding 100,000MW capacity by 2012

Both generation and transmission capacities being enhanced significantly

Oil and gas Pipeline network, city gas distribution, refinery infrastructure installation and upgrading

Roads and highways National Highway Development Program (NHDP)

Plans to construct and upgrade more than 50,000km of national highway by December 2015

Railways Dedicated Rail Freight Corridor (DRFC) network expansion lagging freight growth; this will need to be expedite

Ports Port traffic is estimated to increase by a CAGR of about 12% during 2010–2012

Water and waste management The Jawaharlal Nehru National Urban Renewal Mission is expected to increase steel consumption

Table 3. Opportunities across the infrastructure sector

capacity additions of 100,000MW by 2012 and launched several initiatives including the Ultra Mega Power Projects to address the chronic power shortages. However, capacity additions during the Eleventh Five-year Plan have fallen behind this target, leaving a widening gap to be bridged during the next plan period.

Demand for steel is also expected to come from the huge network of pipelines to be laid over the next few years for oil and gas transportation. It is estimated that the pipeline network for liquid fuel transportation is likely to grow from the present 16,800km to 22,000km in 2014.

Other major steel consumers in India are the automobile and capital goods sectors. Demand from both these sectors has grown significantly over the last few years.

Automotive: the next manufacturing hub in India

The automobile sector grew by 27% year on year in 2008–09 and is estimated to continue to increase in double digits as the launch of low cost passenger cars is likely to expand the market and demand.

Production of two wheelers grew by 15%, while cars, commercial and utility vehicles grew by 26% in 2009–10, and double digit growth is expected in the medium term. With many automobile manufacturers increasing capacity by establishing manufacturing operations in India, not only is the demand for automotive steel expected to be robust, but the high-quality,

value-added steel segment will also see immense growth. The auto component industry grew by 20% year on year between 2009 and 2010 to reach a turnover of US$22 billion, and is estimated to grow by 18% year on year between 2010 and 2011 to reach US$26 billion.

Capital goods sector to accelerate demand for steel

The capital goods sector currently accounts for 11% of steel consumption, and has the potential to significantly increase in tonnage and market share. China’s steel consumption of more than 100 million tonnes for machinery production is a strong indicator of consumption in this sector. With the return of business confidence, burgeoning internal cash accruals and greater capital availability, corporate India’s capital expenditure plans should remain on a growth trajectory and generate greater demand for steel.

31

The shipbuilding industry is likely to undergo a fast-growth cycle due to increasing seaborne trade and coastal shipping trends, which will further push up demand for steel.

Outlook for domestic steel demand

Domestic demand for steel is anticipated to grow by around 10%-12% annually in the next two years on the back of forecast strong GDP growth.

Over the past few years, the demand for long steel has increased at a faster rate than for flat steel as a result of the Government’s focus on developing infrastructure. However, during 2009-10, the demand for flat steel also picked up strongly. The short-term demand forecast for both long and flat steel is positive with growth of about 10%-12% and 9%-10% respectively over the next two years21.

Figure 26. Estimated growth in steel demand

Source: Steel Products update, CRISIL Research, June 2010

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21 Steel Products update, CRISIL Research, June 2010

Global steel 2011 Paving the Boulevard of the Great Indian Steel Dream



China’s reforms began 13 years before India’s. Even at the commencement of the reform process, China was a more industrialized economy - “industry and construction” constituted 48% of its GDP, in comparison to 27% for India when it initiated its reforms in 1991. China has continued to focus on infrastructure. Its share of investment in GDP expenditure accelerated from 38% to 48% during the reform journey, while India’s grew from 25% to 32%.

In 1991, China produced 71 million tonnes of steel, which grew to 127 million tonnes by 2000. In the same period, India grew its steel production from 17 million tonnes to 26 million tonnes. In China, when steel production picked up pace after 2000 and grew exponentially to around 630 million tonnes in 2010, this was not surprising as almost 52% of China’s incremental GDP over the past five years has gone into investment. Although India registered significant growth during this decade, in absolute terms, China’s steel production is 12.3 times that of India’s.

Will India be able to replicate the growth in China’s steel industry?Over the last decade, China witnessed exponential growth in its steel industry, registering a CAGR of 17.2% in production and 14.3% in consumption. In absolute terms, China is expected to produce 630 million tonnes of steel in 2010 — around 47% of global steel production versus 151 million tonnes in 2001.

The ongoing debate is whether India should aspire to grow to such levels and, if required, whether it can replicate China’s growth model in the sector. The following indicators provide vital clues.

Parameters China to India ratio India’s lag in years

GDP 3.8 11.0

Industrial output 8.0 18.0

Steel production 12.3 18.0

Car sales 5.0 6.0

Bank loans 9.2 16.0

Elements China India

Reforms started 1978 1991

GDP composition – industry and construction – at the start of reforms

48% 27%

Share of investments in GDP expenditure at the start of reforms

38% 25%

Share of investments in GDP expenditure (2009)

48% 32%

Share of investments in incremental GDP over five years

52% 38%

Share of consumption in incremental GDP over five years

31% 56%

Table 4. China—India comparison

Source: Sizing up India and China, IIFL, 1 November 2010, via Thomson Research

Source: Sizing up India and China, IIFL, 1 November 2010, via Thomson Research

*Note: All figures are for 2009 or end of 2009 unless otherwise stated. For India, data is for the 12 month period ending in March of the subsequent year.

Figure 27. China and India - crude steel production and GDP growth

Source: IHS, Global Insights, ABARE, World Steel Association

0

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Grow

th (%

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2006 2007 2008 2009 2010 2011F

Real GDP growth of China Crude steel production growth of China Real GDP growth of India Crude steel production growth of India


Figure 29. Lending to infrastructure as a percent of total lending

Source: Juggernaut is starting to roll...with a few links missing, Goldman Sachs via Thomson Research, 11 October 2010

4.97.9 8.0 8.0 9.2 10.4

13.1

21 21.5 22.3 23.625.2 25.7

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India China

India’s GDP data for the past few years indicates that the economy is on a strong growth path. Steel consumption, which is positively correlated to GDP, is anticipated to grow in the coming years in line with the expectation that GDP growth will continue in the 8%-plus range. Like China, Indian steel sector growth will also be infrastructure-driven.

In summary, India does not need to emulate the volume achieved by China. However, the production must accelerate to meet the robust demand growth. The extent of increase in production growth rates will depend upon how the challenges are addressed by stakeholders.

China has invested heavily in infrastructure development to sustain high economic growth during the period. Investment in infrastructure development increased significantly after the country’s GDP crossed the US$1 trillion mark. This in turn fueled the growth in China’s steel industry.

India is currently following a similar trend. The country’s GDP crossed the US$1 trillion mark in 2009 and investment in infrastructure accounted for 7.5% of GDP, one of the highest globally. Infrastructure investments are expected to be close to 9.9% of GDP during the Twelfth Five-Year Plan (2012–17).

4.5 4.75.3

5.76.4

7.2

910 10

9 910

23456789

1011

Spen

ding

(% o

f GDP

)

FY04 FY05 FY06 FY07 FY08 FY09

Figure 28. Infrastructure spend

Source: Juggernaut is starting to roll...with a few links missing, Goldman Sachs via Thomson Research, 11 October 2010

India China

The difference between the two economies has been the level of lending to the infrastructure sector. On an average, lending to infrastructure as a percentage of total lending in China was around 28% and in India it was around 10% between FY04 and FY10. However, in India lending to infrastructure also grew to 13% in 2010 versus 7.9% in FY05, to support increased project activity.


Raw material availability — sufficient in iron ore but deficient in coking coalSufficient iron ore reserves

India is the world’s fourth largest producer of iron ore after China, Australia and Brazil, and contributed 9.9% of global production in 2009. The country consumed close to 100 million tonnes and exported approximately 110 million tonnes. Iron ore production grew at a CAGR of 10% between 2005 and 2009 and reached 226 million tonnes in 2009.

India has about 25 billion tonnes of iron ore resources — with a reserves base of 9.8 billion. Though India currently has sufficient iron ore, it must consider the estimated rise in domestic steel production in the near future and work towards increasing its reserve base.

Iron ore exports grew at a CAGR of 6.8% between 2005 and 2009, with China taking approximately 90% of these exports. The debate of rationalizing iron ore exports in favor of domestic use continues, while the Government has followed a mixed policy of increasing the duty on iron ore exports.

Figure 30. Production of iron ore

Source: Federation of Indian Mineral Industries, Ernst & Young analysis

142.7

180.9

206.9214.0

226.0

100

120

140

160

180

Mill

ion

tonn

es 200

220

240

2005 2006 2007 2008 2009

Figure 31. Export of iron ore

Source: Federation of Indian Mineral Industries, Ernst & Young analysis

78.184

91.4

68.5

108.554%51%

49%

32%

50%

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10%

20%

30%

40%

50%

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FY05 FY06 FY07 FY08 FY09

Exports (LHS) % of total production (RHS)

Coking coal deficiencies

India is deficient in coking coal. A significant percentage of Indian steel production is carried out using blast furnaces, with coking coal used as a reducing agent. India has the fourth largest proven coal reserves in the world but these are low quality and 83% of the total reserve is non-coking coal.

Over the last several years, the domestic supply of coking coal has lagged rising domestic demand, and as a result India imports a large quantity of coking coal, particularly from Australia. Coking coal constitutes around 34%22 of total coal imports. India imported 23 million tonnes of coking coal in FY10 to meet the total requirement of around 40 million tonnes.

The demand for coking coal is only going to increase as new steel capacities come online in the next few years, with India’s coking coal requirement expected to reach 90 million tonnes by FY2023. Going forward, the scarcity of coking coal is expected to have a huge impact on the margins of steel manufacturers. The Indian coke industry is dominated by integrated steel players (ISP) as these facilities operate captive coke capacities. The ISPs produce around 40% of total coke in India annually. Secondary steel producers (SSP), which require around 10 million tonnes of coking coal per annum, rely mostly on imported coke as they do not possess captive coking coal facilities.

22 Manoj Chauhan, “Coal India Ltd. company profile,” Ernst & Young, December 2010 23 Coal Sector - The Impending Coal Crisis in India, Credit Suisse, 10 August 2010, via Thomson Research


The consumption of coking coal is estimated to increase at a CAGR of 11.6% between 2009 and 2014, whereas the production is estimated to remain almost the same during that period. This is likely to result in further widening of supply and demand in the domestic coke market. To meet this gap, the captive mining and import of coking coal is expected to grow at a CAGR of around 15% between 2009 and 2014.

Outlook for the Indian steel industryThe Indian steel industry is expected to experience robust growth, as long-term positive indicators (such as strong demand from key end-use sectors and iron ore availability) exceed challenges (such as land allotment issues, shortage of coking coal and environmental clearances). The goals set by the Indian Government to grow the steel sector are encouraging and are reflected in the number of Memorandum of Understandings (MOUs) the central and state governments have signed for greenfield projects. Steel growth has a direct correlation with the GDP growth of a country and as a basic industry it propels downstream industrialization as well and hence it is expected to remain in the key sector for the Government.

Great potential ahead due to rising demand

The Indian steel industry has made significant progress in recent years backed by strong fundamentals. Even during the economic slowdown, the industry succeeded in sustaining positive growth, driven by strong domestic demand from the construction, automobile and infrastructure sectors. The progress made by private sector players in brownfield expansions is significant. There is much upside in per capita consumption of steel in the country from its low base of around 60kg, with the increasing demand expected to lift per capita consumption to far higher levels.

Capacity additions by major steel producers to meet increasing demand

India was the world’s fifth largest producer of crude steel in 2009 and is expected to become the world’s second largest producer by 2015–16 if all planned capacity expansion projects become operational. Projects which are expected to be operational in the next three years include those by Tata Steel, JSW Steel, SAIL and Essar. Based on collated data and estimated project completions, total crude steel capacity in India is expected to be around 112 million tonnes by 2015, a growth rate of 9%.

Figure 32. Growing coking coal demand

Source: Coal industry annual review, CRISIL Research, November 2009

37.6 41.045.6

52.858.7

65.0

23.0 22.7 22.4 22.2 21.9 21.7

0

10

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70

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–09

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Demand of coking coal Production


Table 5. Expected capacity additions

Crude steel capacity (million tonnes) year-ending 31 March

2007 2008 2009 2010 2013F 2015F

Tata Steel (India) 5.0 5.0 6.8 6.8 9.7 12.7

Essar Steel (India) 4.6 4.6 4.6 4.6 9.2 9.2

Ispat 3.6 3.6 3.6 3.6 3.6 3.6

JSW Steel 3.8 3.8 3.8 7.8 11.0 11.0

RINL 3.5 3.5 3.5 3.5 6.3 6.3

JSPL 2.9 2.9 2.9 2.9 6.9 6.9

SAIL 13.8 13.8 13.8 13.8 18.0 24.7

Bhushan Steel 0.3 0.3 0.3 0.3 2.2 5.1

Bhushan Power & Steel 1.4 1.4 1.4 1.4 1.4 1.4

Others 17.9 20.9 25.6 28.1 29.2 31.6

Total crude steel capacity 56.8 59.8 66.3 72.8 97.4 112.5

Source: India Steel Sector: India An outperformer in steel, BNP Paribas Securities, via Thomson Research, 19 October 2010

International steel majors are expanding their Indian presence

Attracted by the growth potential of the Indian steel industry, several global steel players have been planning to enter the market or have announced expansion plans for their Indian businesses. For instance, Arcelor Mittal and POSCO have planned mega greenfield projects at various locations in India.

Some global players have entered strategic partnerships or joint ventures with Indian steel majors as they feel that greenfield projects may take longer to become profitable, while established companies already have their existing customer base in the region. For instance, Arcelor Mittal has acquired a significant stake in Uttam Galva, while Sumitomo Metal has partnered with Bhushan Steel for technological and marketing collaboration, which may be extended to equity participation in future greenfield projects. JFE has also joined JSW Steel as a strategic partner, with a 15% equity share. SAIL has entered a joint venture with POSCO to have FINEX technology at its Bokaro plant. And more strategic alliances and joint ventures are in the pipeline.

Challenges and issuesThe Indian Government’s plan of reaching 200 million tonnes in steel production by 2020 may appear ambitious against the progress made so far. However, relative to what China has achieved over the last 10 years, this target can be achieved. Keeping in mind that India aims to be the world’s second largest producer of steel, there are several constraints and issues that need to be addressed. Many of the risks and challenges are the same the world over — below are those relevant to India.

Scarcity of coking coal

As previously discussed, the availability of coking coal is a key issue for the Indian steel industry because of the scarcity of the resource in the country which will have a huge impact on the production target. The industry also would have to address the issue of volatility in coke prices, which erodes margins for steel producers.


Raw material price volatility

During 2010, there has been a significant rise in global spot prices for raw materials such as iron ore and coking coal, due to a surge in demand from China. However, global steel prices have not increased significantly as demand in the Western world is still below pre-crisis levels. During the year, quarterly coking coal contracts were priced at US$200/tonne and iron ore contracts were priced at US$130/tonne. Steel prices traded in the range of US$575-US$600/tonne. This means cost pressures are inevitable for non-integrated steel companies in India. However, the extent of the pressure would depend on the level of vertical integration.

The level of vertical integration for the three largest steel companies has the following impact:

Steel Authority of India, the largest public sector steel •

producer, has full integration of iron ore and sells more than 95% of its steel production in India, making it more resilient to changes in global price volatility. However, dependence on coking coal has squeezed margins in 2010.

Tata Steel (India), one of the world’s low-cost steel •

producers, enjoys healthy margins in its domestic operations as it has full captive sources of iron ore and substantially for coking coal.

JSW Steel lacks full integration within India in iron ore •

and coking coal, so it is more exposed to changes in raw material prices.

All the major steel producers in India are trying to secure raw material for their future needs by acquiring mines or entering into joint ventures. However, strict land acquisition laws can slow the process.

Complicated regulatory regime

There are many green-field projects being planned in India by steel majors. However, the execution and implementation of these projects is presently a gray area in India’s steel growth story. Cases in point are the greenfield projects of Arcelor Mittal and POSCO, which did not progress even after five years of their announcements. The major issues faced by the companies are related to land acquisition, mining lease securitization, forest clearances, and relief and rehabilitation (R&R) policies.

“Demand for steel in India is growing at the rate of 12%–15%. We expect demand to grow exponentially over the next few years. On the flipside, the severe shortage of roads, rail and

ports will limit the natural evolution of steel consumption and will debilitate the creation of steel supply.”

Mr. R. K. Miglani, ChairmanUttam Galva Steels Limited

While such challenges are generic to large projects in several parts of the world, India has the following specific issues:

Land requir• ed for large projects comes into conflict with social set up — almost 70% of land is covered by agriculture and forests further accentuating the lower land — population ratio.

Certain inadequacies in the land acquisition regulations •

(e.g., definition of public purpose, compensation benchmarking, coverage of displaced persons).

Divergence between states’ and central legislation •

and procedures.

Of late, some projects in the mining and metals sector have been stalled under the Forest Right Act (FRA), which is to safeguard the social rights of the forest-dwelling tribal population residing in that area. The Act allows the players to acquire the land only after the consent of the residents in the area or the people dependent on that area. Most mining resources lie in the tribal belt of the resources rich states of Orissa, Chhattisgarh and Jharkhand, which have recently seen local community uprisings.


The Government is cognizant of the situation and seeks to work out solutions keeping with its inclusive growth agenda. The draft mining bill addresses some of these issues. The issues are complex and need sustained efforts towards building consensus. The industry is also consciously moving to obtain this social license to operate by partaking in development of communities and is well advised to address the longer-term sustainability issues.

Inadequate infrastructure

The major impediment to growth in the Indian steel sector is inadequate infrastructure. A robust transport framework is required to support and facilitate the volumes of steel production planned. The lack of availability of quality infrastructure and logistics will have cost and supply chain implications. Huge investments are required in key infrastructure areas such as railways, roads and ports.

Constrained railway haulage capacity

The Indian railway network was more advanced than that of China’s until 1995. Now, it is constraining the growth of the mining and metals sector due to inadequate investment. Over the last 15 years, there has only been a 3% growth in the railway network. The railway network only has a 30% transportation market share, despite being a cheaper and faster mode of freight movement than road.

To help Indian railways gain a bigger share of the freight market, in 2005 the Indian Government offered licenses to private players to start container operations in the country. However, the rail container sector still accounts for only about 1% of the cargo handling market.

Congested ports

About 70% of the total port traffic in India is handled by the western ports of Jawaharlal Nehru Port Trust (JNPT), Mundra, Kandla and Pipavav. Port traffic is estimated to increase at rate of approximately 12% between 2010 and 2012.

Figure 34. Growth in port traffic

Source: India Transportation: Sea and Land Cargo-Let the rough, Nomura International ( Hongkong) Ltd., 18 February 2009, via Thomson Research

636718 719

799882

989

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CAGR ~ 12%

FY11F FY12F

The port development plan established by the Indian Government in FY06 predicted port traffic of 1,009 million tonnes with planned capacity of major ports to be 1,002 million tonnes by FY12. However, actual capacity additions are lagging24.

Currently, Indian ports face issues such as low productivity, high costs and large vessel turnaround periods. With dependence on low ash coking coal and export/import of steel set to increase in the future, the importance of port infrastructure to the steel industry cannot be underestimated.

24 India Transportation: Sea and Land Cargo - Let the rough, Nomura International ( Hongkong) Ltd., 18 February 2009, via Thomson Research 25 Railways: Uncertain today clear tomorrow, IDBI Capital, via Thomson Research, 8 October 2010

Figure 33. Breakup of freight handled in India

Source: Logistics: Container Rail-Thrive (al) of the fittest, IDFC Securities, 1 December 2009, via Thomson Research

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Inadequate road infrastructure

Roads carry 57%25 of the freight traffic in India. The flexibility and “last mile connectivity” that road transporters offer have increased their share of road haulage, even though road transport is relatively more expensive than rail.

Out of the total road length of 3.3 million kilometers, national highways and state highways comprise merely 6%, with almost no expressways. National highways comprise only 2% of the total road length but carry about 40% of the total road traffic,

which clearly indicates the stress suffered by the existing road infrastructure. The steel production target will require increased haulage via the road network, thus the road network must be expanded and upgraded.

India’s huge appetite for steel consumption and its steel production plans appear to be in line with expected demand over the next few years. However, the country and all stakeholders need to work on resolving the challenges to enable these ambitious plans for the sector to be met.


Strategic accelerantsThe Indian steel sector is in a strong position to expand its production, driven by higher demand from domestic consumers and good reserves of iron ore. Ongoing exploration for coal and coking coal reserves in India as well as the policy changes on land acquisitions will aid rapid developments.

Further to the steelmakers’ responses during 2010 (page 13), the following approaches can be considered by stakeholders to accelerate the sector growth in India.

Develop Special Purpose Vehicles (SPVs) for steel hubs

The Ultra Mega Power Project model for adding capacity in power generation is achieving success in India. The Government can adopt a similar initiative to develop a model in the mining and metals sector. The major issues faced by steel companies in India are land acquisition, forest and environmental clearances, and allocation of raw material resources. A nodal agency, in coordination with state and central governments, can create a SPV for each major project hub, obtain all necessary clearances and link resources before inviting globally competitive bids to undertake the project.

It will help fast-forward capacity addition at most logical locations, address all socio-economic and environmental needs, and ensure competition. The premium from the bidding can be partially used to develop local communities and create enabling infrastructure. As these steel hubs will be identified and planned well, the stakeholders (e.g., government, railways, ports, mining companies, steel producers) can work out a plan to create the infrastructure more effectively and efficiently.

Expand rural demand

The per capita steel consumption in rural India is around 2-3kg, compared to the national average of around 60kg, indicating a huge potential market. To capture latent demand, the steel industry can innovate products/applications to cater to the needs of rural customers. For example, the industry can partner with communities and local bodies to provide lightweight, prefabricated structures to build centers for education and health care. Partnerships can be explored with Panchayat Raj institutions, non-government organizations and microfinance institutions, to finance the initial expenditure. Eventually, the higher volumes may help in pricing products appropriately for the market.


Improve logistics and supply chain management

Every tonne of steel produced requires the movement of four tonnes of material. Inadequate infrastructure and the immaturity of the logistics sector have significantly impacted the steel industry, with serious cost implications. The steel industry should evaluate and pursue the following four initiatives to address the issues:

1) Transform the network structure – ensuring that material is moving on the most optimal network and mode (around 60% of tonne kilometers is covered through costly road transportation). Investing in creating the nodes at the right location and if required, teaming with integrated logistics service providers (3PL/4PL) to help build the most optimal infrastructure is likely to yield long-term results for the steel industry. Enhanced usage of inland container depot (ICDs), logistics parks, Free Trade Warehousing Zones (FTWZ), etc., is also expected to help create a more robust and economic network.

“In addition to productivity improvements and securitization of resource needs, the Indian steel industry should focus on developing products that meet customers’ needs, many of

whom are becoming more sophisticated.”

Mr. Malay MukherjeeChief Executive Officer, Essar Group Steel Business


2) Improve the utilization of logistics assets – steel companies should leverage existing assets for better throughput. Improvements in maintenance and planning typically result in better utilization.

3) Improve the efficiency of logistics operations – lower turnaround times in the network lead to poor operational efficiency, resulting in demurrages and detentions. Higher visibility of information along the supply chain, improved planning, and collaboration between various service providers would improve the efficiency of logistics operations. Most of the additional costs currently incurred by the steel industry can be attributed to inefficiency in logistics operations.

4) Optimize the logistics configurations between mines, plants, railways and ports – to achieve economies of scale, mining and steel companies can work together to build infrastructure assets.

Iron ore — assess, process and value-add

Although there has been considerable debate on iron ore export versus retention for value-add, no policy framework has been developed for the long term. The Government and other stakeholders should conduct a comprehensive economic impact assessment of ore exports versus steel production. A strategic long-term view on the subject has to be formed, keeping in mind the relatively lower Reserve—to—Production ratio of iron ore.

However, in the short term, India is a surplus producer of iron ore and exports mainly comprise of fines, which are not used much at present by the Indian steel industry. With the installation of pellet and sinter plants, Indian players can look forward to adding more value domestically as pellets and sinters bring significant premiums compared to fines. Moreover, the conversion of iron ore fines at the mine head arrests environmental pollution and waste.

Sector-level strategy for sourcing raw materials

Indian players can attempt to develop sector-level alliances to increase buying power and exchange knowledge for mutual benefit. China Iron & Steel Association (CISA), on behalf of China’s steel industry, has been negotiating raw material prices with global mining majors. India, which imports a large amount of coking coal, can have a sector-level strategy in place for its sourcing. Similarly, the consolidation of iron ore resources can make sourcing easier and may bring down production costs.

New technologies offer cost reduction avenues

The productivity of Indian steel majors has been low compared to global peers. New technologies may not only increase the productivity of Indian companies, but they could help to reduce raw material costs or even address constraints. For instance, SAIL has entered into a joint venture with POSCO to use the FINEX technology at its Bokaro facility. In FINEX, molten iron


Business risks in mining and metals

These papers summarize the top mining and metals business risks. In 2010, mining and metals companies faced issues such as capital allocation, skills shortage, cost management, resource nationalism and maintaining a social license to operate. To read more about the risks both above and below the radar as well as other insights, you can access them at ey.com/mining.

is produced directly using iron ore fines and non-coking coal, rather than processing through sintering and coke making, which is essential to traditional blast furnace methods. The construction of a FINEX plant costs less than a blast furnace facility of the same scale. Furthermore, reduction in production costs is expected through cheaper raw materials and lower facility costs, pollutant exhaustion, maintenance staff and production time. In addition, it is eco-friendly in that it produces less pollutants such as sulphur dioxide, nitrogen dioxide and carbon dioxide than the traditional methods of producing steel.

Special steel production

The present product spectrum of major Indian steel producers is tilted towards commodity steel but that is changing. The value-added steel not only commands higher margins, but its demand is growing fast due to global automobile players aggressively expanding their presence in India. Indian steel majors are collaborating with foreign players to access advanced technologies in specialized steel. Several partnerships are being announced between Japanese and South Korean companies and Indian players.

Increase in exploration and development activity

India has abundant natural resources but has not been able to fully leverage these resources. With the future growth of the steel industry dependent on the secure supply of resources, survey and exploration are important activities in the value chain. Exploration and survey activities in India are very limited. The annual budget of the Geological Survey of India, which is responsible for geological mapping and resource assessment, was US$87 million. This is substantially lower compared to other major steel-producing countries. Scientific exploration can help discover new reserves and mining organizations can jointly work on mega projects to consolidate mining areas for greater efficiency, reduced wastage and risk minimization.

Strategic focus on risk

The steel sector is undergoing significant structural changes, e.g., vertical integration by players, shifts in value creation toward resources, cost curve changes. These changes increase the need for agility, risk-reward ratios and rebalanced expectations of return on capital expenditure. Steel companies would be well advised to continuously refresh their understanding of strategic risks and evaluate related mitigation plans.


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Tata Steel 2010 annual report•

JSW Steel 2010 annual report•

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Notes

Ernst & Young’s Global Mining & Metals Center

With a strong outlook in the sector, the global mining and metals industry is focused on future growth through expanded production, without losing sight of operational efficiency and cost optimization. The sector is also faced with the increased challenge of changing expectations in the maintenance of its social license to operate and meeting government revenue expectations.

Ernst & Young’s Global Mining & Metals Center brings together a worldwide team of professionals to help you achieve your potential – a team with deep technical experience in providing assurance, tax, transactions and advisory services to the mining and metals sector.

The Center is where people and ideas come together to help mining and metals companies meet the issues of today and anticipate those of tomorrow. Ultimately it enables us to help you meet your goals and compete more effectively. It’s how Ernst & Young makes a difference.

Global Mining & Metals LeaderMike ElliottErnst & Young, AustraliaTel: +61 2 9248 [email protected]

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