Steel Insight 1212

8/11/2019 Steel Insight 1212

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SPECIAL REPORT: STEEL

What hurdles need to be overcomefor India to achieve second top steel

producing status?

December 2012

By Anitha Krishnan,

Associate Editor, Metals

Platts


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PLATTS SPECIAL REPORT: STEEL | 2

What hurdles need to be overcome for India to achieve second top steel producing status?

Indias internal issuescontinue to hinder its lofty ambitionsof emerging as a force to be reckoned with in the global steelindustry. Steelmakers who brought online new productioncapacities in the last fiscal year were left to rummage aroundfor adequate raw material supplies. Others face delays in theirexpansion plans, and troubles with land acquisition, a lack ofadequate infrastructure, and bureaucratic delays continue to

obstruct new projects.

Further exacerbating the situation is the slowdown in Indiassteel demand growth. While market pundits remain confidentof demand burgeoning this decade, it is the slowdown inthe short-to-medium term coupled with weakness in exportmarkets that is presently worrying producers.

Not surprisingly, this year has seen Indian mills clamoringfor increased protection in their home market, and they havewitnessed three significant moves to this end.

In March, India raised import tariffs for certain flat steelproducts. Then in September it partially enforced a new qualitycontrol regulation for both domestic and foreign suppliers ofcertain products. And thirdly, Indian mills took to lobbyingNew Delhi to revise its economic partnership agreementswith Japan and Korea because of surging imports from thesecountries.

Their demands for greater protectionism at homenotwithstanding, Indian mills themselves have been seekingnew export destinations to offset the persistent weaknessesof markets such as Europe. While the Middle East, Africa andLatin America emerged as timely alternatives, Indian exportershave also shrewdly snapped up opportunities in markets whereChina is being checked on anti-dumping grounds.

This thrust on exports over the past two years was also partlyaimed at rerouting surplus Indian production, mainly flats. Thelongs market, in contrast, has witnessed the reverse situation,as dwindling supplies sent prices rallying and created a rare,though brief, window of opportunity for imports (see below).

The general consensus is that if 2012 was bad, 2013 could beworse, although the jury is still out on this. Industry participantsworry that decelerating economic growth and political

uncertainties both at home and internationally, along withmining scandals and liquidity tightness could choke a revival indemand in the coming months. But another school of thoughtfast gaining prominence is that following the recent years ofdouble-digit growth, a slower but more sustainable pace ofgrowth is the new normal for India.

OUTPUT LAGS CAPACITYCrude steelmaking capacity in India totaled 89 million metrictons/year in the fiscal year ended March 2012, up 14% year-on-year. But output was only 74 million mt, up only 4% y-o-y.Average capacity utilization levels fell to 83% in the last fiscal,after having sustained 88-91% for most of the past decade,data from the Indian steel ministrys Joint Plant Committeeshow (see chart 1)

Of the 11 million mt/year increase in crude steel capacity lastfiscal, about 8.6 million mt came from JSW Steel and EssarSteel completing expansion projects.

JSW Steel lifted capacity at its Vijayanagar works in thesouthern state of Karnataka to 10 million mt/year from 6.8million mt/year with the commissioning of a fourth blastfurnace in July 2011. All the additional capacity was directedtowards increased flat rolled steel production.

However, the following month iron ore production in Karnatakaskidded to a halt upon directives from the Indian Supreme Courtin the course of investigations into illegal mining operations.With no captive iron ore assets, JSW Steel has since seen

capacity utilization at Vijayanagar falling to as low as 60%before picking up to average 80-85% in recent months.

On the west coast, Essar Steel completed the expansion ofits Hazira works in Gujarat state in January 2012, rampingcapacity to 10 million mt/year, all for flat steel, from 4.6 millionmt/year previously.

But nearly 70% of Essar Steels ironmaking capacity, or about6.8 million mt/year, comes from six gas-based direct reducediron (DRI) modules. This configuration has proved unfortunate,as natural gas supplies have been crimped since early 2011

following production declines at its usual supply source. Essarhas been compelled to turn to expensive spot purchases andcapacity utilization at Hazira has averaged 50% for most of thisyear.

Meanwhile, state-owned Steel Authority of India Ltd (Sail) hadtargeted to lift crude steelmaking capacity to 21.4 million mt/year by FY 2012-13, from 13.8 million mt/year previously. It isnow expected to end this fiscal with installed capacity of about17 million mt/year, still well short of the target.

Source: Joint Plant Committee, Indian steel ministry

Chart 1 Indian steelmaking capacity, production


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DEMAND GROWTH SLOWSThe trend of stunted output growth has continued so far thisfiscal with finished steel production rising only 3.1% y-o-y toabout 37.5 million mt during April-September (H1 FY 2012-13),compared to a 9.3% y-o-y growth in the same period a yearago.

But in the face of decelerating demand growth, some industrysources reckon it is just as well that output is restrained. If wewere producing more, we wouldnt know where to sell it all,commented an Essar Steel official.

Real consumption of finished steel in India grew 5.4% y-o-yto 36.7 million mt during April-September. But some analystsattribute this healthy looking growth in part to low steelconsumption in the same period of the previous fiscal (up only1.8% y-o-y).

This October, the World Steel Association forecast Indian steel

demand growth would slow down from 7.5% in 2011 to 5.5%in 2012 and to 5% in 2013 owing to unfavorable domestic andexternal economic conditions.

UNSEASONAL PRICESThat domestic demand was sagging became more evidentwhen steel prices defied seasonal trends and tumbled in earlyNovember. This is traditionally when domestic demand andprices start to ascend as construction activity resumes afterthe end of the monsoons, and the festive season in October-November spurs sales of auto and white goods. This trendwas sorely missing from the Indian market this year, with steeldemand and market sentiments remaining muted.

In the domestic market, transaction levels for IS 2062 gradeA/B structural hot rolled coil, 3mm thick and above, fellgradually through the year to Rs 33,000-34,000/mt ($621-640/mt) ex-works in early October. At the start of the year priceshad averaged Rs 36,000-36,500/mt ($700-710/mt).

The lack of a seasonal pick-up in demand thereafter saw pricesfalling further to Rs 31,000-32,000/mt ($577-596/mt) ex-worksin early November.

In December, however, Indian producers have attempted toarrest the price decline by lifting base prices by Rs 1,000-1,500/mt ($18-27/mt) on the back of higher international pricesand a weak rupee ($1 =Rs 54.8).

IMPORT TARIFFS UPAs mentioned earlier, in a much anticipated move in March,India lifted the customs duty levied on imports of coatedand uncoated non-alloy flat steel products to 7.5% from 5%previously. Since alloyed carbon steel was exempted from thistariff hike, Indian imports of such material jumped by more than45% y-o-y during April-September, driven chiefly by supplies ofboron-added HRC from China (see table 1).

Russian and Iranian mills were also seen offering boron-addedcoils. The tariff structure was subsequently amended in Julyto include certain alloy flat steel products such as boron-addedmaterial under the higher rates.

TIGHTER QUALITY CONTROLFollowing an unsuccessful attempt last year, in March 2012 theIndian government announced plans to enforce a quality controlregulation by September which would require both domestic

and foreign suppliers of certain steel products to have theirmaterial certified by New Delhis Bureau of Indian Standards(BIS). Steel customers decried this regulation as a non-tariffimport barrier being sought by domestic steelmakers.

But given the lengthy registration process, the regulation wasenforced for only some products; for others implementationwas deferred until the end of March 2013 so as to allow moretime for foreign mills to have material certified.

Cold rolled grain-oriented electrical steel sheet and strip wasone product granted extra time a pragmatic move given

Indias complete dependence on imports and the fact that onlya handful of foreign suppliers had registered by September.

JAPAN/KOREA IMPORT SURGEThe above moves did little to stem steel import volumes intoIndia, which, on the contrary, surged by more than 35% y-o-yduring April-September. This was chiefly because suppliesfrom Japan and Korea swelled, as imports from these nationsare taxed at lower rates under the comprehensive economicpartnership agreements (CEPAs) they currently enjoy with India.

Table 1 - Indian imports of alloy steel(000t)

Apr-Sep 2012 Apr-Sep 2011

China 477 287

Russia 74 12Japan 70 48

Korea 51 69

Germany 41 46

Malaysia 16 1

Turkey 15 0

Total 917 626

* Includes Stainless



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The CEPA with Korea took effect from August 2009 and withJapan, two years later. Imports of Korean-origin HRC presentlyattract a 3.125% import tariff and those from Japan are taxedat 3.3%. These rates will progressively be reduced to nil withinfive years from the start dates of the agreements.

Over the past two years these nations have displaced China

as the top supplier of steel to India, much to the consternationof Indian producers. Imports of carbon steel originating fromJapan and Korea accounted for more than 37% of Indias totalimports during April-September 2012, and dominated flatproduct imports (see chart 2).

Indian mills have been demanding that New Delhi eliminatesteel products from the scope of the CEPAs, and some havemade thinly veiled threats to cut domestic prices at the time ofimport arrivals should buyers resort to foreign purchases.

EXPORTS SURGESignificant new steelmaking capacity in India began to becommissioned since early-to-mid 2011, which was alsowhen domestic steel demand had started to sag. Producersconsequently turned to exports to reduce the pressure on thedomestic market.

During 2011-12, overall Indian steel exports rose by more

than 11% y-o-y to reach 4.3 million mt, with flat productsrepresenting about 80% of the total, and in the first half of FY2012-13 exports topped 2.4 million mt. However, it should beremembered that export volumes account for only 5-6% of totalIndian steel production.

The most significant jump in export volumes was seen in thecase of hot rolled coil/strip, which more than doubled y-o-y inFY 2011-12. But while Europe had previously been the favoreddestination, it has now been replaced by the UAE, SaudiArabia, Africa and even some Southeast Asian markets [seechart 3].

ANTI-DUMPING BENEFITS

Indian exporters have been snapping up export opportunitiesin regions from which Chinese steel is being discouraged onanti-dumping grounds. For instance, Russias move to slap anti-dumping duties on imports of Chinese-origin organic-coatedproducts made it a new export destination for India. DuringApril-September 2012, Indian coated product exports to Russiamore than tripled year-on-year to 53,680 mt, making it the thirdlargest destination after the USA and UAE.

Ongoing inquiries in Thailand into the alleged dumping ofChinese-origin boron-added HRC saw some Indian producersmoving in to make sales there. Thailand has previously beena virtually non-existent market for Indian HRC on which the

country has levied anti-dumping duties of 27-32% since May2003.

CHANGING TRENDS IN LONGSSmaller steelmakers operating electric arc and inductionfurnaces have traditionally dominated more than 50% of Indiaslong products market, but they have been beset with issuesthroughout the year owing to electricity supply cuts, shortagesof raw materials and volatile input costs.

Consequently longs production has faltered since the beginning

of 2012, sending prices surging and generating unusualimport buying interest. Prices for 8-32mm diameter thermo-mechanically treated Fe500 rebar rose by at least Rs 3,000-4,000/mt ($59.6-79.5/mt) early this year to average Rs 40,000-42,000/mt ($795-835/t) ex-works in mid-March, while importoffers for equivalent material from Russia and Turkey averaged$720-730/t cfr India at the time.

However import buying interest evaporated shortly afterwardsas buyers reckoned that cargoes for any orders placed thenwould arrive at the end-May/early-June, just when themonsoon season was underway and construction activity wouldhave slowed down. Delayed monsoons and a quiet constructionmarket thereafter have dampened longs demand.


Chart 2 Indian steel imports, product-wise, origin-wise


Chart 3 Indian HRC Export Volumes by Destination


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Electric steelmakers are also being compelled by a newsteel quality control regulation to invest in upgrading and/ormodernizing their facilities, and the general consensus is thatthese developments will force smaller inefficient players outof the market. Expansions by Sail and state-owned RashtriyaIspat Nigam Ltd (RINL) in the longs sector will further shrink themarket share of secondary producers in the long run.

DRI CONSTRAINEDAlthough India is the worlds largest producer of directreduced iron (DRI, or sponge iron), a large part of it coal based,production has suffered on coal, gas and iron ore supplyconstraints, dipping by more than 10% in FY 2011-12 to 20.5million mt.

Larger mills are resorting to alternative fuel supplies for theirupcoming DRI plants. JSW Steel is installing a new 1.2 millionmt/year Midrex DRI plant at its Vijayanagar, Karnataka works,scheduled for a mid-2013 start-up, but the plant will be fuelledwith gas from the steelworks two Corex ironmaking units. Upuntil now this gas has been used for generating electricity.

LONG TERM OUTLOOKDevelopments over the past two years have significantlyaltered the Indian market and industry scenario. What hasremained unchanged however, are the usual predictions forambitious growth in Indian steel demand and capacity.

The India Steel Vision 2020 report, unveiled during the WorldSteel Associations annual conference in New Delhi thisOctober, forecasts domestic finished steel demand to more thandouble this decade to reach 155 million mt/year by FY 2020-21

from an estimated 71 million mt/year in FY 2011-12 (assumingthe GDP growth rate averages 8% during this period). Demandfrom the construction and infrastructure sectors is expectedto continue to account for more than 60% of domestic steeldemand, as it does today

SLOWER END-USER GROWTHThis demand forecast is despite the fact that the pace ofgrowth in most end user sectors is expected to slow downthis decade from previously seen levels, with the steepestdrop forecast for the automotive sector. Although this is stillprojected to achieve an annual growth of 11.5-12.5% thisdecade, higher than any other sector, the most recent half yearfigures suggest this could be rather too high.

Some pundits continue to make predictions of India achievingmore than 200 million mt/year of crude steelmaking capacityby the year 2020, a target that industry sources dismiss asovertly optimistic. Issues pertaining to land acquisition, rawmaterials availability, and inadequate infrastructure continue tohinder the development of new steelmaking capacity.

Foreign investors such as ArcelorMittal and Posco have sofar been unsuccessful in progressing their Indian steelmakingambitions, plans for which they had first mooted nearly adecade ago. The steel ministry has also dropped plans tofacilitate the development of ultra-mega steel plants. These

were large projects of 10 million mt/year capacity each forwhich the central and state governments were to guaranteethe availability of land, raw materials, infrastructure and otherresources. The steel ministry cited lack of support from thevarious state governments and other ministries governing land,mines etc. as reasons for shelving the idea.

Authors of the India Steel Vision 2020 report, however, remainoptimistic that the government will implement policies toeliminate these hindrances and accelerate growth in the steelindustry.

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