India’s growing dominance of the global steel market was put in perspective last month by Sajjan Jindal, the vice chairman and managing director of steel major JSW Steel at the Steel Survival Strategies XXIV conference where he was honoured with the prestigious Willy Korf/Ken Iverson Steel Vision award.
"I feel very fortunate that at this time in the steel cycle I am in India and expanding our business in an expanding market," he said, attributing India’s increasing clout in the steel domain to government policies that were providing ‘tremendous incentives’ to the industry.
Jindal observed that while global steel production and consumption numbers for May 2009 clearly showed that most regions were experiencing negative growth, the only exceptions were China with a more or less flat growth of just 0.6%, and India which was way ahead with a 9.5% growth rate.
Sharing his positive outlook is a recent ASSOCHAM paper on the way forward for the domestic steel industry.
The paper notes that, “possessing all the necessary factor advantages and also a rapidly growing domestic market, India is uniquely placed to become the steel hub of the world. Against a fast growing economy and ambitious 11th plan targets, the target set by National Steel Policy (NSP) appears to be very conservative.”
“At the forecasted growth rates of 6.9% by 2011-12, the country would end up with just 57MTPA of production capacity,” it adds. “However India’s steel demand having risen at a CAGR of almost 10% during the last 3 years along with the 11th Plan target of 12% manufacturing growth, the Steel Ministry and the industry should aim at much higher growth than the one set by the NSP.”
With the domestic market clearly showing signs of a demand revival, backed by strong Q4 numbers on production and consumption of steel, industry experts are optimistic that Greenfield capacity expansions are likely to re-emerge sooner in India vis-a-vis other countries. Infra projects key to growth Adding to the industry’s optimism are the many pro-industry proposals tabled in the recent budget. The FM has approved a huge boost for infrastructure spending and rural housing that could translate into new business opportunities for the steel sector. Among the key measures announced are 87% hike in fund allocation for the Jawaharlal Nehru National Urban Renewal Mission (JNNURM), a 45% increase for Bharat Nirman and a 63% jump (to Rs8883 crore) for the Indira Awaz Yojna that promotes rural housing.
The government has also proposed increasing the fund allocation for the Common Wealth Games from Rs2112 crore to Rs3472 crore which is expected to benefit the infra development and realty sector. As expected the budget has also given greater flexibility to the India Infrastructure Finance Company Limited (IIFCL), set up as a refinancing facility for infrastructure projects.
IIFCL will now be allowed to refinance 60% of bank loans for infrastructure projects in the PPP domain. Allocations for the National Highway Authority of India (NHAI) has also been hiked by 23% while NRHM allocation will be raised by Rs257 crore – both are positive announcements to boost the infra sector, signalling a increased demand for steel in the months ahead.
Raising the industry expectations is a recent PricewaterhouseCoopers (PwC) report that estimates more than US$500 billion worth of investment will flow towards India's infrastructure sector by 2012, to upgrade or build more roads, ports, railway lines and airports.
Not surprisingly, steel companies like Zenith Birla, the flagship of the Yash Birla group and leading player in the manufacture and export of steel pipes, tubes and hollow sections are quick to acknowledge the opportunity. “The government’s thrust, if backed by the required investments in the infra development sector will provide a much-needed fillip to the steel industry,” concurs MS Arora, executive director & CEO, Zenith Birla (India) Ltd. “Steel demand will definitely increase and our industry can also expect good orders,” he adds.
“The government’s planned focus on infrastructure automatically implies sunrise opportunities for construction, particularly steel construction due to its inherent speed and cost efficiency,” avers Dr. VR Rajan, joint managing director and CEO, Phenix VP, the Ahmedabad-based PEB and heavy structural steel company which has a capacity for 60,000 MTPA and targets the warehousing, factory building and infrastructure sectors.
Rajan is bullish that the spurt in steel construction will be visible over the next six months. “The positive signs are already there,” he stresses. “We intend to leverage this opportunity through our focus, product range, technical services and out-of-the-box thinking which allow us to acquire special products and skills that suit the individual requirement of every project.”
This wave of optimism among steel players fuelled by the expected demand increase caused by the government’s proposed infra push, is also endorsed by the Institute for Steel Development & Growth (INSDAG), the non-profit making organisation established by the Ministry of Steel and major steel producers, on the lines of the UK-based Steel Construction Institute.
“Infrastructure and construction sectors consume approximately 50% of the total steel production and have played a key role in the growth of the steel industry in India. The government’s infra initiatives have only improved the situation for the steel sector in India,” concurs Dr. RKP Singh, the institute’s director general.
“The opportunity is expected to improve even further when the housing sector recovers fully and fresh investments are infused in housing. Overall the situation for both steel and cement sectors, the two main raw materials for construction will remain positive,” he adds. Leveraging the infra boom
Leading steel companies are unanimous in acknowledging the huge opportunity offered by the government’s ongoing focus on developing infrastructure pan-India and the proposed mega investments into steel intensive sectors like the railways, power, ports and airports.
“We are well geared to meet the requirement of quality steel for the infrastructure sector,” avers Vikram Amin, executive director (sales & marketing), Essar Steel, the fully integrated flat carbon steel manufacturer that offers a product mix ranging from iron ore to ready-to-market products that cater to the automotive, white goods, construction, engineering and shipbuilding sectors.
Amin reveals that with nearly US$350 billion envisioned to be invested in the sector, the company is gearing up to meet the spurt in demand. He says, “With addition of new facilities, our production capacity will increase from the present 4.6 MTPA to nearly 10 MTPA. We have already commissioned a Pipe Mill, a state of the art 5-meter wide plate Mill (for customized higher grade steel requirements for the infrastructure sector). We are developing high strength galvanized (Zinc Coated) steel for meeting critical requirements.”
According to him, Essar Steel already enjoys extensive exposure to the infrastructure sector including highways & flyovers, railways, airports, ports, energy & power, oil & gas, telecom and urban infra. “All infrastructure majors are our customers,” he stresses. “The products that we supply include hot rolled sheets and plates, galvanised sheets and shot-blasted plates. We are also adding reinforcement (TMT) bars and structural steel to our product basket to enable construction companies to source their requirements from us.”
As part of its growth strategy the company is also actively consolidating its focus on the PEB or Pre-Engineered Buildings segment. “We already have an 80% market share in the segment and are jointly developing new grades of steel to meet the ever demanding steel requirements for this sector,” says Amin.
Tata BlueScope Steel Ltd (TBSL), the JV between Tata Steel and BlueScope Steel of Australia and a global player in the zinc-aluminium coated steel category with an annual capacity of 2.75 MTPA is also optimistic on the positive impact of the government’s infra focus. “The infrastructure and construction industry plays a key role for zinc-aluminium coated steel market in India,” explains Sureet Chatterjee, chief – marketing & business development, TBSL. “Zinc-aluminium sheets are used as roofing and walling applications apart from PEB which are directly tied to the construction sector.”
“The government’s fillip to the infrastructure sector will hence directly impact the zinc-aluminium (Zn-Al) market especially in sectors like airports, ports and railways where new buildings will come up and others renovated,” he adds. “Therefore business plans to tackle the opportunities are in place that will enable us to address the entire value chain which includes architects, building consultants, Indian Bureau of Standards and end consumers. The strategy should be to influence the entire value chain with specific plans for each link so that the concept of steel buildings is understood and gets acceptance.”
While broadly targeting the manufacturing, commercial, infrastructure and residential segments, TBSL has three primary divisions – Coated Steel for Coated Coils (Specialty: Zinc aluminium coated coils. Key Clients: Kirby, Interarch, Multocolor, Lloyds PEB, Lloyd Insulation, Metco), Tata BlueScope Building Products (Specialty: Roofing & walling solutions. Key Clients: Delhi Metro, Delhi Commonwealth Games, Delhi Airport Authority, Indian Railways) and Tata BlueScope Building Solutions (Specialty: Pre-Engineered Buildings/PEB. Key Clients: M&M, Reliance, Hindustan Lever, Kohler India).
“Our upcoming facility at Jamshedpur will have the capability to make coils in thickness ranging from 0.25mm to 1.3 BMT (Base Metal Thickness),” adds Chatterjee. “Our Building Products division provides a complete range of roofing and walling solutions in addition to some unique solutions for the low-cost housing sector.
“Our Building Solutions business also offers complete solutions in PEB for industrial purposes and warehousing. We also have downstream production facilities at three locations – Hinjewadi (Pune), Sriperumbudur (near Chennai) and Bhiwadi (Rajasthan). In short we have the capability to provide an array of customised solutions for the building construction domain.” Beating the global blues
While the domestic market has given steel majors reasons to celebrate, it’s the prolonged slump in the global market over the past three quarters that remains a cause for serious concern. It’s a trend that has not only adversely impacted the lucrative export market for domestic steel players but also forced a crash in the global prices for steel thereby putting profit margins under severe pressure.
Elaborating on the domestic repercussions of the global scenario and his strategy to counter the trend, Zenith Birla’s Arora says, “The global downturn has had a negative impact on our industry. The demand for pipes is considerably reduced with an added pressure on the prices and margins. Our main strategy has been to execute cost reductions in every activity and source the steel at the cheapest price possible. We are also negotiating with shipping lines and transporters to reduce costs.”
“The global meltdown has severely impacted our exports,” admits Amin. “However, we have been able to increase sales in the domestic market. This was possible because of our large presence in the retail segment. Essar has over 80 retail outlets across the country catering to the SME segment. Our expansion plan to increase capacity in Hazira is also on track and is due for completion on schedule next year.”
TBSL’s Chatterjee however offers a different perspective on the issue. He says, “The global slowdown has hit everybody but also thrown up opportunities. It has made companies focus on reducing wastage and overheads while simultaneously increasing efficiencies. Besides customer focus has assumed importance like never before with attention being focused on retaining customers by offering the best value for money which comes through knowing one’s customers better. Some have even begun looking for alternative markets and products better suited for large strategic markets.”
INSDAG’s Singh admits that the global situation has put pressures on both prices and margins for steel producers but stresses that the situation is not as bad as it’s made out to be. He says, “The accrued pressure on margins for Indian steel makers has reduced due to a fall in cost of key raw materials like iron ore and coke and a reduction in railway freight rates.”
“Having said that, raw material prices are sensitive to demand and may increase if the situation improves,” continues Singh. “However in the present context, although the margins have reduced, the situation is manageable if cost control measures are exercised by steel producers.” Key Challenges & Road Ahead
While domestic steel majors are upbeat about a spurt in demand from traditional sectors like infrastructure, construction, housing, consumer durables and automotive sectors, industry bodies like INSDAG point to key issues that could pose a serious threat to the sector’s growth plans.
“The shortage of coking coal, delays in allocation of mines to steel producers and securing forest clearance for mine allocation are just some of the key challenges faced by the industry which the government needs to address,” informs Singh. “We also need to focus on increasing steel consumption in rural development projects like bridges, electrification and housing to ensure the future growth of the steel industry in India.”
“The other major challenge faced by the industry is the dumping of steel at cheap prices,” adds Amin. “The Indian economy continues to be in positive growth zone making it an attractive destination to export steel. Cheap imports are hurting the steel industry and need immediate attention from the concerned authorities.”
While it remains to be seen how the government eventually addresses the issues raised by the industry, the emphasis on manufacturing and infrastructure development in the 11th Plan and the recent budget, if accepted by the government provides a bright outlook for the domestic steel industry. However, these are ambitious targets which would require host of changes in policies, institutions and governance and therein lays the biggest challenge of them all.
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