India: Low demand, supply constraints deepen crisis in steel sector
Tuesday, 21 February 2012 | 00:00
The domestic steel sector that supports the growth of economy's key manufacturing and infrastructure sectors is going through an unprecedented slowdown. Worse, the union government sees no silver lining in the horizon.
In fact, the ministry of steel has painted a bleak picture of the sector in the next Five Year Plan period (2012017) beginning this April. It has predicted a demand growth that would be lower than even that during the tenth Plan, while pegging production only a notch higher. Also, both the growth indicators would just be marginally up from the current Plan achievements.
Steel is one of the eight core infrastructure industries that have a combined weight of 38 per cent in the index of industrial production. A host of issues, including a historic low demand, supply constraints at the back of a lull in commissioning of green-field projects coupled with a severe raw material crunch from the ongoing crisis in coal and iron ore sectors, has brought down the sector's growth to an all-time low.
Such bottlenecks, added to a depleting production efficiency of the integrated steel majors like SAIL and RINL, have left the government worried. "The prospects of domestic demand appear grim and gloomy on the eve of launching the 12th Plan," according to the government's working group for the twelfth Plan, chaired by the then steel secretary P K Misra. "Also, all the macro-economic indicators point out the onset of overall economic slowdown of the Indian economy which will have a profound impact on investment," the body states in its recent report.
Both production and consumption of steel during the current Plan period -- at 5.8 per cent and 8.8 per cent respectively - were significantly lower than the 9.4 per cent and 10.4 per cent during the 10th Plan period. Even for the 12th FYP, the steel sector is unlikely to achieve a double-digit growth -- a goal that was initially set for the current Plan period. The government expects a modest 9.1 per cent growth in consumption through 2017, even assuming a high gross domestic product (GDP) growth rate of over 8 per cent, against 8.8 per cent over the past five years.
Steel demand grew by 8.8 per cent during the past four years of the current Plan period, compared to 10.4 per cent in the tenth Plan.
This financial year, consumption -- a measure of demand -- has grown by a meager 4.7 per cent so far, against a 6.2 per cent growth registered during the same period last year. Asia's third-largest economy consumed 56.8 million tonnes (mt) of steel between April and January 2011-12, as compared to 54.2 mt consumed last year.
One reason for the reduced demand is the lower share of commodity sectors (primary and secondary sectors) in the GDP growth.
The demand from automobile sector, a major consumer, has been identified as a dampener. The automobile sector projected a meagre 1.6 per cent growth in steel consumption this fiscal, against an over 7 per cent growth registered last year. Despite the slump in demand, India is going to remain a net importer of steel during the 12th Plan.
Another major hurdle for the steel sector is land availability for green-field steel plants. "Posco and Arcelor Mittal have been engaged with setting up green-field plants for quite some time," pointed out Misra. "However, the progress on this front is long drawn and time consuming. Land availability for mega green-field projects will continue to be a concern."
To add to the problem, the domestic steel industry has been losing ground on its traditional area of strength - availability of low cost and high quality iron ore - at the back of a severe clampdown on mining activities down south and large scale exports of iron ore. A senior official from the ministry said prices have remained high hurting steel companies' bottomline despite the slowdown in iron ore exports over the past some months. "This is a major concern," he told Business Standard.
The concern regarding the raw material for the 12th Plan is compounded by the current large-scale exports of iron ore and a huge shift towards steel-making through the BF (blast furnace) route which uses coking coal as an input. Indian steel-makers meet 70 per cent of their annual coking coal demand through imports.
The ministry holds state-owned miner Coal India Ltd (CIL) responsible for its ills. "The required drive for developing the coking coal assets has been missing in the growth strategy of CIL," according to the working group report.
The government wants steel production to grow from the current 62 MT annually to 108 MT by 2017. This would require an additional 91 MT iron ore and 47 MT coking coal. Overall, the long-term economic sustainability of the steel sector could be threatened by the inefficient use of resources, rising land and labor cost, rising interest rates, illegal mining coupled with iron ore exports and over-dependence on imported coking coal.