Financial Daily from THE HINDU group of publications
Thursday, Dec 30, 2004
Industry & Economy
Steel: Eventful and action-packed year
Shyam G. Menon
Mumbai , Dec. 29
THE steel industry's story in 2004 was within the parameters set for its short to medium-term evolution. Almost two years ago those ground rules were laid as economic growth in Asia, led by China, stretched commodity supply lines worldwide.
The scenario in 2004 was one of raw material shortage, steep raw material costs and high finished steel prices. The latter was a constant bone of contention between steel producers and users. As steel prices rose, users battled to contain the impact and eventually passed on costs to the market. With it, the government dug out threats of a price controller.
High price is a fertile cause for product substitution though real threat to steel in this regard is still far off. The Indian Steel Alliance sailed through choppy waters after one of the biggest players, Tata Steel, dropped prices by a hefty margin of Rs 2,000 per tonne on hot-rolled products. Within a day or two, price corrections were in place across the board in the sector.
Price aside, industry developments of 2004 were mostly a continuation of the previous year's trends, including the strong financial results quarter to quarter. As with any trend progressing towards maturity, the Chinese dragon's huge appetite was further tracked and doubts voiced on whether it was edging closer to a dessert. That would be exaggeration, but consensus on the subject was that the dragon's appetite could begin to slow down. Still, with that happening on a fatter base, its imports would continue to be sizeable.
From a global perspective, there are other large economies such as India, waiting to push up steel consumption. Something, the domestic steel industry is aware of. More than ever before, there are infrastructure projects now readied for take-off and once that happens, home demand itself could be a reason for buoyant steel prices.
Price pressure on raw materials is not projected to ease any time soon (Sesa Goa's Rs 1,000-plus stock price is often cited as example) and one or two big domestic companies have rehearsed growth strategies on a zero duty basis.
With high raw material price, high freight rates and booming steel demand, industry consultants were quick to outline the future trend - consolidation. Indian steel makers had reason to preen as L.N. Mittal's steel conglomerate emerged the biggest.
Domestic steel companies medium to small-sized players compared to the giants abroad also drew up expansion plans. In July, Steel Authority of India Ltd disclosed its corporate plan that envisaged raising hot metal production from 13 million tonnes to 20 million tonnes at an investment of Rs 25,000 crore.
It was based on a projected Indian steel consumption of 55-60 million tonnes by 2011-12.
Rashtriya Ispat Nigam announced a three phase-expansion plan extending up to 2018 that would enhance its steel output to 10 million tonnes. The required investment: Rs 18,000 crore.
Tata Steel, for long involved with keeping production cost low, decided to hike production capacity to 15 million tonnes by 2010. By August 2008, its capacity at Jamshedpur would touch 7.5-8 million tonnes. It was slated to start work on its six-million-tonne Orissa project and was in talks for another integrated steel plant of three million tonnes capacity. Further, it acquired the Singapore-based NatSteel having two million tonnes capacity.
Jindal South West Holdings (JSW), the combined entity of Jindal Iron & Steel Company and Jindal Vijaynagar Steel Ltd, plans to raise capacity at its Karnataka facility to four million tonnes. It has tied up funding for the Rs 1,275-crore project. JSW was also raising capacity at its recently acquired Southern Iron & Steel Company Ltd (Siscol) from 3,00,000 tonnes to 8,00,000 tonnes at a cost of Rs 400 crore. And, the Jindals are planning a five million tonne-steel plant in West Bengal.
Besides strong financial results and capacity expansion, another urge across steel companies was to secure raw material supply, at times through investments in mining. It was not an isolated step. Commodity players from different fields resorted to backward linkages as clarity on the eventual outcome of China's growth game, including the shift in global consumption as a result, evaded pundits worldwide. With the endgame unclear and stretched supply lines being sole palpable truth, hedging risk via such investments appeared wise.
It also turned the spotlight on India's iron ore reserves. At year's start, when the idea of bartering Indian iron ore for Chinese coke did the rounds, a riveting industry presentation was tabled at a seminar. Simply put, the world's biggest steel makers were located in places bereft of huge, good quality iron ore deposits. India has large reserves of ore. But should it open up access to it when there is a bright steel future at home? Is it not a strategic asset?
The debate divided industry as Posco sought to locate its first major investment outside Korea for steel making, in Orissa. It indicated the cost pressure, even insecurity, in which the global steel industry functions at present. Part value addition in one place, with finished steel made elsewhere could be a panacea.
The Chinese are doing it in Brazil, the Indians are planning something similar, so why not the Koreans? In 2005, questions for steel companies could be such, less price trends, which are a global certainty.
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