Riding a rising consumption growth – steel prices are set to soar during 2010. Though recession and ensuing economic slowdown considerably dented consumption growth during 2008-09 its unlikely to influence demand-supply gap significantly in coming years. After reaching the highest point during July-August 2008, steel prices declined by more than 50-60% in the aftermath of the global recession. Since then, prices are on a strong upward ride with prices in the international market also firming up. For example, prices of hot rolled coil (HR) which, in the fourth quarter of 2008-09, were ruling at about 29,500 per MT, are currently at around Rs 32,000-35,000 per MT. That’s about an 18% increase. Its highly likely that high prices will persist, given that HR coils are used primarily in the automobile industry.
Steel Production : India is the 5th largest steel producer in the world, producing 55 MT steel that accounts for 7% of total global production. Steel production in India has increased by a compounded annual growth rate (CAGR) of 10.03 per cent over the period 2001-02 to 2006-07. During the same period – CAGR of world steel production was 8.3%.
The National Steel Policy has a target for taking steel production up to 110 MT by 2019–20. With the current rate of ongoing greenfield and brownfield projects, the Ministry of Steel has projected India's steel capacity is expected to touch 124.06 MT by 2011–12.
Thanks to establishment of new state-of-the-art steel mills, acquisition of global scale capacities by steel makers, continuous modernisation and upgradation of older plants and backward integration into global raw material sources - India today occupies a central position on the global steel map. However, is it enough to quench ever rising thirst for more steel from India’s rapidly growing real estate, consumer goods and infrastructure sectors ?
Consumption Growth : In the midst of recession and economic slowdown – India consumed 26.49 MT of steel during April – September’ 2009, a growth of 5.7% over same period last year on account of improved demand from sectors like automobile and consumer durables. Today, Indian steel consumption accounts for about 5% of global consumption.
A Credit Suisse Group study states that India's steel consumption will continue to grow by 16 per cent annually till 2012, fuelled by demand for construction projects worth US$ 1 trillion. Given the low per-capita steel consumption figure of 35 Kg against 150 kg across the world and 250 kg in China – its only logical that steel consumption will rise rapidly in coming years.
Steel players like JSW Steel and Essar Steel are increasing their focus on opening up more retail outlets pan India with growth in domestic demand. JSW Steel currently has 50 such steel retail outlets called JSW Shoppe and is planning to increase it to 200 by March 2010. They expect at least 10-15 per cent of their total production to be sold by their retail outlets.
Essar Steel which currently has over 300 retail outlets across the country, plans to set up 5,000 outlets of various formats soon. It expects to sell 3MT of steel through the retail route in two years.
Demand Supply Mismatch : While demand growth has been robust, supply of steel has been tight in recent years. Structural issues like delay in capacity augmentation, land acquisition difficulties for new steel projects and other impediments such as floods in Australia and Indonesia, snowstorms in China and floods in Jharkhand and Orissa have played significant role in moderating supply level.
Import has been brisk - according to American Iron and Steel Institute (AISI), India imported 52,000 MT of steel during October’ 2009, a growth of 32% over previous month.
However, during the same period United States imported a total of 1,560,000 MT of steel including 1,177,000 MT of finished steel, bringing imports for the two materials up by 29% and 15% Month on Month respectively. This was the highest monthly total import figure since February.
With recession ending and global economy picking up– imports are rising, firming up steel prices globally.
Rising Input Cost: A major reason for increase in steel price is the cost-push effect of higher raw material prices. Contract prices of coking coal and iron ore are set to rise. Prices of iron ore contracts, which are due to be renegotiated early next year, are expected to be finalised at higher levels of anywhere between 10% and 25% over those of 2008-09. Iron ore contract prices in 2008-09 were sealed at $75 a MT, while coking coal prices were sealed at around $300 per MT. While in the current year, long-term coking coal prices have fallen to $128 per MT, in the spot market, prices are ruling slightly higher.
Expect Steel Prices to Rise in 2010 : December can easily pass off as a watershed month for long product prices. The thrust of about 9% in the last 4 days (Dec 19-22) has amazed all. Although the reason apparently is a Govt crackdown on illegal mining resulting in shortage of iron ore and sponge iron and a speculative one at that – it may as well be harbinger of price trend in new year.