By Sreekumar Raghavan/Commodity Online
MUMBAI: Steel stocks may be down, steel prices may be going through the roof causing inflation to go up in India and allegations of cartelization fill the air, but the country is poised to be the 3rd largest steel producer by 2013.
Strong local demand and global fundamentals will drive Indian steel ouput to 100 mn tonnes from 53 mn tonnes in 2007. Steel demand is expected to grow 4-5% over next four years despite recessionary conditions in USA due to rising share of emerging countries in global GDP.
According to Goldman Sachs, global steel supply will continue to remain tight in2008. Investors can look forward to 2009 with hope as it will present a challenging operating environment for steel producers.
Indian steel consumption has accelerated from 3.4% in FY02 to 11% in FY07 and the momentum is likely to be maintained on the back of US$540b infrastructure investment and US$210b capital expenditure by various industries
Among the factors that enable India to reach the third position include: higher domestic prices of finished steel due to strong local demand, lower iron ore costs due to trade surpluses, lower transportation costs due to proximity of mines, skilled manpower pool at low costs, and local coal availability, according to an assessment by Motilal Oswal Securities Ltd sent to its clients recently.
Strong Local Demand
There are only five producers of Hot Rolled Coil (HRC) currently that manage their sales such that there are no surpluses in the domestic market.
Thus, re-rollers have the option either to buy locally or import, thereby prices are based on import parity, which is generally higher due to factors such as: high sea freight, import duty of 5% and high inland transportation costs.
The prices for long products are marked up over the cost of import price of steel scrap.
India is a net importer of steel scrap due to poor local generation and high consumption
from a large number of mini mills. Therefore, long products too are priced higher.
Lower iron ore costs.
India has rich iron ore reserves. The annual production of iron ore is above 160m tons and 60% of this is exported. Total global trade of iron ore was 750m tons in 2006 and Indian iron ore exports of 95m tons were the third largest next only to Australia and Brazil.
The Indian iron ore industry being largely fragmented, miners are left with no choice but to sell at export parity prices. The high grade iron ore mines are located in Karnataka, Chhattisgarh, Orissa and Jharkhand.
Miners at these locations have to bear high inland transportation costs to send iron ore to the ports, about 400-600km away. Shortage of railways rake forces them to incur roadway transportation costs that are several times higher. Additionally, miners are liable for export duty of Rs300/ton.
Therefore, prices of iron ore at the mine mouth are far lower than international prices. SAIL, Tata Steel, Jindal Steel Power have captive mines and are thereby insulated from input price risk.
