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S. Muralidhar

THE domestic steel industry's woes at the beginning of the millennium and the remedial measures that have since been taken have not been in vain. The cost rationalisation and the improved price realisations have helped steel manufacturers cope with increased raw-material costs, of iron ore, coke and so on, and still post good growth in profits.

Manufacturers such as Tata Steel have simultaneously managed to boost the quality of steel produced to global standards and brand the value-added products in their portfolio. The strength that the domestic steel industry has gained over the past three years was also tested earlier this fiscal, when steel prices fell, though only to recover later.

Pricing trends

Fiscal 2002-03 was witness to the most dramatic upward movement in steel prices. Though there was a plateauing in the pricing trend line of both hot rolled (HR) coils and cold rolled (CR) coils between February and June this year, the prices have gone back to the levels that existed at the start of the year.

The steel industry has not had it this good . Thanks to the sharp focus on costs and the need to reduce overheads that the downturn in prices brought during 2001-02, the jump in prices later became a leap for steel companies' bottomlines. The big rise in Tata Steel's profits and the turnaround of Steel Authority of India (SAIL) are examples of the beneficial effect that the price increases have had on profitability.

However, steel prices during the first few months of this year have been extremely volatile. Steel manufacturers who were rejoicing the sustained price levels in the export markets were jolted by the sudden, sharp fall, by nearly 30 per cent, in HR prices within a short span of four months. Between February and June, the prices of HR steel fell from a peak of $350 per tonne to about $250. The prices of CR steel fell by a smaller 18 per cent. While the volatility in steel prices is likely to continue, the industry expects them to stabilise by the year-end.

Says Dr A. S. Firoz, Chief Economist, Joint Plants Committee, Ministry of Steel, "The steel industry worldwide is immune to periodic downturns in steel prices. Therefore, the recent price drops resulting mainly from excess speculative bookings from China need not affect long-term profitability."

Reflecting the same level of optimism regarding the price trends, Mr J. Mehra, Director, Essar Group, says that "steel prices have been subjected to five cycles since 1995. Currently, they are on an up tick led by growth in demand and consumption in China. There may be marginal dips from here but this will be temporary. This phase will give opportunity to the domestic market to adjust its demand and supply mismatch witnessed earlier."

With equilibrium in steel demand and supply will come stability in steel prices. The current global overcapacity in steel production is expected to even out slowly. OECD countries have identified 140 million tonnes of unviable steel capacity to be phased out over the next two years.

Similarly, the proposed merger of three large steel companies in the US could lead to a rationalisation of steel manufacturing capacities in that market.

However, these developments are also likely to be delayed owing to political compulsions in those countries.

Domestic demand

The domestic demand for steel in fiscal 2002-03 grew at about 4 per cent. Growth in the first quarter of this fiscal has also been a lower than expected 4.9 per cent. In 2002-03, the country's total production of finished steel is estimated to be about 33 million tonnes.

The low growth in domestic demand during a year when steel prices climbed steeply to touch 2001 levels did not hurt steel companies, thanks largely to the substantial increase in demand in the export markets. However, there is a looming prospect of a slowdown in the export markets in the months to come, partly because of some additional capacities in China going on stream and the possibility of further trade actions in the US and the European Union restricting imports from countries such as India.

As a result, the steel industry is keenly looking towards increased demand in the domestic market. There are a few pointers to a possible kick up in domestic demand that will enthuse steel makers.

For one, the good progress of the monsoon is expected to lead to a rural economic recovery and, consequently, a jump in rural demand for long products steel. The possibility of a revival of housing and construction activity in these areas is brightening. The current estimate for GDP growth during this fiscal is put at over 6 per cent. Given that 2004 is election year, the healthy growth rate is expected to be carried over to the next fiscal too.

Further, except for electricity generation and distribution, the other steel user segments, such as manufacturing, transportation, construction and shipping, registered good growth rates last fiscal. Projections for these user segments during the current fiscal are also encouraging.

The Government's recent announcements on the golden quadrilateral road project, the proposed modernisation and expansion of the country's ports and the planned expansion of the Railways' network are all potential demand generators for the industry. The Tenth Plan document talks about a railway track renewal plan for about 34,990 km; the recent spate of accidents also highlights the need to rehabilitate and rebuild old bridges and culverts.

However, the past two years' announcements by the Government have not been acted upon and until these plans fructify, the likelihood of any pick up in the Centre's steel demand would be low.

Exports, the growth driver

The country's steel exports, which had been stagnating during the three years of 1999-2000, 2000-01 and 2001-02, recovered in the fiscal just ended.

Exports of finished carbon steel during 2002-03 rose by an industry-wide average of 13 per cent and crossed 3 million tonnes for the first time.

The growth in export revenues has been even better, thanks to the higher price realisations in the export markets. Though steel exporting companies have also been able to discover new markets, China has been one of the major and preferred destinations for Indian steel. However, the sudden outbreak of SARS and the resultant slowdown in economic activity in China had hit Indian exports temporarily earlier this year.

As regards the export performance, Mr J. Mehra feels that the rising trend is likely to continue. "China has been restructuring and steel prices have turned around on the back of strong demand there, which is growing at 10-15 per cent. This year, China is expected to buy 20-25 million tonnes of steel."

Future trends

Despite the projected increase in demand from China this year, the steel industry is still worried about the possibility of a slowdown in purchases by China by 2004-05. This could happen on account of two reasons:

The infrastructure development work related to the 2008 Olympics may start slowing by that year, and the coming on stream of additional steel producing capacities in that country.

India's exports have also been marginally hit by trade actions initiated by , among others, the US, Canada and Thailand. However, Essar's Mr Mehra is optimistic that Indian steel exports will continue to be on an uptrend. "Exports to the US are not large and has been lower than the threshold 3 per cent level. Certain value-added products, which are exported, have a long way to go before they touch the 3 per cent barrier," he said.

"However, Indian steel sector must exercise caution so that we do not breach the magic 3 per cent mark and attract restrictions. However, fears that similar restrictions may be imposed by China are unfounded," he added.

Though India's steel exports to China have remained lower than 3 per cent, it is growing fast. Indian industry has already initiated a consultation process so that exports to China do not suffer due to the imposed restrictions.

Though the real pluses in performance by the steel companies have been on the export front during the last fiscal and the first quarter of this year, growth is likely to come from a revival of domestic demand. With better acceptance of Indian steel by the domestic automobile, components and consumer goods industries, domestic steel consumption will rise.

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