There is a great deal of speculation on the sustenance of the rising steel prices in the global market. Various reasons for the hike are mentioned like rebuilding of inventories, improvement in economic indicators especially in the US and some emerging economies leading to demand growth from auto, infrastructure and a few other processing industries and above all ticking up of real estate market and higher infrastructural spending by China. Along with northward movement in prices of major raw materials — scrap, coking coal and iron ore — the finished steel prices are gradually regaining the levels ruling a year back. There are marginal variations in the spread between Billets and Rebars, HR and CR, CR and Coated products, but the rising trend in prices is clearly visible.
The rise in global prices has indeed justified the price hike in the domestic market of India and somewhat neutralised the direct impact of price increase on the user industries, some of whom allege that by influencing the government to impose a series of import-restricting measures, the price rise in the domestic market was more symbolic of meeting the gap in availability at higher price. The rising prices are particularly helpful for the industry engaged in brown field expansion and it can be safely predicted that unless the same trend persists for the next few quarters, it would be difficult for many of them to embark on capacity augmentation via green field expansion mode.
Organisation for Economic Cooperation and Development (OECD) in its latest report has focused on the issue relating to excess supply syndrome in steel engulfing the globe. It has rued the fact that notwithstanding falling prices, low capacity utilisation following subdued demand, slew of trade measures by the major consuming centres thereby becoming highly protective, excess capacity scenario and enhancement of self-sufficiency rates in the emerging economies are going to prevail. While Europe, Nafta, CIS, Africa, West Asia, Japan and South Korea have already eliminated or postponed steel capacities totaling 26.79 MT, expansion of around 100.4 MT has been undertaken by CIS, Latin America, Africa, West Asia, India and ASEAN countries.
China, which has already abandoned a few steel making capacities, is also in the process of addition in capacities mostly by their SOEs by around 28 MT by 2017. As a result the global steel capacities, currently at 2.32 billion tonne, are slated to reach 2.42 billion tonne by 2017 and a major part of which would be contributed by the emerging countries (80% of incremental capacity additions).
India is shown to complete a major portion of brown field expansion of around 30.8 MT between 2014 and 2017 to take its current crude steel capacity of 108 MT to reach 138.8 MT in next two years’ time at an average rate of 9.5% per annum. This appears to be a little optimistic, as by 2015 the capacity addition in India has been of the order of around 3 MT only, by 2.8% annually. Secondly, even assuming a higher capacity utilisation of around 90% of crude steel from the current level of 81% and assuming 90% conversion ratio of crude steel, the finished steel availability in the country by 2017 comes to around 112.4 MT.
The critical issue is if there would be adequate apparent steel consumption (ASC=domestic plus net of exports/imports) to take care of the total availability in 2017. The ASC has touched 80.3 MT in FY16 at an annual growth rate of 4.3%. At an average annual growth of 10% (highly optimistic though) in the next two years the total finished steel demand is likely to be around 97.2 MT by 2017, much below the projected availability.
Thus the capacity additions for India by 2017 contemplated by OECD have to be staggered by another two years in the minimum (by 2019 instead of 2017) to have a realistic assessment of the capacity augmentation scenario. Any capacity assessment has to be based on a clear perspective of demand scenario that is likely to emerge in the next few years to support the projected availability and arrive at self-sufficiency rate in the country since innumerable challenges faced by China after creating an over-ambitious steel capacity is too fresh a memory to forget.
The author is DG, Institute of Steel Growth and
Development. Views expressed are personal.