The Indian steel industry, at 55-60 million tonnes, is the 5th largest in the world, but dwarfed significantly by China?s 500-million-tonne gorilla. It has been growing at 8-10% over the last few years. The potential for future growth remains strong, as the per capita consumption of about 50 kg is very low compared to other countries. While the domestic demand has shown a steady and strong growth during the last decade, the economic crisis has changed the way the world steel industry is looking at India.
During the 2002-2007 period, the world steel industry was performing extremely well. Construction boom was on in almost every region of the world, be it the US, Europe, Middle East or China. Besides, cars were selling like hot cakes. The global steel majors, coming out of the gut-wrenching industry downturn of 1992-2002, were busy acquiring capacity and consolidating the industry. First Arcelor, and then ArcelorMittal is one example of such mergers. The only worry for the steel makers was the steadily increasing prices of raw materials. The emergence of the Chinese demand had a profound impact on the iron ore industry, with the Vale (then CVRD)/Rio Tinto/BHP behemoth already enjoying significant pricing power and their strategic position increasing every year.
In this environment, when the global majors looked at India, they saw an Industry which, at 35-40 million tonne, was only about a tenth of China?s. The capacities were either government-owned, or when in private hands, owned by entrepreneurial groups keen to expand rather than divest. Thus, they did not find any acquisition opportunities in the country. However, a distinguishing feature of India was iron ore. Not only was it present in abundance, it was to be given free to anybody agreeing to set up a steel capacity, and doing value addition. As per studies carried out by Ernst & Young, a captive iron ore mine improves the Internal Rate of Return (IRR) of a steel plant by almost 10% points or more. Since steel projects are significantly high cost (approximately $1 billion for every tonne of capacity, with minimum size of 2-3 million tonne), captive iron ore significantly improves the viability of a new plant. Besides, India was geographically strategically placed as far as demand was concerned. Other than domestic demand, neighbouring regions, both Middle East and South East Asia were net importers of steel. A low-cost capacity is always a boon in a cyclical industry.
This led to a race for announcing mega projects in the country. It started with Posco, followed by ArcelorMittal. A lot of other global majors also looked at India, spoke to central and state governments and sniffed at opportunities. Most of them adopted a wait-and-watch attitude, to see how the announced projects moved. However, as is known, most of these projects got caught in red-tape and land acquisition issues.
When the slowdown had hit the global steel industry what had earlier looked like a long-term sustainable demand growth, was exposed as caused by over-construction and over-consumerism. Suddenly, the industry, at the global level, found that it was sitting on a substantial over-capacity.
However, the Indian steel industry merely sneezed in the downturn and moved along. A few months were bad and prices corrected significantly, but demand continued to grow month-on-month. Every consuming industry of steel continued its upward march. Construction growth was good, and with India?s woeful infrastructure, looked set to grow for a long time. India?s low-cost compact cars are now a model that the world car industry is trying to emulate, and Indian car industry will remain a growth vehicle, not only to meet domestic demand, but also to export.
In this scenario, the global steel industry is discovering India as a consumer. There is now a lot of interest to supply finished products to the Indian consuming sectors?even if intermediate product is manufactured elsewhere. As earlier, the turning point was the decision of ArcelorMittal to acquire a stake in Uttam Galva. That the global major, a $60 billion behemoth, was interested in a (relatively) small downstream facility worth a few hundred million dollars signalled the importance of Indian steel consumer to the steel world. The ArcelorMittal-Uttam deal was preceded by Essar acquiring Shree Precoated. Thereafter, other JVs were announced, mostly in the downstream segment, between Japanese and Indian companies.
We believe this is just the beginning of the trend, which is expected to gather further steam in the coming days. We expect newer deals and announcements over the next few months.
Navin Vohra, Partner & National Leader-Metals & Mining, Ernst & Young