Strong market demand to drive enhancement of steel intensity

By: |
March 10, 2020 4:30 AM

It is also traditionally true that in India the domestic market coverage is the first and foremost driver of steel capacity creation as catering to the export market in majority of the cases comes second.

The crude steel production in earlier years was lower than the installed capacity as growth of domestic market could not keep pace with incremental addition to capacity. The crude steel production in earlier years was lower than the installed capacity as growth of domestic market could not keep pace with incremental addition to capacity.

The primary focus of National Steel Policy 2017 is installing a crude steel capacity of 300 MT in the country by 2030-31. The current installed capacity in crude steel stands at 147 MT and working capacity at 142 MT. Thus, the projection is to add around 158 MT steel in the next 12 years at a compound annual growth rate of 6.4%. What drives the urge for installing capacity? The answer is market demand. It is also traditionally true that in India the domestic market coverage is the first and foremost driver of steel capacity creation as catering to the export market in majority of the cases comes second. This is unlike in many other export oriented countries like Japan, Turkey, Ukraine, Russia and South Korea. There are a large group of countries having steel export orientation (export as percentage of production) at 40-50%. These two sets of countries have installed capacities despite the domestic market having accounted for less than 50% of the incremental production. India does not belong to this group.

It must be appreciated that China was an isolated story altogether. It had created capacity of nearly 1.2 billion tonne to cater to the domestic demand of 750-800 MT leaving an export volume of annual average of 70-80 MT (currently much lower). The crude steel production in earlier years was lower than the installed capacity as growth of domestic market could not keep pace with incremental addition to capacity. Subsequently concern for sustainability and environmental degradation led to closure of polluting units and current working capacity came down to approximately 1 billion tonne.

In a way, this background of installing capacities (in countries apart from China) to cater to international market and not being confined to serve the domestic market shaped the global steel industry for the last 4-5 decades and led to the current scenario of excess capacity posing a stiff challenge to the viability and growth of steel industry. As global steel use has currently come down to only 2-3%, the countries envisaging addition to crude steel capacity are drawing attention and India is one of them. It is perceived by many (OECD and G-20) that since globally there is a clear gap of around 425 MT with effective capacity exceeding the production of crude steel, demand growth in specific parts of the globe could be met by free flow of steel across the border.

The stronger side of the argument favours creation of indigenous capacity to cater to the growing domestic market. It is a challenge to indigenous producers to roll out value added steel to meet the dynamic transformation of the market demand including replacement of imports of engineering goods containing steel by setting up additional facilities inside the country and it would be a fair assumption to envisage that incremental capacity additions would contain technological transfer and recent advancement specifically in rolling to enable the new and old producers meet this demand. Recent collaborations with Japan must lead to strengthen this aspect. Arithmetically with 92% yield of crude to finished steel and a healthy capacity utilisation of 85%, the finished steel production by 2030-31 is estimated at 235 MT. Assuming imports and exports match at a higher level (a restrictive assumption although) this implies that domestic market in India is to absorb an additional 135-140 MT of finished steel in the next 11 years’ time at a CAGR of 7.9% per annum. Thus a higher rate of growth in the domestic market is a precondition for augmenting steel capacity at 300 MT by 2030-31.

Recent studies have shown that around 68% of finished steel in the country goes for building, construction and infra sector (BCI) which is slated to enhance its share to around 70% of total steel consumption by end of FY31. The engineering goods, a part of consumer durables, automobile and packaging industries draw their basic sustenance from the growth of BCI sector, while rise in disposable income, ease in credit availability and household consumption are some of the factors influencing auto, real estate and consumer durable demand. This implies that around 100 MT of incremental demand must come through BCI sector.

Of the infra sector, railway demand is traditionally more steel intensive. The need for rails emanates from track renewals, gauge conversion, doubling of lines, metro rails, DFC, rolling stock procurement, station development, wagons and coaches.

If funds are made available, a substantial component of the above sub categories would contain steel. There are a few major segments in infra, like roadways, communication towers, irrigation, ports, among others, where not much use of steel is taking place. Even if the standard designs in steel for ROBs are made available, there is little surety that EPC contractors winning the bid in road contracts are made to use steel in bridge construction. Life Cycle Analysis conclusively puts steel a much preferred choice of materials; however, it is yet to be made mandatory in project evaluation. The increase in steel intensity in infra including real estate where massive public investment is taking place paving the way for private investment also, can be a reality if the critical sectors of the economy and the designing professionals are made to be convinced on the advantages of steel use and are assured of regular supply of steel in specific grades and dimensions.

The author is DG, Institute for Steel Development & Growth
(Views expressed are personal)

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