What the steel industry expects

Growth potential: The per capita consumption of steel is around 33 kgs in India as against 242 kgs in China and an average of over 400 kgs in the developed countries. This wide gap in relative steel consumption indicates that the potential ahead for India to raise its steel consumption is high.

Continued demand: Strengthening of steel prices since 2003 till early 2006 helped the domestic steel companies immensely as many of them managed to reduce their debt burden considerably. Going forward, the demand for the metal is likely to sustain on the back of continuing demand within India and from the US and other South East Asian nations.

Domestic cushion: A robust housing and infrastructure sector, with growth potential in the auto and the consumer durables sectors is likely to be a big positive for the domestic steel sector.

India advantage: Indian steel producers are one of the lowest cost producers in the world, which provides them with a hedge against fall in prices. Further, relatively efficient and vertically integrated companies like Tata Steel are likely to be in a better position to weather any steel downturn.

Fragmented industry: While there have been concerted efforts to control the fragmented nature of the industry through consolidation and closures, the problem continues to persist. Further, the biggest threat to the industry remains from the cyclicality of the sector, which could put immense pressure on steel prices if steel consumption shows signs of faltering or supply exceeds the demand considerably.

Capped benefits:  Indian steel companies have to bear additional costs pertaining to capital equipment, power and inefficiencies (low per employee productivity). This has capped the edge they would have otherwise enjoyed due to availability of cheap labour and raw materials.

Import threat: Another possible threat to the domestic steel sector continues to be from dumping by international companies. With wide spread capacity expansions taking place across the globe and the protection to domestic steel companies being progressively reduced with consistent reduction in custom duties, international steel companies might look at markets to dump their products. In such a scenario, Indian companies stand to lose due to lack of competition in terms of size, which now they are scaling up.

Volatile prices: Chinese exports have flooded world markets, driving down prices. The Chinese steel industry is destabilizing the market through a dramatic expansion in capacity fuelled largely by subsidies and government-directed lending. The continuous warnings given by the EU and US government to China are a clear indication of rising Chinese imports into these nations. Though the steel prices are expected to remain firm on account of strong demand within domestic market and industry witnessing consolidation, the impact of Chinese exports is hard to predict, leading to considerable uncertainty on the pricing front.