Posted on 28 April 2006

 

Source: SEAISI

It has been widely published that there is a long list of big steel investments planned in India. The proposed projects will add  about 100 million tons from greenfield investments  and 27 million tons from mill expansions by 2012 (Metal Bulletin, February 2006). There is no question on India becoming the next economic superpower.  However, there is a big question on when the world will see the steel expansion plan to be materialised.  To add more concerns, it was reported that Orissa state government has threatened to cancel MoUs of five companies who had not taken steps to proceed with their proposed projects (Metal Bulletin, April 2006).  

The first problem is the unsteady and moderate domestic growth of steel demand in India.  There is a question on whether the domestic demand will be able to support the new planned capacities.  This is important as in almost any country, domestic market is the most profitable market since export prices are heavily discounted by shipping cost, duties, and handling.   As we all know the steel demand growth is largely influenced by the economic growth and its structure.  Unlike China, India's economic structure is largely supported by services and not industry sector.  If the current  growth pattern is sustainable, there will be no sudden increase in steel demand.  In 2011-2012, the demand forecast will merely be at 59.1 million tons (Battacharya, et. al., 2006), much lower than the proposed capacities.  Companies will have to look carefully if they aim at overseas market as the future global competition will be very tough.  

Finished Steel Demand Forecast of India

	2006-07	2011-12	2015-16	2019-20
Demand (Million Tons)	41.3	59.1	76.1	98

(Battacharya, et. al., 2006)

The second problem is factors of production.  A good infrastructure is badly needed to link all supply chains in the industry from the iron and coal mines to steel consumers.  Both government and private initiatives in developing powerplants, sea ports, railways, roads, etc. will be the keys to new capacity realisation. It should be noted that if a company must bear most of infrastructure developments for a new project, the viability of the project will deteriorate.  The strength and weakness of the Indian steel industry are summarised in the following table.

India Steel Industry – Strengths & Weaknesses

Strength	Weaknesses
Low cost of iron ore	Limited availability of coking coal
Low unit labour cost	Low labour productivity
Market growth	Poor efficiency
	Poor infrastructure
	High conversion costs from hot metal to finished product
	High capital cost

(Chatterje, 2006)  

 

While there is a huge potential of India to become a steel giant, it is expected that there will be some natural delay or cancellation of many of the proposed projects to allow the country to prepare all factors of production needed and to smoothen the balance of supply and demand.       

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