The world steel industry had a roller coaster ride last year,
worsted badly in the first three quarters by economic recession,
next only in severity to the Great Depression of the 1930s, only
to recover tentatively in the final three months,
writes Kunal Bose
in New Delhi. Steel production globally slipped 8% to 1.22bn
tonnes in 2009 when consumption of the metal, seen as the
bellwether of the world economy was down 9% to 1.2bn tonnes.
The difficulties that the industry experienced in the form of
shutting down of relatively high operational cost blast furnaces,
laying off of thousands of workers and failure to recover costs
from selling prices of steel are all written in red steel company
balance sheets. ArcelorMittal’s return to convincing profits in
the quarter ended December 2009 is proof of gradual
improvement in outlook for steel.
According to Sushil Roongta, chairman of Steel Authority of
India, the world industry would have found itself in greater
straits but for China springing a surprising 14% crude steel
production growth to 574mt (millon tonnes) in 2009 and to
some extent by India lifting production to 58mt. What calls for
particular attention is China achieving a compounded annual
growth rate of 19% in steel production since 2000 and India 9%
though from a much lower base while for the rest of the world
the CAGR is only 1%. A major point of concern at this point is
the recession induced idle capacity which would progressively
come back in the production stream with improvement in steel
prices.
A consultancy firm Ernst & Young report says capacity use
“slumped to about 69% in 2009 after reaching a peak of 87% in
2007.” World capacity use would have looked more dismal if
China accounting for as much as 47% of global production with
capacity use of 83% is excluded. Incidentally, China made use of
90% of steel capacity in 2007 in a booming market for all metals.
As for the current year the world capacity use figure excluding
that of China is likely to be around 61%. Including China, which is
to run its steel mills to 80% capacity, the world use rate is to
climb to 77%. In the meantime, as China makes stunning
progress in production, what is proving reassuring for
steelmakers elsewhere is that China itself used close to 500mt
of finished steel — remember 8% of crude steel is lost in the
process of making finished steel — leaving moderate export
surpluses. A big portion of the Chinese demand came from the
real estate sector which together with infrastructure accounted
for 56%.
The World Steel Association says China’s apparent steel
consumption will rise further to 553mt this year on the back of
continuing thrust on infrastructure development and house
building. At the same time, rising imports of high end flats are
indicative of recovery in the Chinese manufacturing industry.
Even while China has to contend with a number of dumping
charges by the US and European Union steelmakers, the fact
remains that it turned into a net importer of steel last year.
Imports of longs used in construction jumped 114%. As for
dumping, China Iron & Steel Association has also made several
complaints that US and CIS groups benefiting from state subsidy
are selling some high value steel products in its country.
India, China’s next door neighbour, has for over a decade
lived under the fear of its steel market being deluged by Chinese
products. In an interview with DCI, Roongta says, “I don’t think
China is building all that capacity with exports as an objective.
China being a net importer of steel in the last two years will
prove the veracity of my contention.” A point not to be missed
in this context is the potential of Chinese per capita steel
consumption rising steadily from around 320kg to 500kg like in
some developed countries by 2018. This being the target, China
by the end of 2010 will have raised its steel making capacity to
around 700mt when production will be well over 600mt and
consumption in excess of 550mt.
The structural changes that the world steel industry is
experiencing, says Gujarat NRE chairman Arun Jagatramka, will
see India emerging as the third biggest user of the metal at 63mt
after China and the US but ahead of Japan in the current year.
Much like China, the Indian steel consuming sectors, particularly
infrastructure, manufacturing and automobile defied the
economic downturn resolutely and that would explain why steel
production in the country grew 3% in 2009. Even while India is
targeting a sustainable GDP growth rate of 9 to 10%, the steel
intensity of its economy remains low, the per capita consumption
being around 45kg. This is particularly so as the per capita Indian
rural steel consumption is a trifling 2kg or about. India’s steel
minister Virbhadra Singh is now pursuing the goal of making the
country the world’s second largest steel producer by 2015 and
raising capacity to over 200mt by 2020.
The Ernst & Young report says the world steel industry will
get more and more concentrated in China and India on local
demand and cost competitiveness consideration. The report
notes, “the growth potential of the Indian steel industry has
driven various capacity expansion plans over the last five years.
While some of this attributed to debottlenecking and brownfield
expansion, the industry’s announcement of greenfield
investments is also contributing to its growth. Till now 222
MOUs have been signed... to add capacity amounting to 276mt.”
What primarily will help India in chasing big capacity
development is the country’s iron ore reserves of 25bn tonnes,
the world’s sixth largest. Nearly half of India’s iron ore
production of 210mt is exported in the absence of adequate
domestic demand. The local steelmakers do not tire of making
representations to the government that ore exports should be
banned and the resource should be preserved for value addition
within the country in future. This is, however, strongly contested
by the spokesperson for standalone miners R.K. Sharma.
Whatever it is, the abundance of iron ore resource and its high
quality is one compelling reason for ArcelorMittal and South
Korean Posco to seek building large steel complexes in India.
They are also putting their bet on the local Indian steel market
with potential to grow at up to 14% a year for a long time,
according to Roongta.
Unfortunately ArcelorMittal, Posco and also local groups like
Tata Steel have been hitting one roadblock after another as they
try to acquire large parcels of land to accommodate steel
complexes of 10mt to 12mt capacity. As the villagers required
to be resettled elsewhere to make room for steel complexes ask
for much better compensation than is offered in consultation
with local governments, NGOs will be hoisting flags of protests
on grounds of feared environment damage and displacement of
tribals in particular. Moreover, major iron ore-owning states like
Orissa and Jharkhand are found wanting to deliver on the
promise to give linkages to ore deposits plus the host of forest
and environment related clearances. At this point, nobody could
say for sure when will the two proposed mills of ArcelorMittal of
12mt capacity each or the one of Posco of identical capacity be
seeing the light of day.
In the meantime, however, the existing Indian steelmakers
with much surplus land at their disposal are giving shape to
brownfield capacity expansion without glitches. Roongta says,
“making good use of our land bank , we at SAIL will be first
lifting crude steel capacity from 12.49mt to23.7mt by 2012 and
then to 46.9mt by 2020. Hopefully, by then we shall also have
greenfield capacity coming through to make us a 60mt group.”
Similarly Tata Steel’s Jamshedpur plant is having its capacity
expanded by 3mt to 10mt. But as to when the company will be
able to start building the three announced greenfield mills
remains shrouded in uncertainty. Singh admits that a “major
challenge for me is to see that much of the proposed greenfield
capacity gets implemented in spite of all the hurdles. I’m in
constant dialogue with the states where the new mills are to be
built.” He thinks that if he is given charge of the iron ore
portfolio which now is with the mines ministry then he will be
able to expedite the allotment of ore deposits to investors in
new steel projects. Singh wants to avoid a situation where for
lack of sufficient new capacity building, India becomes a large net
importer of steel.
Because of the memory’s bitterest recession, the world steel
industry has seen minimal investment in new capacity building in
the past two years, except in China and to some degree in India.
The scene remains difficult with around 40% global capacity
remaining idle. No doubt steel prices are improving but these
are still about half the 2008 July–August rates. Building a new
steel mill is capital intensive and a long gestation proposition. At
this point, banks and financial institutions are not too keen to
lend money to new steel ventures. Their interest in steel will
revive only when the market turns decisively positive for the
metal. In the prevailing environment, however, steel capacity
consolidation should get a boost. Capacity consolidation will
improve the industry’s capacity to negotiate market troughs
better in future. This is the mantra of Lakshmi Mittal, the man
who presides over the world’s largest steel group.