Indian steel's long-term fundamentals are intact : Ernst & Young
A summary of the Ernst & Young Steel Report, Indian Steel Industry 2009: squeezed, but strong
Tweet-- Leading professional services firm Ernst & Young (EY) today released a report titled ”Indian Steel Industry 2009: squeezed, but strong” at the Mining to Steel Summit 2009 organized by Indian Chambers of Commerce (ICC) here. Sounding an optimistic note, the report states that though the world steel scenario is grim, India has the potential to grow at double digit rates and should target a production of 125 mn tonnes in the medium term.
Drawing a parallel with China, it goes on to say that during the 1998-2003 period, when the finished global steel production grew at a compounded annual growth rate (CAGR) of 1.6%, the Chinese finished steel consumption doubled at a CAGR of 18%. The key drivers of Chinese steel demand were massive infrastructure development and high level of urbanization, escalating demand from housing, automobile and white goods sectors, says the report.
Says Navin Vohra, Partner & National Leader – Metals & Mining Practice for Ernst & Young, “the current Indian scenario is very similar to that of China in 1998 and we expect significant investments here towards large-scale public infrastructure, urbanization, auto and white goods. Further, in the long-term, capacity in the commodity industry has to move to low-cost centres and India is well-placed with abundant high-quality iron ore, qualified manpower and competitive capital costs due to low land and construction costs. ”
According to the report, while the near-to-medium term future of the global steel industry is challenging, the outlook for India is also encouraging because unlike the last bear phase during 1993-94 to 2001-02 when the domestic sector was reeling under a supply overhang the supply – demand scenario is more balanced this time.
On the related question of whether the Indian steel industry is prepared for the expected demand growth, the report has suggested certain proactive measures to boost supply additions such as priority sector status for credit availability, clear and unambiguous mine allocation and land acquisition policies.
Steel prices remain under pressure in near-term
According to the report, the near-term outlook for the industry is challenging as the growth in key end-user industries such as construction, automobiles and manufacturing has taken a backseat. The downturn has also led to a decline in the prices for raw materials such as iron ore and coking coal, albeit at a lower rate than the dip in steel prices. Further, prices are expected to decline in 2009 as consumption levels are projected to continue plummeting.
As steel manufacturers have undertaken production cuts, this is likely to result in a surplus of iron ore and resulting weakening of ore prices. It is expected that the domestic steel companies will try to drive hard bargains for iron ore, though the consolidated nature of the raw material industry ensures that generally it is the input suppliers who have better bargaining power than the steel manufacturers, thereby impacting operating margins, says the report.” Similarly, the coking coal market is also expected to turn into a surplus on account of the production cuts in the industry.
Says Navin Vohra, Partner & National Leader – Metals & Mining Practice, Ernst & Young, “the companies with captive mines will be in a better position to combat the downturn. The key strategies which companies can adopt in this scenario is to focus on value-added products, rationalize cost structure through better manpower planning, logistics and raw material sourcing. The companies with a focus on the domestic market are likely to be more favorably placed, given the relatively stronger demand from the local users.”
Raw material security to drive M&A in the long-term
Over the last three years, the Indian steel industry has witnessed 44 merger & acquisition (M&A) transactions aggregating USD 16.8 bn. A majority of these were outbound deals and acquisition of steel processing units. Achieving resource security has been a primary driver behind these deals. Further, geographical expansion, increased market share and an improved cost structure have been governing these transactions.
Given the current liquidity crunch, M&A activities have dried up and are expected to remain low in the short-term as companies are finding it difficult to raise funds from the debt and equity markets. Only cash-rich or well-capitalized companies are expected to follow the inorganic growth route.
The report estimates M&A activity to rebound when the credit crunch eases and the economy picks up as domestic players will require iron ore and coking coal reserves for enhancing their raw material security. Further, there is a relatively high fragmentation in the industry in India and therefore a need to attain economies of scale and improve bargaining power with raw material producers. Increasing geographical spread to enter high-value steel markets is another imperative.
Notes to Editor
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