September 07, 2008
Factors driving Indian steel sector mega growth
It is reported India is poised to be the 3rd largest steel producer by 2013 as strong domestic demand and global fundamentals will drive Indian steel output to 100 million tonnes from 53 million tonnes in 2007.
Among the factors that enable India to reach the third position include 1. Growth in demand
2. Higher domestic prices of finished steel
3. Lower iron ore costs
4. Lower transportation costs
5. Skilled manpower pool at low costs
6. Thermal coal availability at low cost
1. Growth in demand
According to Goldman Sachs, Indian steel consumption has accelerated from 3.4% in 2002 to 11% in 2007 and the momentum is likely to be maintained on the back of USD 540 billion infrastructure investment and USD 210 billion capital expenditures by various industries
2. Higher domestic prices of finished steel
There are only 5 producers of hot rolled coil currently that manage their sales such that there are no surpluses in the domestic market. Thus, re rollers have the option either to buy locally or import, thereby prices are based on import parity, which is generally higher due to factors such as high sea freight, import duty of 5% and high inland transportation costs.
India is a net importer of steel scrap due to poor local generation and high consumption from a large number of mini mills. Therefore, long products too are priced higher.
3. Lower iron ore costs
India has rich iron ore reserves. The annual production of iron ore is above 160 million tonnes and 60% of this is exported. The Indian iron ore industry being largely fragmented, miners are left with no choice but to sell at export parity prices. The high grade iron ore mines are located in Karnataka, Chhattisgarh, Orissa and Jharkhand. Miners at these locations have to bear high inland transportation costs to send iron ore to the ports, about 400 to 600 kilometers away. Shortage of railways rake forces them to incur roadway transportation costs that are several times higher. Additionally, miners are liable for export duty of INR 300 per tonne. Therefore, prices of iron ore at the mine mouth are far lower than international prices. SAIL, TATA Steel, Jindal Steel Power have captive mines and are thereby insulated from input price risk.
4. Lower transportation costs
Indian steel producers are mostly located in iron ore rich belts and incur low costs despite high inland transportation costs. Proximity to iron ore mine is more critical than the proximity to customers as the requirement is twice the volume of iron ore for every ton of saleable steel.
5. Skilled manpower pool at low costs
India has a rich pool of trained manpower due to overstaffing by two of its leading steel companies, SAIL and TATA Steel. Combined with lower salaries, the specific labor costs per ton of HRC produced is just USD 15 to USD 20 per tonne for players like JSW, Ispat and Essar Steel while the costs ranges from USD 50 to 150 per tonne in the Western world.
6. Thermal coal availability at low cost
India has 250 billion tonnes of coal reserves, the third largest in the world. Though Indian coal has high ash content and low calorific value, the cash cost of power generation is less than US cent 2 per kWh. Many of new generation steel plants have access to captive coal blocks or they are located in coal rich belt of West Bengal, Jharkhand, Orissa and Chhattisgarh.
