Pre Budget Sector Analysis

Global production capacity of steel stands at 1350 million tonnes of which near about 1200 million tonnes has been produced in 2006. In other words, steel industry is operating at 90 per cent capacity. Its estimated that 250 million tonnes more capacities would be added in the next three years as many of the steel companies worldwide have gone for the expansion to ride the bullish cycles.

Emerging economies are supposed to contribute around 70 percent of the global steel demand by the year 2020. Demands at developed markets are facing declining trends and constitute about 40 per cent of global share. India along with China would be the major growth driver for the steel in the world. Hence, it is very critical that these two economies keep doing well to sustain the bullish phase.

On the domestic front, Indian economy is expected to surpass Japan by 2032, has witnessed a tremendous growth during last 5 years. Sectors like Automobile, Capital Goods, Consumer Durables and Constructions are witnessing double digit growth and steel being a core sector is having immediate advantage. In addition, increased spending on infrastructure would give another boost to the steel sector as the Roads, Ports, Power and Housing account for 40 per cent of steel demand.

The government is putting great thrust on the infrastructure and indirect benefit of the same accrues to steel industry for both Flat as well as long products. Our talk with industry players suggest that steel prices are unlikely to face any major downward movement at least for next 12 months and if so things should be quite robust for the Indian players.

Even internationally, things are better as there has been consolidation within the industry with Mittal last year taking over Arcelor and now Tata Steel is acquiring the Corus. This consolidation means better pricing power for the industry internationally. Further, prices of coking coal, one of the major raw materials, has started declining (near about 16 per cent) should help companies to improve margins. So at this point time things are quite robust.

Budget expectations

Steel sector was the first core sector to be deregulated in 1991, tariffs rate were lowered and quantitative restrictions were lifted to liberate the sector from numerous regulatory requirements. The sector had shown growth since then and production has raised manifold.

We do not expect any major changes on custom duty front as government very recently announced some cut in stainless steel as well on other non-ferrous metal. In other words, do not expect any change in the coming budget on the custom duty front but on excise front there has been demand that Cenvat to be reduced from 16 per cent to 14 per cent. If that happens this would be good for the industry, as prices of steel would come down pushing the demand for the steel. On the raw materials front, there has been demand from the industry to reduce custom duty on melting Iron and steel scrap from present 5 per cent to 2 percent. We feel it would be unlikely to be met in the coming budget. “We don’t see any potential effect of custom duty cuts on melting scraps in the coming budget because that would be minimal in nature.” Dr. B N Singh, JMD & CEO, JSW Steel Ltd. But biggest concern for the industry is the supply side increase and second is the efforts by China and India to cool down the pace of economic growth. If that happen Steel industry may have some trouble going forward.