China, India steeling up the marketplace

There’s a whirlwind of confusion within the Indian steel industry.  On the one hand, there is euphoria — demand for iron and steel continues to soar. 

And India knows that it, along with China, will decide the fate of global steel markets in the future. On the other hand there is great uncertainty.

Nobody is sure about what the prices of steel or the raw materials that go into the making of steel will be like over the next few years.

Demand for steel is good news, but uncertainty about the price at which it can be sold can spell trouble.

First look at the causes leading to the euphoria.

 The financial meltdown took the wind out of most developed markets. For two years successively, their production has dropped. 

And it is not certain if 2010 will allow them to reach the production levels they had achieved in 2007.

India did see a marginal dip in production in 2009, but it was just marginal.  It bounced back in 2009, producing 56 million tonnes, and is likely to see production levels soar further this year.

India’s consumption growth continues to climb unabated.  “Look at the way India’s imports continue to surge ahead, while exports have begun to slow down,” sais Ashok V Bharadwaj, director, Ispat Industries, at a  MetalBulletin Steel conference in Mumbai last month. 

This view is echoed by T S Sunderasan, secretary general of the Ferro Alloys Producers’ Association.  “India’s economy has been growing at 8-9%.  In January this year, the Index of Industrial Production (IIP) rose by 17.9% compared with the level in January 2009 .The growth rate for durables stands at 22% and automobile production at 17%.  But most important, infrastructure growth will add to the demand for steel manifold.  That is why the World Steel Association (WSA) expects India to become the third-largest producer of steel by 2013 (today it ranks fifth), if not earlier.”

These numbers could rise even further with the emergence of new towns and cities, and the building of better highways and railway networks. Not surprisingly, every industry analyst expects domestic steel production to virtually double from the current 57 million tonnes a year to 124 million tonnes by 2012.

More interestingly, India’s consumption growth is likely to overtake China’s growth rate.

“While India’s consumption of steel continues to soar at over 14% CAGR per annum, China’s consumption has slowed to 5%,” adds Bharadwaj.
This is lower than the 6% for all Brics countries, and even lower than the world growth rates.

What this means is that China will have more steel for export, so  expect market prices of steel to soften.  But that is where the uncertainty begins.