Exit of global biggies a boon for local steel firms

When ArcelorMittal and Posco announced the withdrawal of their plants from Odisha and Karnataka, respectively, around three months ago, few saw it as a blessing in disguise for domestic steel makers.

There was widespread concern on the hefty foreign direct investment India would be losing. But very little was said of the steel glut the withdrawals had spared the country.

“On a long-term basis, the exit of these projects can be beneficial for the domestic players as these global giants had planned huge capacities of around 24 million tonne per annum (mtpa) through their projects. Looking at the current rate of steel demand growth, the addition of such massive supplies would have led to issues of oversupply and price war in the short-to-medium term,” said Chhabi Singh, consultant with CRU Group, which provides market analysis on the global mining, metal and fertiliser industry.

Another benefit from the exit of foreign companies would be higher availability of raw material for domestic players, said Giriraj Daga, an analyst with Nirmal Bang Brokerage. Domestic steel manufacturers should capitalise on this opportunity to secure long-term raw material supplies, he said.

A Moody’s report issued in July also pointed out that the scrapping of the plants would be beneficial for domestic producers such as SAIL and Tata Steel. “These companies plan to add around 60% to their March 2013 capacities over the next 3-5 years and can now look forward to a less crowded market than would have been the case had the inward investment initiatives proceeded,” it said.

Posco and Arcelor had abandoned their 6 mt and 12 mt greenfield plants, respectively, after long delays on account of local opposition to their plans, difficulties in acquiring land, limited availability of coke, iron ore and power linkages, among other factors.

The exit of global giants may have provided an opportunity to domestic steel makers to strengthen and expand their presence, but they continue to face several issues, whether it is greenfield or brownfield projects.

As R K Goyal, managing director of Pune-based Kalyani Steels, put it, “Whether they (global giants) are here or not, there is no opportunity. Any greenfield plant takes 3-10 years to start operations. Setting up a steel plant in India has become extremely difficult. You don’t get water, land or iron ore mines. Attractiveness of India has therefore reduced for these players. They may have decided to go but what about the plight of domestic players?”

Kalyani Steels, part of Baba Kalyani Group, currently operates a 0.7 mtpa plant at Ginigera in Karnataka. The company has been trying to set up a 3 mtpa plant in the state for the past two years, but is yet to receive any land, water or mine for the project.

Singh, however, said that despite the various delays, several capacity addition projects are in progress. The ongoing expansions would be able to add another 30-32 mt of crude steel capacity till the end of 2017, which will take the total crude steel capacity closer to 134-136 mt by 2017 from 104 mt now.

However, steel consumption in the country is currently not progressing at the required momentum. India’s steel consumption remained almost flat during the first six months of fiscal due to slowdown in automobile and construction space. It grew by a marginal 0.8% to 36.6 mt during April-August, while production grew 6.2% to 40.4 mt.

“If the capacity additions continue to outstrip sluggish growth in domestic demand, India would likely become a net exporter of steel. Moreover, given that countries in Asean are already erecting barriers against imports of cheap steel, Indian producers will be hoping that the domestic economy quickly regains momentum so that their growing output is absorbed by local demand, thereby avoiding the intense competition in regional markets,” the Moody’s report concluded.