Indian firms gearing up to benefit from China’s demand-supply gap

Indian firms gearing up to benefit from China’s demand-supply gap. Union Steel Minister Virbhadra Singh is adamant: The country should ban the export of iron ore in order to meet increased domestic demand from steel producers, a move welcomed by several Indian companies. “It is a timely intervention,” JSW Steel Ltd’s Chief Financial Officer (CFO) Seshagiri Rao said. “We are now classified as importers of steel and exporters of iron ore, which has to be reversed in order to create additional steel capacity to meet India’s growing domestic demand.” He added that the steel industry has been debating the issue for some time now. For the past three years, India was a net importer of steel, with imports having risen by 46 per cent this year. At a seminar in Delhi recently, the steel minister said the country could consider banning exports of iron ore from May 2011. In July, Karnataka had banned iron ore exports, though that was an issue arising from illegal mining. India aims to push its steel production to 120 million tonnes by 2011-12, from an estimated 65 million tonnes in 2009-10. With steel makers in the country gearing up to expand their production capacity, the demand for iron ore is expected to soar in the near future. Hence, placing restrictions on exports would be beneficial for the domestic steel industry. “There’s a huge opportunity for Indian steel makers in the near term, as many would be able to export Indian-made steel to China,” Ankit Miglani, deputy managing director of Uttam Galva Steels Ltd, said. “China is set to face a demand-supply gap in the immediate future due to the closure of its unproductive firms. In order to meet their growing requirements, and sustain a 9 to 10 per cent growth, they will have to import steel. And they will look to India.” JSW Steel’s Rao agreed: “Several Chinese firms, experiencing unviable productive capacity and high conversion costs, had downed their shutters recently. Marginal overheads such as power and fuel costs, stores and consumable and maintenance cost, apart from the raw material costs, were wreaking havoc with these firms, resulting in a higher cost of production.” Chinese factories were being segregated on the basis of productivity. According to A Manoj, a board member of the All India Steel Re-rollers Association (AISRA), “Unproductive ones were stalled for the moment, to conserve their iron ore resources and prevent further losses.” However, “China has witnessed a drop in export surplus due to the country’s inherent problems,” said Revati Kasture, head of the Mumbai-based Credit Analysis and Research Ltd (CARE). “The domestic demand in China lies intact and is growing steadily.” According to the information available on the World Steel Association website, crude steel production from China actually dropped by 1 per cent in August 2010 only, while the year-to-date production rose 15 per cent. It is currently at 426 million tonnes, which is 46 per cent of the world total. In 2008, China had a surplus of 65 million tonnes, which fell to 25.4 million tonnes by next year. Chinese steel exports in 2010 have also dropped markedly, from a high of 5.6 million tonnes in June to 4.5 million tonnes in July and 2.7 million tonnes in August. Ravindra Deshpande, metal analyst at Elaara Capital, cited several reasons for the drop. “Higher cost of electricity and pollution concerns also hampered steel production growth,” he said. CARE’s Kasture noted that the regulatory scenario had added to the woes of Chinese manufacturers. “The growth seen in the Chinese steel industry is the induced benefits of the stimulus package announced by the government, which will eventually leverage out. Only after this, an apparent demand drop would be noticeable,” she said. The Indian picture is not that rosy either. “We are still a far cry from what could be considered a boom time for the Indian industry,” AISRA’s Manoj said. “Though the Indian government was trying to reverse the negative sentiment that was wracking the industry due to the earlier recessionary conditions, the pace was extremely slow.” According to Kasture, India would also register a drop in operating capacity levels in the near term “due to overstocking.” She added that a 7.7 per cent drop in world demand is also expected. Commenting on the overstocking issue, JSW Steel’s Rao said that as of October 2010, his company’s order book stood at 15 per cent operating capacity levels. He added that the growth seen currently was large enough to absorb the stock produced earlier, though the company has been facing several cost pressures due to the fluctuations in the prices of iron ore and coking coal, which had led to the squeezing of operating margins. Rao insisted that though India has its own share of problems, growth was just around the corner. “A growth of 10 per cent in FY10 (fiscal 2010) and 14 per cent in FY11 will be seen, due to the positive business sentiments in the country,” he added.