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India steels the
limelight
By Indrajit Basu
KOLKATA - A lot, maybe too
much, has been happening in the Indian steel
industry lately. For the past 12 months, the
industry has been going through a cyclical boom of
a magnitude not seen in decades, as a consequence
of which not only are the top and bottom lines of
India's steelmakers swelling as never before but
so are the pockets of investors in steel stocks.
The regulatory environment, too,
is changing rapidly for the better, enabling the
industry to stretch out to foreign shores. The
country's steel industry as a result is getting
renewed global attention, which is evident from
the fact that India exported a record amount of
steel and iron ore in 2004. Giant steelmakers from
Asia and Australia have also begun to get into the
sector to cash in on its huge metal resources and
the industry's ability to produce cheap steel.
Early this year, South Korean steel giant
POSCO announced that along with Australia's BHP
Billiton, it wished to set up steelworks in India
with an annual capacity of more than 10 million
tons. And last week, China's largest steelmaker
Baosteel Group, which controls the listed Baoshan
Iron and Steel Co Ltd, said it was considering
investments in India to secure iron-ore supplies
from the country. "We are considering if we can
make an investment in India to get iron ore," said
Yu Zhonghai, director of China's International
Business Development Department, adding that its
India plan is an extension of the strategy to
control more iron ore in the international market.
India possesses one of the largest
iron-ore reserves but does not have the
commensurate steelmaking capacity to use all of
it. Baosteel's intention of setting up a base in
India then should have come as good news. But the
country's industry is hardly happy. In fact it is
worried that Baosteel's dependence on India's iron
ore could lead to an unbridled sucking out of ore,
creating a significant supply strain to India's
steelmakers. "India's domestic consumption of iron
ore will be very high," said S K Tamotia, an
industry expert. "And since iron ore is a
non-renewable resource, any export intent has to
be looked at very carefully." Others add that any
more exports of local ore that can be used to set
up domestic industry could have a ripple effect on
the Indian economy.
China's overwhelming
appetite for iron ore aimed at increasing its own
finished steel production beyond the current
capacity of 220 million tons a year, and India's
skyrocketing iron-ore exports, provide enough
reasons for the local steel industry to be jittery
about the Middle Kingdom's India interest. India
is already the second-largest provider of iron ore
to China. In 2004, China imported 208 million tons
of iron ore, with 50 million tons - worth US$5
billion - coming from India, making it China's No
2 supplier after Australia, which shipped 78
million tons. The third was Brazil, with 46
million tons. AME Mineral Economics, a
mining-economics consulting group, released a
study this month predicting that Chinese iron ore
imports this year would increase 25% to 250
million tons. Other analysts are even more
bullish: London-based ship broker Howe Robinson
expects Chinese iron-ore imports to soar by 70
million tonnes in 2005 - a 35% increase - to
support the country's expected raw-steel
production of 330 million tonnes. (A tonne is
1,000 kilograms; a US ton is 2,000 pounds, or
907kg.)
India's iron-ore exports shot up
to 60.5 million tons in 2003-04, a growth of more
than 60%. But simultaneously, its domestic need
for ore has risen sharply. Consumption has risen
about 45% between 2000-01 and 2003-04 and now the
government proposes to increase the output of
finished steel from the current 35 million tons to
100 million a year by 2020. Clearly, India's own
demand for this resource is going to leapfrog too
in the coming years.
But an impending
shortage of iron ore is not the primary concern. A
much bigger problem, at least for now, is the fact
that the steel sector repeatedly drew the Indian
government's ire in 2004 for hiking prices. While
the government does not want local steelmakers to
"profiteer" from the burgeoning demand for steel
in the country, the industry says it is helpless
in the face of surging prices of inputs such as
coke, iron ore and melting scrap that it has to
pass on to consumers. The spot rate for a ton of
iron ore, for instance, has shot up from $15 just
three years ago to the current $60. Steel-user
industries such auto manufacture and construction
have also voiced their concern as price hikes put
immense pressure on their margins.
The
Indian steel sector is worried over the country's
excess dependence of steel and iron-ore exports on
China. It feels that as with the United States,
Canada and the European Union, there is every
possibility that anti-dumping duties could be
levied on Indian imports into China, and this
threat will be even greater if and when Chinese
steel consumption starts slowing down. "This could
severely hurt realizations of companies that
depend on export revenues," said an official with
Tata Steel, India's largest steelmaker. In fact,
as a consequence of the anti-dumping duties on
Chinese steel by the US and Canada, China last
year had to resort to curbing - for a while - its
total steel imports by 3%.
Nevertheless,
for Baosteel perhaps, India is its only hope.
That's because Baosteel is under intense price
pressure from its other ore suppliers. Early this
month, Baosteel had to accept a 71.5% price rise
from Australian iron-ore suppliers Rio Tinto and
BHP. Earlier in the negotiations, Baosteel had
conveyed an expectation of a 30-50% hike.
Together, Rio Tinto and BHP account for 40% of
China's iron-ore imports and naturally, the scale
of the rise shocked the country, sending ripples
throughout its steel industry that's fueling much
of China's development. The new price rises will
hit smaller Chinese steelmakers particularly hard
as many have to buy imported iron ore from
Baosteel.
But a section of the Indian
steel industry is strongly in favor of China's
entry. "The logical view is that the market should
decide. Besides, if China is willing to pay so
much money, what's the problem?" said Sandeep
Bhargava, director of Rawmet, a commodities
trading house. Bhaskar Chatterjee of the Steel and
Mines Ministry of the eastern Indian state of
Orissa feels that if China's insatiable demand for
ore and steel can bloat India's foreign-exchange
reserves, there's no point fussing over it.
After undergoing a churn for the past
seven years, India has finally emerged as one of
the cheapest steelmaking locations, with only
South America beating it in terms of costs. This
competitiveness also drew POSCO to India, beating
Brazil. POSCO said that besides costs, India's
proximity to East and Southeast Asia, which are
likely to be the main drivers of steel demand in
the foreseeable future, was a major attraction.
Indrajit Basu is a Kolkata-based
equity analyst turned journalist with more than 12
years of experience in business/finance and
technology journalism. Besides writing for Asia
Times Online, he also writes for US-based
publications, as well as IT companies.
(Copyright 2005 Asia Times Online Ltd.
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