The domestic steel industry is heading for a major glut if the demand scenario doesn’t improve over the next two years. The reason for the same being that while the demand for various grades of steel is growing at 0.5-1% annually, the production is growing at a rate of 3-4% and is expected to take a major leap when the companies start commissioning their expansion projects in the next two years. This is likely to lead to a situation where the production will comfortably outstrip demand and the companies will have to scout for more and more opportunities abroad to sell their products.
“This is not always a very favourable situation as exports are usually margin dilutive, especially when the domestic currency is growing,” said an analyst with an international brokerage.
This trend has already started showing signs in the domestic steel industry and experts say that there are chances that it may be more visible next year.
According to the data available from the Joint Plant Committee (JPC), India’s total steel production during April-January 2014 grew by 3.7% to 70 million tonnes (mt) against 67 mt a year earlier. During the same period, domestic steel consumption grew by a meagre 0.5% to 61 mt against 60 mt last fiscal.
Steel — which is the backbone of major powerhouse sectors of the economy such as automotive, real estate, white goods like refrigerators and washing machines, construction of roads, highways, etc — always grows at a 1.5 times rate of gross domestic product of the economy, when the economy is growing above 6%, said AS Firoz, chief economist at JPC.
However, whenever the economy slips below 6%, the growth rate of steel usually lags GDP by 1%, he said.
Assuming that post elections, even if the sectors pick up, the analyst said it cannot go beyond 2-3% growth rate. This essentially means the consumption in India will reach up to 82 mt in FY15 from the expected consumption of 80 mt in FY14
This will be in sharp contrast to over half of 14 mt of additional capacity which is expected to come up in the next fiscal.
This will be largely contributed by SAIL, which is expected to take its capacity up to 21 mt from the current 13 mt by FY16 end, Tata Steel, which is expected to add 6 mt to its current capacity of 10 mt, JSW Steel, also expected to add a minor