While India’s infrastructure investment is likely to provide a boost to steel demand over the long term, there could be challenges to the raw material availability. Iron ore related uncertainties could be sorted out in the medium to long term, coal is likely to remain in deficit for the domestic steel industry, write Soumyo Roy and Priyesh Ruparelia.
As per the 12th Five Year Plan, the projected investment in infrastructure stands at Rs 4,099,240 crore or close to $1 trillion. Considering this huge investment potential and the fact that construction and capital goods, which are essentially linked to the infrastructure sector, together account for about 72 per cent of the total domestic steel consumption, demand outlook for steel remains favourable in the medium to long term. However, persistent deterioration in demand from key end-user industries has resulted in a weak consumption growth in 2011-12 and 2012-13, with the growth rates of 5.5 per cent and 3.3 per cent respectively as compared to nearly double-digit growth levels registered during the previous two years.
While the Working Group on steel industry has estimated a consumption growth (CAGR) of 9.6 per cent over the 12th Plan period, continued weakness in demand conditions since the last two years has made the likelihood of achieving the same challenging. Additionally, a muted growth of 3.3 per cent in the first year of 2012-13 would necessitate a far sharper growth of over 11 per cent in the remaining four years to achieve the consumption target in the terminal year. ICRA believes that infrastructure project off-take would remain critical for achieving this growth, and some of the major factors constraining project progress include challenging macroeconomic conditions; high, albeit softening, interest rate regime; regulatory issues such as delays in land acquisition, R&R (Resettlement and Rehabilitation), environment clearance etc.
Although the finished steel production in India increased by 6.6 per cent during 2011-12, reduced domestic consumption of steel necessitated higher exports, which rose by 19.4 per cent during the same period as against a growth of 3.3 per cent registered in 2010-11.
Production growth of long steel products (8.2 per cent) outpaced the growth of flat steel category (6.4 per cent) in 2011-12 because of the demand from the infrastructure sector, to which these products mainly cater. Going forward, the Working Group estimates an overall production growth of 11.3 per cent (CAGR) over the current Plan period to meet the Group’s estimated consumption target. Raw material scenario would play a critical role is achieving this production growth, and any shortfall in availability would adversely affect the steel production, as was witnessed during 2012-13, where the limited iron ore availability across the country, besides slowing demand, resulted in a sluggish production growth of 2.5 per cent as against 6.6 per cent recorded during the previous year. This article studies the evolving raw material scenario in India and highlights major challenges.
Raw material scenario
Steel is a highly raw material intensive industry, with the two primary raw materials – iron ore and coal – accounting for the majority of the total raw material costs. Every tonne of steel production requires around 1.6-1.7 tonne of iron ore. On the other hand, while every tonne of steel production through the blast furnace route requires around 0.8-1.0 tonne of coking coal, production of sponge iron requires between 1.2-1.9 tonne (depending on grade) of coal for every tonne of output. Availability of these key raw materials at economical rates is therefore critical for the production of steel.
Iron ore Indian iron ore demand is generally met by its domestic supply. Among Indian states, Odisha, Karnataka and Goa have historically been the major producers of iron ore, with these three states contributing around 74 per cent to the total iron ore production in the country in the peak year of 2009-10. However, iron ore produced from Goa is mainly for exports, given its low iron content.
Clampdown on illegal mining in Karnataka by the honourable Supreme Court of India since July-August 2011, ban on mining in the state of Goa by the Government of India, and uncertainties following quantitative restrictions imposed on iron ore mining in Odisha by the state government has substantially reduced the iron ore production in the country. Iron ore production in India declined from 218 million tonne (mt) in 2009-10 to 208 mt in 2010-11, and further to 169 mt in 2011-12, thus reducing the domestic production by around 23 per cent over just two years. The cumulative iron ore production in the first 11 months of 2012-13 further dropped to 132 mt, a 14 per cent drop over the corresponding previous. This forced some of the players to import significant quantum of iron ore during 2012-13.
Although in September 2012 and April 2013, the Supreme Court allowed 18 and 63 mines falling under the Categories A and B respectively, to resume operations in Karnataka, it is subject to certain pre-conditions which could delay the actual resumption of mining operations. However, all mining leases under Category C have been cancelled. In addition, the total production from the state would be limited to a ceiling of 30 mt going forward. The investigation into illegal mining in Odisha as well as shortage of railway wagons led to a significant decline in ore production from the state during 2011-12. In addition, various orders issued by the Odisha Government restricting iron ore mining curtailed iron ore output during the second half of 2012-13. Although the situation normalised somewhat in recent months, uncertainties continue to plague the iron ore mining situation in the state, given that investigations by the Shah Commission are still in progress.
The lower domestic production and hence, availability of iron ore led to firm domestic prices in the first half of 2012-13, despite a declining trend in the international price levels. However, despite the decline, international iron ore prices remained at substantial premium to the domestic prices even in September and October 2012. In spite of this, some Indian players were forced to resort to imports during 2012-13, given the shortage in domestic iron ore production. With a reduction in the domestic prices in the subsequent months following somewhat normalisation of the iron ore situation, and firming up of international ore prices driven by improved demand from China, domestic iron ore is significantly cheaper compared to imported iron ore at present. Although, domestic iron ore sold by various private miners are at some premium over the NMDC notified prices, the same still remains cost competitive compared to imported iron ore.
The 12th Plan envisages a total iron ore demand of 206 mt by 2016-17 to meet the country’s steel production targets, which would imply the need of a significant ramp up in the iron ore production over the 12th Plan period. This would remain a major challenge, given that regulatory issues are likely to restrict mining activity in the major iron ore producing states at least in the near term. Also, iron ore lumps, which are mostly used by domestic steelmakers, comprised only 37 per cent of domestic iron ore production in 2011-12. Hence, usage of pellet made from iron ore fines needs to fill in the gap between demand and supply of lump ore going forward. Given that India has a current pelletisation capacity of around 50 mt, a significant ramp-up in pelletisation capacity would remain critical for the country’s ability to meet the domestic iron ore requirements from domestic sources. Nevertheless, in ICRA’s opinion, while there can be shortfalls in the near term, iron ore is unlikely to be a major bottleneck for the domestic steel industry in the long term, especially if exports continue to remain at a low level.
Coking coal availability will remain critical for various blast furnace operators to enhance production. In 2011-12, India imported roughly 65 per cent of its total coking coal requirements of around 46 mt, since India’s coking coal production is much lower than its requirements, and the coal produced is also of inferior quality. Given the low availability of domestic coking coal, ICRA expects the imports of coking coal to increase substantially during the 12th Plan, as steel production in a large number of new upcoming projects is likely to be through the blast furnace route.
Although prices of coking coal in the international market have seen a declining trend over the last two years, the benefit arising out of the same to the Indian blast furnace operators have been limited, given the depreciation in the Rs vis-à-vis the USD. The dependence on imports is likely to keep the Indian blast furnace operators exposed to the volatility in the availability and prices of coking coal in the international market, as well as ocean freight and exchange rate fluctuations. In addition, the coking coal requirement for the steel sector is envisaged by the Working Group to double to around 90 mt over the 12th Plan period, which would also require a ramp up in coal handling and material movement capacities in the country.
The long products segment in India is dominated by the secondary steel makers comprising electric arc furnace/induction furnace (EAF/IF) players and re-rollers, whereas large integrated steel producers have an overall share of only around 25 per cent of this market. Such secondary players are primarily dependent on sponge iron and steel scrap to produce finished steel through the EAF/IF route, although the share of sponge iron is significantly higher than that of scrap. Indian sponge iron industry has seen low capacity utilisations over the last two years due to curtailment in iron ore production, lack of availability of domestic thermal coal for the sector and shortage of domestic natural gas.
Over the last five years, the total domestic coal production has increased at a CAGR of 4.1 per cent, whereas demand has grown at around 6.1 per cent, with the balance being met from imports. During 2011-12, only four per cent of India’s domestic coal production went into sponge iron production. The production from various captive blocks allocated to sponge iron players have also failed to reach the expected levels, due to various roadblocks. Going forward, with the demand of domestic thermal coal from priority sectors like power expected to go up further, and the structural bottlenecks preventing quick ramp up of production, ICRA expects the availability of domestic thermal coal for the sponge iron segment to remain limited during the 12th Plan period. While this is likely to force sponge iron players to opt for other sources like e-auctions or imports, the economic viability of the sector could come under pressure in such a scenario, since the costs of coal procured from these sources are significantly higher than linkage coal. In addition, uncertainties have also resulted in 2012, after the Ministry of Coal de-allocated around 20 captive coal blocks allocated to various players, of which around 9-10 were for captive usage of sponge iron players. The problem has been further aggravated, given the ongoing uncertainties regarding the fate of all coal blocks allocated during 1993-2010. The shortage of thermal coal could significantly affect sponge iron production which, in turn, is likely to affect the supply to various secondary steel manufacturers who depend on sponge iron for their raw material requirement. This could lead to sponge iron shortage being partially met by scrap. Nonetheless, the availability of sponge iron is expected to remain critical for the country’s steel production growth going forward.
While India’s large investments in infrastructure is likely to provide a boost to its steel demand over the long term, there could be challenges to the raw material availability. While iron ore related uncertainties could be sorted out in the medium to long term, coal (both coking and non-coking) is likely to remain in deficit for the domestic steel industry. The rush of Indian steel players to acquire coal mines overseas need to be seen in this context.
The authors are Senior Analysts with ICRA.