Is India´s steel industry ready to take the torch from China?

Japanese, Korean and Chinese steel companies have great interests to build plants in India, but face a regulatory maze.
As Prime Minister Narendra Modi pushes for improvements in India´s infrastructure and housing, the nation´s steel consumption is set to accelerate. China´s demand for steel, meanwhile, is retreating from the double-digit growth rates of the past 10 years as Beijing tries to shift the economy to focus on domestic consumption rather than exports. Now, the question is whether India is ready to take on the torch from China. To do so, India would need better regulations, power availability and infra¡structure improvements.

China´s steel capacity peaked last year as cuts finally took hold. The country may cut five million tonne (mt) of capacity this year, according to Bloomberg Intelligence analysis. That compares with net additions of 20 mt last year and 50 mt in 2013. China steel capacity increased sharply following the government´s RMB 4 trillion, post-financial crisis stimulus package. The industry has almost no entry barriers due to the easy availability of technology and equipment, favourable financing rates, and support from local governments. As a result, overcapacity and low operating rates became the two main issues facing the industry. Margins at major Chinese steelmakers´ listed units have generally narrowed since 2005 as government consolidation efforts have done little to ease the glut. Competition has been stoked by smaller, private mills that can produce at lower costs because they aren´t subject to environmental policies.

Since China introduced its tougher environmental protection policies in 2013, capacity closures of steel mills have been accelerating in several regions. Local governments are determined to achieve capacity closure and pollution emission reduction targets, which are now key performance indicators, replacing previous GDP-focussed measures. China´s Ministry of Industry & Information Technology (MIIT) has announced three batches of qualified steel companies, which are complying with the required standards for environmental protection, production scale and safety.

Producers that don´t comply and those facing high cost for meeting the requirements will be under pressure to exit the market. Therefore, overcapacity in China´s steel industry may gradually ease this year because of fewer new plants and the elimination of facilities failing to meet environmental standards and those losing money. As a result, crude steel output dropped 2 per cent in the first five months this year.

By contrast, Indian´s steel output keeps growing, even though its steel output growth has slowed in the past three years, mainly due to delays in securing environmental clearances for projects. The country´s five-year plan for 2012-2017 sets that capacity will rise to 142 million metric tonne by 2017, up more than 40 per cent from 2014. And capacity is planned to be further increased to 300 mt by 2025.

The rise in capacity is likely to be driven by demand growth. Indian´s steel consumption is posed to accelerate as the country invests in rural infrastructure and manufacturing growth jumps from the current rate of 8 per cent to as much as 12 per cent in the coming years. Demand for steel is expected to rise 10.3 per cent a year before 2017, according to its five-year plan. India´s finished steel use per capita was 59 kg in 2014, or 12 per cent of the rate in China and 27 per cent of the global average. That leaves room for India to play catch-up as projects are implemented. India´s push to double its urban population by 2050 and increase the urbanisation rate will drive steel demand. The country´s rate was 32 per cent in 2014, lower than China´s 54 per cent and will rise to 50 per cent in 2050, based on United Nations´ forecasts. Chinese apparent crude steel demand more than doubled from 2005 to 2014, while the country´s urbanisation rate rose to 55 per cent from 43 per cent. This implies the potential demand additions for India once the urbanisation rate target is reached.

Steel demand in China, by contrast, has slowed down, pressuring metal prices. And there is no clear clue for a demand recovery soon. China´s announced plans to accelerate railway and other infrastructure projects have yet to translate into more demand for metals, according to Bloomberg Intelligence´s channel checks with producers and traders. It appears that implementation of the projects may not have started, as metal producers are still waiting to receive orders. China´s local governments, which usually match Beijing on infrastructure investments, may lack funds this year due to declining tax proceeds and land sales.

To protect domestic producers, India is likely to increase import taxes on steel products and file anti-dumping charges against China. Indian imports jumped 29 per cent in 2014. China is its largest sourcing country due to cheaper prices. Indian producers have 37 mt of new capacity under construction or planned, according to Bloomberg Intelligence analysis. That equals to 35 per cent of capacity as of year-end 2014, including 14.5 mt to come online by end 2016.

Indian producers can now import high-quality iron ore at about the same cost as lower-quality, domestic feedstock, thanks to falling global prices. The situation is hurting Indian miners, while boosting margins at the nation´s steel mills. Iron ore prices have more than halved since the start of 2014, and touched a six-year low in the first half this year. India raised export duties on iron ore, motivated by concerns about availability of the raw materials for its steelmakers. India became a net-importer of iron ore last July.

The availability of stable power supply may be a key issue for Indian steel mills to expand capacity. Producers may face power constraints stemming from supply deficits and underdeveloped transmission lines. In addition, while the country is coal-resource rich, it relies on imported coking coal, the key fuel for steel-making. Regulatory maze could be another key concern. Japanese, Korean and Chinese steel companies have great interests to build plants in India, while the major setback is a regulatory maze. Posco scrapped its plan for a 12 million-tonne-a-year steel plant in Odisha state that it started setting up in 2005, due to difficulties in acquiring land and iron ore mines. ArcelorMittal also can¡celed its plan to build a steel mill in Odisha. Prime Minister Modi´s government seeks to attract foreign investments and will have to prioritise finding a solution to these issues.

The article is authored by Yi Zhu, Bloomberg Intelligence Analyst, Metals & Mining.