Sohrab Darabshaw

According to a report, crude-steel output in China dropped 1.3% to 270.07 million metric tons in the first four months of 2015 as compared to the same period in 2014. The World Steel Association has forecast that China will end up using far less steel this year and maybe even the next. Which again means more supply and far less demand.

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The report quoted Alan Chirgwin, BHP Billiton iron ore marketing vice president, as saying steel supply was expected to rise by about 110 million metric tons this year, exceeding demand growth by around 40 mmt.

Yet this has not fazed Rio Tinto Group, for example, which recently announced it would continue with its plan to produce iron ore at full capacity despite the fall in prices. While BHP and Brazil’s Vale SA have, for now, stepped on the brakes vis-à-vis their medium-term plans, team Rio, on the other hand, thinks reducing production costs will help it hang on to its lead…and profits.

Betting on a Comeback

Rio Tinto sees China coming back with renewed vigor and driving global iron ore demand through 2030.

Where does that leave India? So far as iron ore or even steel consumption is concerned, China is miles ahead of India, even in the fatigued condition it finds itself today. India, as reported by MetalMiner, drew a blank for about two years due to a court-imposed ban on ore mining, which left its steel companies at the mercy of imports, something that they continue to rely on even today.

That had also affected its iron ore exports, especially from the ore-rich provinces of Goa and Odisha. India’s iron ore imports went up dramatically to a record 6.76 million tons in the first 7 months of the 2014-15 fiscal year. Once, the country was the third-largest supplier of iron ore to the world, but, because of the export duty and a national mining ban, it had turned into an importer.

Analysts predict India was likely to remain a net importer of iron ore in 2015-16 as well, no thanks to the continued drop in falling international rates. The only silver lining, claimed analysts, could be that due to the resumption in the domestic production of iron ore, the quantity of imports may not be as high as the last fiscal year.

Captive Market

India’s steel companies do not have captive mines, so they have to get their average 95 mmt a year of iron ore from elsewhere. With international price of ore hovering today at about $50 per mt for high-grade ore, it is too attractive a deal for Indian steel mills to be passed on. As reference points, last year, iron ore imports happened when rates had touched $90 per mt.

In all this, Australia, a country that sells about 80% of its ore to China, sits in a happy position. While it hopes that the recent cuts in interest rates will revive the Chinese economy, and thus its demand for iron ore and coking coke, it is also looking increasingly to India to pick up its stock. Last year, for example, as reported by MetalMiner Australia had approved Adani Group’s approximate $15.5-billion (AUS $16.5 billion) Carmichael coal project in Queensland that could yield up to 60 million mt of coal per year. That was just the beginning. For the Aussies, if the dragon’s appetite for iron ore and coking coal is satiated, the hungry tiger is always lurking in the background.

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When the Tiger and the Dragon dine together the world sits up and takes note.

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Signing business agreements worth $22 billion is a big deal so Indian Prime Minister Narendra Modi’s recent visit to China made big, bold headlines here. Some of India’s old, and some not so old (Adani, Bhusan Power and Steel), players in the steel and power sectors, were signatories to the 26 deals.

Steel and Energy Deals

The notable contracts included the one between India’s IL&FS Energy Development Co. and China Huaneng Group for a 4,000-megawatt thermal power project, and India’s Bhushan Power and Steel sealing a pact with China National Technical Import and Export Corporation for an integrated steel project in Indian province of Gujarat.

So here were two Asian, nee global, giants, breaking bread and talking business at the same table, sending analysts scurrying to their laptops to chalk out spreadsheets and draw pie charts in an effort to understand the impact of all this in the long term.

While business leaders of both nations, including Alibaba Group Chairman Jack Ma, spoke of long-term interests, such talk brought the arclight swinging back to the present and short-term situation currently prevailing in the Asian region, especially in iron ore and coking coke, two crucial ingredients in making steel.

There’s no doubt in anyone’s mind that steel is the mainstay of Asia’s infrastructure, a fact that has had iron ore and coal miners — and even steel majors in China, India and as so far as Australia — jockeying for a major piece of new market share. With demand from Europe and the US lacking, suppliers in all three countries are walking a thinly veiled tight rope to ensure their survival.

Wither Demand

Once a destination of hope, the Chinese dragon, for now, has lost some of its hunger. Some say next-door neighbor India is where one can find fresh action. The jury’s honestly still out on that one, though. But the slowdown in China’s economy means less need for steel, in turn, lowering the demand for ore and coking coal. Leaving miners re-tweaking their business plans.

Last year, for example, the Rio Tinto Group, BHP Billiton Ltd. in Australia, and Vale SA of Brazil, to stem the tide, had stepped up low-cost output to pump up volumes, leading to a glut. Now, everybody’s mantra seems to be – cut production costs faster than the falling prices.

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According to a recent report from the Freedonia Group, worldwide demand for copper is expected to advance 4.7% every year to 37.2 million metric tons in 2019. It also says the Asia-Pacific region is expected to see the fastest annual gains, led by increased output in China and India.

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Electrolytic refining of primary copper will be the primary method of production in these countries, but recycled scrap will account for a larger share of total refined copper output.

Construction Spending in India, US

Outside the AP region, the Freedonia report says advances in construction spending would also fuel copper demand in North America, particularly in the US, where early signs of building construction activity significantly increasing exist. This is followed by Western Europe which could see a “moderate increase” in copper demand since construction and manufacturing output there is expected to climb at a below average speed.

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Around the world, copper producers have started looking to India as the provider of relief in an otherwise somewhat bleak copper market.

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The long-term forecast issued recently by the US-based research firm, The Freedonia Group, predicts that India will register the fastest gains of any major copper metal market through 2019.

Strong Housing Demand

Demand in China, the biggest consumer of copper, has started to weaken because of a downturn in its economy. India, on the other hand, has an industry-friendly government in the saddle that’s willing to try investment-friendly policies and that’s, so far, driving driving up the local economy.

The Modi administration’s openness to trade is one of the favorable reasons cited by the Freedonia paper. Another reason is that a strong increase in India’s building construction, driven in part by an expanding urban population and government investment, is expected to boost copper consumption here.

Worldwide demand for copper, says the report, is expected to advance 4.7% every year to 37.2 million metric tons in 2019. It also says the Asia-Pacific region is expected to see the fastest annual gains, led by increased output in China and India. Electrolytic refining of primary copper will be the primary method of production in these countries, but recycled scrap will account for a larger share of refined copper output.

US Construction is Next Best Hope

Outside the AP region, the Freedonia report says advances in construction spending would also fuel copper demand in North America, particularly in the US, where early signs of building construction activity significantly increasing are being recorded. This is followed by Western Europe which could see a “moderate increase” in copper demand since construction and manufacturing output there is expected to climb at a below average speed.

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It may be the world’s largest steel producer, but Lakshmi Mittal-led ArcelorMittal saw a decline in its businesses in India in 2014 for two main reasons: weak demand and cheap imports.

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The firm’s recently released annual report said ArcelorMittal and its subsidiaries rang in sales of $225 million from India. Once upon a time, in fact in 2010, ArcelorMittal’s Indian operations had netted $873 million, so that will give readers some perspective of the depth to which sales have plummeted.

It would not be an exaggeration to state that almost all of India’s major steel companies have stories similar to that of ArcelorMittal. Even the government-owned Steel Authority of India Ltd. (SAIL), which had posted a net profit for the October-December quarter 8.6% higher than the same period last year, had a similar lament.

In its Q2 results statement, the company said the turnover was impacted due to “challenging market conditions” and high imports, among other reasons.

Rough SAILing

SAIL chairman C.S. Verma told the media here that the only way his company had circumvented these challenges was by bringing in initiatives to reduce energy consumption and optimize raw material utilization, as well as adopt state-of-the-art technologies.

It looks like these measures were not enough to save SAIL from Fitch Ratings. Fitch recently lowered the outlook for SAIL’s long-term foreign currency issuer default rating to negative. The crux of the matter lay in its commentary, where Fitch said continued weak steel demand growth in India, high steel imports or a further softening in global steel prices could derail SAIL’s efforts to modernize.

Same Story at Tata Steel

Another Indian steel behemoth, Tata Steel Ltd.’s Indian steel operations had a rough quarter again for almost the same reasons — sluggish demand, cheaper imports and higher raw material costs on account of mining stoppages. In the December quarter, Tata Steel’s consolidated sales declined over the preceding quarter by 6.1% on the back of a 3.1% decline in steel volume and weak steel price realizations. The only redeeming factor here was Tata’s European operations which turned in a substantial jump in profitability.

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ArcelorMittal, Inc., as reported by The Economic Times, suffered weak Indian domestic demand for steel as the rupee depreciated by more than 30% since 2010, which also made imports difficult. ArcelorMittal had to pay more import duties to get ore into its CEO’s native country (7.5%) as opposed to imports from Free Trade Agreement (FTA) countries, who paid just 0.8%, adding to the company’s financial burden.

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In February this year, Standard & Poors downgraded the company’s credit rating on lower than-expected profit though it maintained a stable outlook, saying ArcelorMittal would generate at least neutral cash flow and avoid meaningful debt increases over the next two years.

Weak Demand, Rising Imports

Most of India’s steel majors, such as ArcelorMittal, have, in recent times, been left trying to cope with weak demand and rising imports from China, Japan and South Korea.

Steel Authority of India Ltd.’s C.S. Verma, for example, has gone on record saying he is optimistic about a recovery in domestic demand in India, though that, to some extent, could be offset by a continued slump in export markets. Along with a few others, he feels steel prices, having plunged to a historic low, will only recover going forward.

A report released by Dun & Bradstreet earlier this week, reported sentiments generally in tune with the sentiments of executives such as Verma. While the outlook for mining and metals industry remained volatile globally, in India, though, the formation of a stable government had “reaffirmed corporate and consumer sentiment significantly,” the report said.

The latest Sector Outlook for Metals in India 2015 report by the agency said demand was likely to improve as fiscal policy was better geared toward an investment-led growth strategy. The government policy shift could provide an overall metal sector could benefit.

Government Help

India’s Modi government and the local governments are trying their best to improve the local situation. Indian Steel and Mines Minister Narendra Singh Tomar announced that the government had planned to set up four steel plants in the provinces of Jharkhand, Karnataka, Odisha and Chhattisgarh.

Of the four, the one in Chhattisgarh is touted as the most important. SAIL and the National Mineral Development Corporation plan to create an ultra-mega steel plant there. It’s a multibillion-dollar greenfield project that, when complete, will have a 3 million metric-ton-per-year capacity. It is planned that both the company and the Chhattisgarh government will sign agreements for the project when Prime Minister Narendra Modi visits Chhattisgarh on May 9.

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While India leads the world in Direct-Reduced Iron production, the domestic industry has been facing an uphill production battle for the last four years.

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India’s DRI sector is hoping for help from the government and clarity in the overall steel policy to see it through, what many have dubbed, its most critical phase ever.

Demand DRIs Up

What is worrisome is that the falling demand for steel, especially construction steel globally, could further, negatively impact the sector. Some are quick to note that India’s DRI units need not worry much on this front as the market in India has remained insulated from global trends owing to steadily increasing domestic steel consumption.

Two other risks facing the sector are imported scrap being used by steel companies in India, DRI is an excellent substitute for scrap in electric arc furnaces, and the reliance by medium-sized DRI producers on inferior technology. That means technological limitations stop the producers from exploiting inferior grades of iron ore and coal.

Further, the limited availability of coking coal only motivates steel production in the country through a combination of DRI and blast furnace. What has added to the misery is the recent round of coal auctions held by the federal government.

Unable to Bid in Coal Auction

DRI companies were unable to participate in the auction, and a hitherto discounted source of fuel was lost, pushing the cost of DRI production by an estimated 40%, some have said. The DRI segment has brought this to the government’s attention.

While many steel companies prefer to use DRI instead of scrap, the slowdown in the global steel industry has seen some amount of the steel melting scrap being imported into India because of lower import duties. What makes steel plants happy in such cases, besides the cheap duty, is the fact that the imported scrap percentage works out to be higher, which eventually negates the cost of imported scrap.

To many analysts, the DRI sector in India is poised on the cusp of a turnaround, but only if there is adequate government backing as well as support from domestic steel companies. Even then, it could easily take four years for the industry to come back to an even keel and ramp up production.

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Why Manufacturers Need to Ditch Purchase Price Variance

High costs and lower demand are just two of the problems plaguing India’s DRI sector. DRI is used by the steel industry in flat as well as long steel product segments, and is also used in infrastructure projects.

Low Steel Demand Hits DRI Producers, Too

According to figures put out by the World Steel Association, in the first quarter of 2015, India, with over 4,500 tons of DRI, headed the list of 14 nations that accounted for 87 % of the world’s total DRI production. The Sponge Iron Manufacturers Association has estimated India to have an installed capacity of 37 million metric tons, although it’s difficult to arrive at an accurate figure due to a general lack of proper research.

EAF and Induction Resources

India’s DRI industry has nurtured secondary steel producers who largely use electric arc or induction furnaces to make their steel, for which DRI comes as handy substitute for scrap.

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Yesterday’s post explained how the Short Range Outlook (SRO) report released by the World Steel Association for 2015-2016 predicted steel demand would grow by just about 0.5% to 1.544 million metric tons in 2015.

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The world’s steel sector looks on with hope to India to see it through this downturn. The country’s per capita consumption was still low, at about 60 kg as against the world average of 220 kg. With the government’s Make In India (manufacturing) plan slowly grinding into motion, it is hoped that this will lead to an increase in steel consumption.

The End of Annual Growth for Chinese Steel

So, the China steel story is over, at least for the short-term. The economic deceleration there, following low investment growth since 2008, is expected to adversely impact any steel growth there, and it has so far this year.

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According to the latest Short Range Outlook (SRO) report released by the World Steel Association for 2015-2016, steel demand was forecast to grow by just about 0.5% to 1.544 million metric tons in 2015. The next year could be better with a forecast of 1.4% to reach 1,565 mmt. Last year, incidentally, steel use grew by 0.6% in 2014.

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The economic slowdown in China is leading to lesser uptake of steel and that was was one of the major reasons for the sluggish growth. This was expected to be partly only partially offset by a measure of growth in developing economies such as India, Indonesia and Vietnam.

The Dragon Gives Way to the Tiger

Clearly, in the next two years, so far as steel is concerned, one emerging superpower will give way to another neighboring one. India’s steel consumption growth was on its way to register a new high this year as well as the next, at 6.2% and 7.3%, respectively, while other high-consuming nations besides China, including the US and Japan, are expected to see a decline.

India, as per WSA data, was the world’s third-largest steel producer with a production of 14.6 mmt in the first quarter of 2015. In this period, India’s production grew by 9.4% compared with the first three months last year. As reported by MetalMiner, it was in February this year that India had passed the US to become the world’s third-largest steel producer, after China and Japan.

Can India Offset the Losses?

The world’s steel sector hopes India can power it through this downturn. The country’s per capita consumption is still low, at about 60 kg opposed to the world average of 220 kg. With the government’s Make In India (manufacturing) plan slowly grinding into motion, it is now hoped that this would lead to an increase in steel consumption.

So, is the China steel story over? It’s affirmative, at least for the short-term. The economic deceleration there, following low investment growth since 2008, was expected to adversely impact its steel growth, and it has.

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