It should be taken as a sign of India’s evolution as a global rather than a national player that Steel Authority of India, the country’s largest steel producer, is looking overseas for supplies of iron ore. Although India is a major iron producer in its own right, granting of new mining rights have been fraught with local opposition and delays creating a potential gap between steel producers aspirations to build capacity later in the decade against domestic iron ore supplies. There are voices in both the industry and parliament questioning whether India should be exporting low value resources like iron ore to China rather than converting it into higher value steel products for both a rising domestic market and for export according to an article in the FT.
India produces about 65m tons of steel a year yet with a population of 1.15bn its per capita consumption is just 40kgs a year compared to a global average of 150kgs. Part of this can be explained by the fact that some 300m Indians are at the subsistence farming level and so their steel consumption is minimal but a growing middle class and massive long term infrastructure investment plans means the potential for growth is huge. According to this FT article, India’s Ministry of Steel is preparing a policy document on the infrastructure that will be required by an industry capable of producing as much as 300m tons of steel a year – illustrating the long term goal.
SAIL is not alone. An article reproduced in Mineweb quotes India’s Economic Times as saying state-owned National Mineral Development Corporation (NMDC), India’s largest iron ore producer, is set to make its first venture outside of the country, reportedly agreeing to pay US$2.5 billion to acquire a 50% stake in Ferrous Resources Brazilian iron ore operations.
These investments differ markedly from Tata’s purchase of Corus Steel and Hindalco’s purchase of Novelis which were more about gaining a foothold in foreign markets. They were much less about positioning themselves for growing demand in their domestic market.
Public spending on infrastructure and rising automotive sales have been a major driver of domestic consumption of all metals. Steel demand grew at 13% in India last year. The essentially socialist political parties are treading a thin line between opening up sectors of the market such as liberalizing equity markets and allowing foreign direct investment of certain sectors although notably not defense or retail, while keeping debt markets firmly closed. This has served India well in the run up and during the recession, largely insulating the country’s banks against the global meltdown. Fortunately India enjoys a high savings and investment rate of 38% and growth is expected to reach over 7.5% this year from 6.7% last year and possibly into double digits within a few years. Much will depend on how long the country can keep inflation under control against a backdrop of loose monetary policy and high public spending. If inflation picks up (and India isn’t isolated from the world if global inflation rises) leading to interest rates being raised growth will suffer. But the key issue is administrative reforms. In recent years, these have appeared to stumble and been slower than many would like but providing they continue, India’s natural entrepreneurial spirit, competitively low wages and rapidly growing middle class will ensure the steel makers efforts to secure long term raw material supply are well rewarded.