India's Metals Future

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It is widely assumed that metal production capacity in developing countries will continue to grow as demographics drives rising domestic demand. This assumption is what has fueled much of the faith in China’s never ending appetite for iron ore, coal, bauxite and non-ferrous metals like copper and nickel. India is seen as the lesser brother to China, driven by the same upward only long term trend as those 1 billion inhabitants, many of them living rural lifestyles gradually urbanize and a rising population seeks work and advancement.

An interesting analysis of India’s position appeared in a press release in advance of a New Materials research report from Business Monitor International. The June report looks both short and long term with, interestingly for us, a specific focus on the Indian steel and aluminum industries expressing growth prospects and some of the risks attached to their projections. Although broadly positive about the prospects for steel and aluminum production, saying producers will continue to find a healthy domestic market for new capacities coming online, they rightly also express concerns that a market imbalance may push prices down if they are unable to offload surpluses onto the international market; saying India will need to expand its export markets if it is to maximize capacity utilization.

In the first quarter ,India’s crude steel output was up 20% year-over-year to 16.1mn tons, reflecting the country’s steady return to form since the second half of 2009. The report believes the momentum to be sustainable, with monthly output remaining above 5mn tons for four successive months in March – the first time India exceeded this level was in December 2009. Expanding capacity meant that March represented a new high at 5.5mn tons.

Consumption is expected to grow at more than 10% over the next five years, driven by the construction, real estate and infrastructure sectors. In April 2010, consumption grew 9.6% y-o-y to 4.14mn tons and output grew just 5.3% to 4.9mn tons, leading to a 47.9% surge in imports to 660,000 tons. The automobile, household goods and capital goods industries also contributed substantially to the growth of the market. BMI forecasts average annual growth in finished steel consumption of 14% in 2010-2014. This is based on a forecasted average real GDP expansion of 7.6% per year over the coming 10 years, ultimately driven by the Indian consumer. To what extent India manages to continue with this level of growth remains to be seen, much will depend on continued moves to liberalize the domestic market, wider global growth helping steel exports and India’s ability to control inflation not now but a couple of years down the line. By 2014, based on BMI’s forecast model, finished steel consumption should reach 100mn tons, which is nearly twice the amount consumed in 2008 and only 6mn tons behind the US.

Government projections should be taken with a pinch of salt, a point BMI is not slow to point out. Steel minister Virbhadra Singh stated in May 2010 that India would double steel production to at least 120mn tons by 2011/12 even without the planned POSCO and ArcelorMittal projects which have been mired in land rights disputes. BMI forecasts 87.5mn tons output by 2012 but even this may be overly optimistic as new capacity has been slow to be added. The country may have 100 mn tons by 2014 and utilization at about 90% would see production at a still respectable 90 mn tons per year. Inevitably some sectors will see over capacity and some under resulting in exports and imports across the product range. Capacity utilization rates will depend on producers ability to secure exports in an increasingly protectionist world.

Although Indian aluminum producers enjoy some of the lowest costs of production in the world, growth in the industry could still be tough in the years ahead. Indian aluminum producers can produce aluminum at a cost of US$1,000-1,200 – half the cost of Chinese production – due to the country’s plentiful bauxite resources and subsidized power costs. As a result, India has been a significant exporter of primary metal to China as Chinese smelters have idled capacity again last year in the face of low metals prices. This is unlikely to be a long-term trend and the industry could face overcapacity if all three major producers continue to add capacity. The downstream market has limited ability to absorb excess primary metal as finishing capacity is only gradually being added so exports are the most likely outlet for excess metal if all the current projects come to fruition.

The road from developing to developed is never smooth so we should not be surprised to see countries like India go through periods of excess capacity resulting in a global increase in metal supply. A more consumption orientated China could provide a home for some of this capacity but a more likely outcome is the two rising powers will slug it out for business on the global stage.

–Stuart Burns

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