Indian Steel Sector Hit by Slowing Infrastructure Projects

The Indian steel sector has been hit badly because of slowdown in infrastructure projects, high interest rates and falling CAPEX, even as domestic steel prices remained stable mainly due to fall in supply from south Indian state of Karnataka, according to Business Standard.

Profitability margins of most Indian steel producers came under pressure in the first half of 2012 due to reduced steel demand and increases in raw material cost and coal prices.

It is believed that steelmakers registered falls in margins because they have to spend more on the raw material. Shortage of raw materials due to the Karnataka ban created pressure for a hike in raw materials costs.

The Supreme Court of India banned all mining activities in the Bellary and Tumkur regions in the southern state of Karnataka last August after the Central Empowerment Committee report that mining had caused severe environmental damage in the region.

Karnataka produces approximately 18 million metric tons of iron ore. Steel manufactures have set up plants in the iron ore-rich region of Bellary. The suspension of mining activities in the region has resulted in severe shortages of raw material for the steel and sponge iron manufactures who are dependent on iron ore supply from Bellary.

Steel producers may see further rises in manufacturing costs because fuel shortages may create a problem for their plants in the near future. These shortages may arise because Indian power producers are likely to get more coal during this fiscal year.

Following the recent directive of the Prime Minister’s Office (PMO), Coal India Limited (CIL) is currently agreement-bound to supply 90 percent (the trigger level) of the 306 million tons required for 75 power stations in the country, which were commissioned before April 2009.

The state-owned CIL is the primary source of coal for steelmakers, power producers and other industries, though some firms in many sectors have their own coal mines in other countries or import coal to meet supply requirements.

Analysts say with the major portion of coal supply going to power producers, main sufferers of the fuel shortage will be steel mills and cement producers. After PMO directives, it’s uncertain how CIL will maintain balance in distributing coal to steel mills, power producers and the cement manufacturers.

Market analysts believe that despite the slowdown in the global economy, steel prices in India will remain stable. The demand for steel in India is likely to increase in 2012. According to the World Steel Association, in 2011 global crude steel production reached 1.527 billion tons and showed 6.8 percent growth over 2010.

China remained the world’s largest crude steel producer in 2011 (695.5 million tons) followed by Japan (107.6 million tons) and the US (86.2 million tons). India was fourth (72.2 million tons) for the second consecutive year.

The domestic scenario indicates a slowdown in the growth of steel demand, but Fitch Ratings expects the outlook for Indian steel producers to remain stable in 2012. The ratings agency is of the view that demand for steel from the automobile, white goods, construction and infrastructure sectors would continue to grow through 2012, though at a low rate of 6 to 7 percent.

Fitch has already lowered its real GDP growth projections for India for the year ending March 2012 and FY13 to 7.0 percent and 7.5 percent, respectively, down from the 7.5 percent and 8.0 percent estimated earlier.

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