Steel Authority of India's Cold Rolled Mill Plans Fly in Face of Demand

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Lately, India’s government-owned Steel Authority of India Ltd (SAIL) has embarked on an ambitious, and what some may even call ballsy, expansion plan.

The expansion is worth approximately USD 9 billion. Much of the funds will be spent on the extension of its hot metal production capacity to 23 million tons a year (mtpa) by 2014-15 from the present 14 mtpa. Coming at a time when growth in this sector has slumped, not only in India but globally, one should not be berated for questioning the wisdom of the move.

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Now, SAIL has announced yet another step that may be dubbed as “daring.”

It has floated a global tender for setting up a 1.2-million ton (mt) cold rolling mill for making automobile grade steel. The plant will be coming up at Rourkela in the eastern part of the country.

The Telegraph quoted SAIL Chairman C. S. Verma as saying the demand for steel from the auto sector was poised to take off once again. Verma believes that the worst phase for both the auto and steel sectors is over. He is obviously banking on India’s credentials as a viable automobile manufacturing hub, something that the nation’s Finance Minister P. Chidambaram is proud of. Almost all the leading global brands have, in the past, set up shop in India.

SAIL’s cold rolling mill will be built at a cost of around USD 800 million through a joint venture.

India’s Automotive Outlook: Hot or Not?

For now, the Steel Authority of India’s move may seem a bit puzzling. India’s automobile industry, like the nation’s overall steel sector, is hurting. A downturn in the domestic economy and the continued erosion in the value of the Indian rupee versus the US dollar have all added to the sector’s downturn.

So much so that the Society of Indian Automobile Manufacturers had recently forecast a second consecutive year of lower car sales, prompting some within the Indian government for a government impetus to help it tide over the current crisis.

In the April to August 2013 period, car sales in India fell 5.8 percent to 699,300 units. In October, the figure was at 163,199 units against 169,788 in the same month last year. Analysts say the figures for the September-December period, too, may show only a marginal increase.

But SAIL’s eyes are on the future, not the immediate demand picture. Part of its decision is also being propelled by reports by some analysts who believe that demand for domestic steel was now set to increase owing to the high value of the dollar, which will makes it cost-effective for car makers to buy local steel rather than import it.

Steel Demand Outlook

Obviously, if the Indian rupee continues to be at a low against the dollar, Indian steel consumers, including auto manufacturers, will find it lucrative to purchase cold rolled steel from Indian companies like SAIL.

The other thing that SAIL seems to be banking on is a period of relative political stability from next year. General elections in the country are to be held in the early half of 2014, and with it, the period of uncertainty for the Indian economy is expected to be over.

Once the new government settles in, analysts across sectors are optimistic that it would announce new policy measures that would spur economic growth, including in manufacturing – leading, in turn, to a renewed growth in demand for steel.

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