India’s Steel Industry Braces For Chinese Construction Investment

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A report in China Daily quoted a senior officer of India’s Tata Steel saying that for Chinese steel companies facing overcapacity problems, it might be a good idea to invest in India, which is now allowing 100% foreign direct investment in construction projects for the first time.

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Such is the hysteria being whipped up around Chinese steel imports by this news, that the domestic India media is full of reports that speak of the Indian Government seriously contemplating increasing import duties on steel in the coming days from present levels of between 5 and 7.5%.

This may mollify the Indian steel companies but will such a protectionist regime help India’s economy? That’s is the question that needs to be discussed, according to some economists.

The foreign direct investment announcement may also necessitate an upward correction in most of the previous steel growth predictions. Just a few days before the government’s proclamation, the World Steel Association (WSA) had predicted India’s steel demand would hit 76.2 million tons this year, up by 3.4% from 2013.

In 2015, it predicted the same to grow by an additional 6%. Compare this to India’s 1.8% growth in 2013 to understand how much demand growth is forecast to jump.

The FDI move was necessary since India needs to enhance its affordable housing stock to stop the slums in its metropolitan areas from spreading. Also, the new government has announced plans to build 100 “smart” cities, which again, is likely to spur steel demand.

The real estate sector saw rising FDI between 2006 and 2010, but afterward both spurts leveled off. Between 2000 and 2014, construction development received FDI worth $23.75 billion.

So, while India’s steel consumption is clearly set to rise, China’s is set to go the other way. Indian steel companies are left wondering how they will cope with the rise? They currently are producing only about 80% of their installed capacities because of the shortages of iron ore and coal, both crucial in steelmaking.

So, Prime Minister Narendra Modi’s, “Make In India” program will clearly have to rely on Chinese steel to see the light of day. Ravinder Bhan, deputy general manager of marketing at state-owned Steel Authority of India Ltd. (SAIL) was quoted in The Economic Times saying “The ‘Make in India’ slogan has to be true for steel also. Let steel firms get iron ore and other raw materials. But that’s not happening.”

A forecast by Deutsche Bank earlier in the week said India’s steel demand was expected to rise by 4-5% this year, and would touch 15% CAGR after fiscal year 2017 “as the country has the potential to emerge as the second largest steel consuming market after China during FY15-20.”

The research report said India would emerge as a large importer of steel particularly in FY 2019-20 with imports of as much as 24 million tosn of steel – equivalent to 17% of its consumption. Domestic steel production is estimated to rise by 48% by 2020, it said.

So, they may not like it and certainly oppose it, but from the looks of it, India’s steel companies may have to live with China breathing down their backs for some time. Or they need to pray to the gods they believe in that China’s economy picks up soon.

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