One factor that has played a role in price trends for steel is the sector’s relative fragmentation. The top ten steel producers in the world produce slightly more than 30 per cent of the world’s steel. While various types of steel are produced, and several value-added processes exist, the scope for differentiation is limited, making steel a commoditised product. This leaves limited scope for pricing power except in niche products such as high alloy steel for machinery, etc.
In contrast, iron ore, a key input to steel is an industry dominated by a few, with the top three iron ore producers in the world controlling 70 per cent of the world’s seaborne iron ore. Consolidation has been the buzzword among the mining majors with BHP Billiton (NYSE:BHP) and Rio Tinto merging their Western Australia iron ore mines.
The latter is an effort to regain a semblance of control over raw material prices which have collapsed since late 2008. Global coal prices are down between 55 per cent and 65 per cent from the peaks in July 2008. Iron ore prices are down 60 per cent from the peaks of April-May 2008. The lower raw material prices have eased the pressure on steel producers who had a low degree of backward integration.
The Indian scene
The Indian scenario for steel looks a little more optimistic than the global situation. Domestic HR coil prices declined just 26 per cent from their peak in June 2008 to their trough in February 2008. The domestic market has exhibited some early signs of recovery with several steel producers hiking or contemplating a hike of between 2 and 5 per cent.
Even as international prices have weakened, domestic steel prices have been supported by shortfall in supply, after accounting for exports. The past year saw domestic output of 55.2 million tonnes against consumption of 52.6 million tonnes. India exported 6.6 million tonnes of steel and imported 7.7 million tonnes.
Growth in output in recent years has been slow, with finished steel output growing by just 6.2 per cent in 2007-08 and remaining almost flat (0.2 per cent growth) in 2008-09. Greenfield additions to steel capacity have been hampered by limitations in infrastructure such as ports, railways and roads and problems in land acquisition. India’s compounded growth rate in consumption has hovered at 8.5 per cent in recent years.
To bridge the shortfall between the current capacity of 56 million tonnes and future requirements, the Ministry of Steel has set an ambitious target of 110 million tonnes to be achieved by 2010-11 and 240 million tonnes by 2020.
Brownfield expansion, that is, expansion of existing capacity, is expected to add 60 per cent to existing capacity at 40 million tonnes. Greenfield expansions, are expected to fill in the remaining 40 per cent.
