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Steel sector sitting pretty, thanks to Chinese demand

By Ramnath Subbu

MUMBAI AUG. 23. The Indian steel industry, hitherto beleaguered by huge debts and falling demand, is witnessing a resurgence of sorts on the back of better domestic demand from the automotive and construction industry as also improved export demand from China. A favourable monsoon has also helped.

The performance of steel companies in the first quarter of the current fiscal (2003-04) testify to the recovery. Tata Iron and Steel Company reported a spurt in its net profit in the quarter under review at Rs. 267.07 crores and net sales were up 28 per cent at Rs. 2,257.10 crores. Jindal Iron and Steel Company saw a 100 per cent jump in its net profit at Rs. 20.31 crores on higher sales of Rs. 470 crores and Essar Steel's net profit was Rs. 10.25 crores against a loss of Rs. 138.22 crores in Q1 of 2002-03.

"For the steel sector an important development in the late 1990s was the declining rate of GDP elasticity of steel. The reason for the decline is the difference of elasticity of steel demand among different sectors, with elasticity being the highest in the secondary sector (1,3) and just about 0.21 in the tertiary sector. The silver lining in the current uptrend in economic growth is that it has been taking place across the old economy sector, which form the crux of the secondary sector. The demand for steel, therefore, will show a higher elasticity in the coming years than before," said J. Mehra, Managing Director, Essar Steel.

The changing consumption pattern is a factor that has led to a boom in certain steel consuming sectors with housing being one example as easy availability of finance has contributed to a boom. "Once the economic growth picks up, as we see in the next year, the sector will receive a further boost. Similar boom is seen in the automobile sector and also in the white goods sector," said Mr. Mehra.

Steel makers experienced a tough year in 2001-02 with prices falling to historically low levels amid a worldwide demand downturn. Global prices, however, staged a recovery in 2002 and in the first half of 2003 led by improving demand, especially in China and some global production cuts. Accordingly, domestic prices have also firmed up.

Mukesh Agarwal, Head, Corporate Ratings, Credit Rating and Information Services of India (Crisil), said, "Since global demand-supply situation is expected to improve, average international prices of HR coils are expected to stabilise at $260-270 a tonne in the medium term. Stable international prices and an improved domestic demand-supply situation are likely to ensure that prices remain firm at current levels over the next year". It was felt that they could move up by a further Rs. 1000-1,500 a tonne in the coming months.

"There are two factors, the boom in the auto and construction sectors and exports picking up due to China. Exports to China are sustainable because they are following a development model to reach the U.S. standards. The North-West region of the country is still underdeveloped," said J. K. Tandon, Joint Managing Director and CEO, Jindal Vijaynagar Steel.

China is hosting the Beijing Olympics in 2008 and construction activity is on at a feverish pitch. For China, the snag has been the availability of iron ore and they are setting up two terminals to handle up to 140 million tonnes annually.

Mr. Mehra said demand was growing at 16-18 per cent in China and during the current year, it was likely to buy 20 million tonnes of steel. "The good show therefore, is expected to continue," he said.

"In India, it will not be long before we can achieve the same as China because infrastructure development is also catching up. It has been estimated that over the period 2002-2010, consumption and production in India will grow at 8 per cent while in China it will be around 6 per cent," said Mr. Tandon.

Steel exports have also seen a smart growth, for example, during the first quarter of 2003-04. Tisco's export turnover was Rs. 367.67 crores (Rs. 208.80 crores) and Jisco Rs. 341.04 crores (Rs. 183.24 crores).

However, export is an option available only to the handful of quality steel producers. The two major markets of China and the U.S. are vulnerable as Indian exports may attract restrictive measures unless exporters are careful about the quantum of exports to these countries.

"There is no doubt that there is need for protection from the WTO (World Trade Organisation) onslaught. While they have a problem with the export of HRC from India, there is always the option of going for value-added products which is already taking place," said Mr. Tandon.

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