Global Scenario

Indian Scenario

Production

Demand - Availability Projection

Pricing & Distribution

Imports of Iron & Steel

Exports of Iron & Steel

Duties & Levies on Iron & Steel

Custom Duties

Peak rate of Custom Duty has been reduced sharply during last 5 years .In the Union Budget 2003-04 it has been further reduced to 25%. This has forced domestic industry to become internationally competitive. The custom duty on seconds and defective steel has also been retained at 40%, which would increase the gap between the prime and the defective category and make the import of seconds and defectives less attractive. Custom Duty has been reduced on a wide range of inputs, which would bring down the cost of production for the domestic steel industry. In the Union Budget 2003-04 the Customs Duty on Met Coke has been rationalised at 10%. However, the steel manufacturers have been given exemption from paying 4% SAD.

Excise Duty

Excise Duty on iron & steel has not been reduced in successive budgets. At present excise duty on all iron and steel is 16% ad valorem called CENVAT.

Levies on Iron & Steel

SDF- This was a levy started for funding modernisation, expansion and development of steel sector. The Fund, inter-alia, supports :

Capital expenditure for modernisation, rehabilitation, diversification, renewal & replacement of Integrated Steel Plants. Research & Development Rebates to SSI Corporations Expenditure on ERU of JPC

Expenditure on ERU of JPC

Fund was abolished on 21.4.94 Cabinet decided that Corpus could be recycled for loans to Main producers Interest on loans to Main Producers be set aside for promotion of R&D An Empowered Committee has been recently set up to guide the R&D effort in this sector. EGEAF - Was a levy started for reimbursing the price differential cost of inputs used for engineering exporters. Fund was discontinued on 19.2.96.

Opportunities for Growth of Iron and Steel in Private Sector

The New Industrial Policy Regime

The New Industrial policy has opened up the iron and steel sector for private investment by (a) removing it from the list of industries reserved for public sector and (b) exempting it from compulsory licensing. Imports of foreign technology as well as foreign direct investment are freely permitted up to certain limits under an automatic route. Ministry of Steel plays the role of facilitator, providing broad directions and assistance to new and existing steel plants, in the liberalized scenario.

The Growth Profile - Steel

The liberalization of industrial policy and other initiatives taken by the Government have given a definite impetus for entry, participation and growth of the private sector in the steel industry. While the existing units are being modernized/expanded, a large number of new/greenfield steel plants have also come up in different parts of the country based on modern, cost effective, state of-the-art technologies.

Increasing role of private sector in total production can be seen from the fact that its share has increased from 51.4% in 1991-92 to approximately 68% in 2002-03. This trend is likely to continue.

At present, total (crude) steel making capacity is over 30 million tonnes and India, the 8th largest producer of steel in the world, has to its credit, the capability to produce a variety of grades and that too, of international quality standards. As per the ratings of the prestigious " World Steel Dynamics", Indian HR Products are classified in the Tier II category quality products - a major reason behind their acceptance in the world market. EU, Japan have qualified for the top slot, while countries like South Korea, USA share the same class as India.

DEVELOPMENT OF INDIAN STEEL SECTOR SINCE 1991

The economic reforms initiated by the Government since 1991 have added new dimensions to industrial growth in general and steel industry in particular. Licensing requirement for capacity creation has been abolished, except for certain locational restrictions. Steel industry has been removed from the list of industries reserved for the public sector. Automatic approval of foreign equity investment upto 100% is now available. Price and distribution controls have been removed from January, 1992, with a view to make the steel industry efficient and competitive. Restrictions on external trade, both in import and export have been removed. Import duty rates have been reduced drastically. Certain other policy measures such as reduction in import duty of capital goods, convertibility of rupee on trade account, permission to mobilise resources from overseas financial markets and rationalisation of existing tax structure for a period of time have also benefited the Indian Steel Industry.

Production of Iron & Steel

(A) Finished Carbon Steel Production

The total production of finished carbon steel in the country has been 30.11 million tonnes in 2001-02 as compared to 14.33 million tonnes in 1991-92, indicating an increase of 110.12%. Producer-wise production of finished steel. The high share of the secondary sector in finished steel production is largely due to substantial supplies of semis, the basic feed material from the main producers for conversion to needed shapes by rolling.

(B) Pig Iron Production

The total production of Pig Iron was 3.946 million tonnes in 2001-02 as compared to 1.59 million tonnes in 1991-92 registering an increase of 148.18% during the considered period. Earlier Pig Iron was produced primarily by the integrated steel plant of SAIL and RINL. Of late, the share of stand-alone pig iron units has increased significantly.

(C) DRI Production

The production of DRI has increased from 1.31 million tonnes in 1991-92 to 5.403 million tonnes in 2001-02, registering an increase of nearly 4.12 times over the considered period. India has emerged as the second largest producer of DRI in the world after Venezuela.

Import and Export of Iron & Steel

Although India started exporting steel way back in 1964, exports were not regulated and depended largely on domestic surpluses. However, in the years following economic liberalisation, export of steel recorded a quantum jump.

Apparent Consumption of Finished Carbon Steel

Apparent consumption (i.e production + imports - exports +/- variation in stocks) of finished steel, year-wise, has been shown below. Apparent consumption represents the actual demand of steel in a particular period/year. It has increased from 14.84 million tonnes in 1991-92 to 27.35 in 2001-02. Increase in apparent consumption has not been uniform, fluctuating from a high of 21.8% to low of 1.2 % reflecting uneven growth in steel demand.

Additional Capacity Creation in Private Sector Since 1991

After de-licensing of Indian Iron and Steel Industry and as a result of the steps taken for creation of additional capacity in the private sector, 19 projects involving a total investment of Rs. 30,835 crores equivalent to a capacity of approx. 13 million tonnes per annum have already been cleared by Financial Institutions and are in various stages of implementation. Already 8 units with a total capacity of Approx 5.45 million tonnes have already been commissioned.

IMPORTANCE OF STEEL

Steel has had a major influence on our lives, the cars we drive, the buildings we work in ,the homes in which we live and countless other facets in between. Steel is used in our electricity-power-line towers, natural-gas pipelines, machine tools, military weapons-the list is endless. Steel has also earned a place in our homes in protecting our families, making our lives convenient, its benefits are undoubtedly clear.

Steel is by far the most important, multi-functional and most adaptable of materials. The development of mankind would have been impossible but for steel. The backbone of developed economies was laid on the strength and inherent uses of steel.

The various uses of steel which in turn is a measure of adaptability of steel can be judged from the following characteristics of steel:

Steel compared to other materials of its type has low production costs. The energy required for extracting iron from ore is about 25 % of what is needed for extracting aluminum. Steel is environment friendly as it can be recycled. 5.6 % of element iron is present in earth's crust, representing a secure raw material base . Steel production is 20 times higher as compared to production of all non-ferrous metals put together.

The steel industry has developed new technologies and has strived hard to make the world's strongest and most versatile material even better. There are altogether about 2000 grades of steel developed of which 1500 grades are high grade steels. There is still immense potential for developing new grades of steel with varying properties .The large number of grades gives steel the characteristic of a basic production material Steel has enjoyed an important position in our lives and will continue to do so in the years to come. However, the degree to which it maintains its dominant position will depend on if steel can exploit its potential by developing new higher grades and adaptable grades . This can be achieved by refining the structure and applying alloying techniques and thus furthering its utility value. We will have to find out ways to use steel and be ready to face a stiff competition from Aluminium in the future.

INTERNATIONAL STEEL MARKET ROUNDUP - January 2004

Flat Products

As expected, US prices continue to creep up. Order intake at the steelmakers remains steady. Distributors need to fill holes that have developed in warehouse inventories. There are signs that industrial production has begun to turn around. However, service centres still report difficulty in passing on the mill increases to their customers. The withdrawal of the Section 201 tariffs has not caused too much immediate concern about imports, given the state of the economy, the weakness of the Dollar and the disincentive of escalating ocean freight rates. Several domestic mills are experiencing supply side problems which are causing late deliveries.

There is fresh concern over the level of stocks in Japan. Local inventories of strip products, at end October 2003, rose by 2.6 percent compared with the previous month. The market had been expecting a decrease. However, quayside warehouse stocks of imported flat products fell by 9.5 percent from September - the first decline in 6 months. Demand from the auto and construction machinery sectors is good and export enquiries are still encouraging.

Posco of South Korea forecasts both home and export demand, particularly from China, to be strong during the next year. Order intake at the Taiwanese producers is firm as they are still benefiting from booming business with mainland China. CSC will raise domestic prices for all its steel products except electro-zinc coated coil for the first quarter 2004. However, the company has decided not to change export prices for the Japanese market.

The EU mills are expressing their determination to increase prices in the first quarter of 2004. Procurement charges for raw materials, energy and transport have grown significantly during the last year. However, we are now in the typically slow pre-Christmas period and, for the moment, buyers are holding off purchasing. Many negotiations are not expected to close until late December.

The economic climate in Poland is improving and should translate into increased steel demand in the near future. In Slovakia and the Czech Republic domestic consumption is good because both economies are going well. Supply and demand are evenly balanced. It is easy for the mills to export and they are enjoying good order loads. Imports generally remain at a steady level. The only real problem besetting the industry is delayed payment. We have noted a slight negative price tendency, which is probably due to a seasonal slow down in sales.

Long Products

US pricing activity continues to improve as producers move to recover margins lost to higher input costs. Lately, demand has started to harden in the non-residential construction market but as the worst of the winter weather is still to come, this recovery may not last.

Japan is moving into the season of low demand for long products. However, the producers' efforts to raise prices on the back of soaring ferrous scrap charges and transport costs have met with further success in recent weeks. South Korean demand has turned downwards, as the construction sector begins to cool. The mills hope for some recovery based on future predictions for reconstruction work to buildings and infrastructure damaged by the Summer typhoon. Activity in the Taiwanese building market has failed to rally. Steel values continue to climb only as a result of ever rising expenditure on billet.

In general, EU producers have not been able to persuade buyers to accept higher prices to offset their heavy input costs. The Polish economy is picking up and this should create a more encouraging environment for the long product makers come the Spring. For the moment, seasonal factors have not undermined prices. Although we are now in the winter period, sales to the Czech/Slovak building industry are still at a good level. There is some downward price pressure along the Czech/Slovak border with Poland but this is not really influencing the situation throughout the rest of the region.

GLOBAL STAINLESS OUTPUT UP 850,000 TONNES IN 2003 (4.4 PERCENT)

Our estimate for global stainless steel output in 2003 is 20.2 million tonnes up 4.4 percent on the year earlier figure. We forecast further expansion in 2004 to around 21 million tonnes. Western World production is expected to rise from 18.7 million tonnes in 2002 to 19.5 million tonnes this year and to over 20 million tonnes in the following twelve months.

Demand in the European Union has been rather sluggish since January. In contrast, export sales have improved. This has enabled the steelmakers to increase output by an estimated 3.5 percent in 2003. Over the next twelve months domestic consumption should be better but foreign supplies may drop a little.

Japanese production is expected to end this year at a figure 3.4 percent higher than in 2002. All the improvement has been the result of a rise in export volumes - mainly to China. Home consumption should expand marginally in 2004 and sales to the Asian markets should hold up quite well.

In contrast, the situation in the United States is dire. Domestic demand is flat. Exports are almost impossible to secure. Output this year is likely to be down 2.5 percent. Further cuts are possible if the threatened closure of melting at the J and L plant takes place.

Posco's new steelmaking unit is near full production. Korean output this year will expand by approximately 18 percent. Further growth is forecast in 2004 when the full effect of the new capacity is felt. Most of the extra supply will be sent to China as hot rolled coil.

Foreign sales (particularly to China) have propped up stainless steelmaking in Taiwan. Output this year will be 2.5 percent higher than in 2002, despite local demand being slow.

We also anticipate a modest rise in production for the "others" classification of the Western World in 2003. Furthermore, an upturn is also expected in output from the former command economies of China and Russia.

Why of Steel Futures

1. Wide Price Variation

The domestic steel prices show high variation on a monthly basis. The instability in domestic prices is mainly derived from the wide variation in international steel prices and the imported steel prices.

The international steel prices are distorted and show wide vary based on global over capacity, subsidy & government support, safeguard measures against imports.

2. No Government Restrictions

The domestic steel industry was de-licensed and decontrolled in early 1990's. The price regulation is also abolished and as such the Government has no control over prices. The Government has also considerably brought down the customs duty and excise duty in the last few years. The steel distribution control is also removed except 5 priority sectors.

In the absence of any concrete reference price on the domestic steel traded in the country, the Government in the National Steel Policy has emphasized the need of steel derivatives to smoothen price variation. This important price risk management tool in the form of futures trading is essential for continuous development of the sector.

3. Large Number of small and marginal players in private and unorganized sector

In India, 68 % of crude steel is produced by private sector and 56.5 % of finished steel is produced by secondary producers. With the liberalized Government policy in place, more number of private players is expected to enter, participate and grow in the steel industry in the coming days, resulting in higher demand for right pricing based on indicative markets.

Thus there is a whole lot of producers and buyers in the production and supply chain whose business is hugely dependent on the right price discovery of the commodity.

4. Buoyant domestic industry and its international linkages

The steel market in Southern Asia, including India has grown by 4.7 % CAGR since 1980. The demand of steel in the region by 2010 is expected to rise by 43 %. In India the domestic demand and exports are in a rising trend since the last couple of years.

The Indian industry also imports specialized steel as the domestic manufacturers are more comfortable in producing construction steel. Thus there are high linkages with international markets.

5. Standardized Quality

In the presence of IS Grades the commodity steel can be reasonably standardized in the form of long (ingots) and flat (coil).

FACTS AND FIGURES

Iron and steel in history

It is believed that iron in pre-historic times may have been obtained from fragments of meteorites and it remained a rare metal for many centuries. Even after man learned how to extract iron from its ores, the product probably was so relatively soft and unpredictable, that bronze continued to be preferred for tools and weapons. Eventually iron replaced the non-ferrous metal for these purposes when man learned how to master the difficult arts of smelting, forging, hardening and tempering iron.

Man's use of iron in antiquity is attested by references to the metal in fragmentary writing and inscriptions from the ancient civilizations of Babylon, Egypt, China, India, Greece and Rome. Archeological finds in Mesopotamia and Egypt are proof that iron, and later steel, have been in the service of mankind for almost 6000 years. In early times, iron was melted with the use of charcoal made from wood. Later coal was discovered as a great source of heat. Subsequently, it was converted into coke, which was found to be ideal for smelting of iron ore.

Iron kept its dominant position for around 200 or more years after the Saugus works, the first successful iron works in America, was founded in 1646. With the advance of the Industrial Revolution, iron formed the rails for the newly invented railroad trains. It was also used to armour the sides of the fighting ships. About the mid-19th century, the age of steel began with the invention of the Bessemer process (1856), which allowed steel to be made in large quantities and at reasonable cost.

Use of iron in ancient India

Indian history is also full of references to the use of iron and steel. Some of the ancient monuments like the famous Iron pillar in New Delhi or the massive beams used in the Sun Temple at Konark bear ample testimony to the technological excellence of ancient Indian metallurgists. The use of iron in India goes back to the ancient era. Vedic literary sources such as the Rig Veda, the Atharva Veda, the Puranas and epics are filled with references to iron and to its uses in peace and war. According to one of the studies, iron has been produced in India for over 3000 years in primitive, small- scale facilities.

Global Scenario

World's total crude steel production grew at a slower rate during the first half of this century and the growth rate picked up at a significant rate after the second world war:

World Demand

The apparent consumption of steel is expected to grow at 2.4% in 2001-2002. However world steel dynamics estimates this growth in 2001-2002 to be around 1.4%. Recent estimates show that the total world apparent consumption of steel will be around 769.2 MT in 2001 and 830 MT by 2005.

The global steel markets growth from 1980 has been around 1% (CAGR). However there are wide regional disparities among the developing world (4.7%), developed world (0.5%), and Eastern Europe (-5.5%).

According to World Steel Dynamics, steel consumption in the Pacific Basin during 1999-2010 is expected to rise by 43%, while in the Atlantic Basin, it is expected to rise by 25%. The Pacific Basin is expected to remain short of steel, while the Atlantic Basin is expected to remain with an excess supply of steel making capacity.