STEEL INDUSTRY IN CRISIS

IS REAL CONSUMPTION THE ANSWER ?

D. M. Shah; Lalit Sharma

L&T ECC Limited

WORLD STEEL OUTLOOK

The world crude steel production for 2008 was 1330 mt, a decline
of 1.2 % as compared to 2007. China produced 502 mt of crude steel in 2008,
a growth of 3 % over the 2007 level. The picture in the other developed parts
of the world was of continued decline in steel demand triggered by the decline
in the GDP in these economies. As per IMF the world GDP growth estimated
for 2008 is 3.7% as compared to 5 percent achieved in 2007.

Part of the despondency and pessimistic outlook is attributable to

the severe dent in the high profitability enabled by unprecedented growth in
demand for steel and extraordinary price realizations during the boom period .

GLOBAL DOWNTURN & INDIA

What has the global downturn meant for the steel industry in India?
Fortunately for us, the steel industry in India is highly country centric, and
focus is substantially on the domestic market. However with the decline in the
world steel demand exports have had to be scaled down considerably. The
buoyancy with which the future plans were being made and taken up for
execution has also been affected. However, the situation cannot be termed as
desperate.
INDUSTRY REACTION
It is obvious that every steel company in India and elsewhere in the
world is viewing the situation from its own perspective and arriving at a plan
of action that it thinks is most appropriate to its future.

The sudden change from the aggressive to the cautionary mode by

the steel producers in India has obviously affected other associates such as
the Equipment Suppliers, EPC contractors, raw material suppliers, service
providers etc
Needless to say these companies have also been evaluating the
change in the dynamics of the industry and trying to come to a realistic and
workable solutions. It is in this context that I propose to outline L&T's
perception and the approach that it considers appropriate to provide a win win
situation even under these difficult conditions.

INDIAN STEEL SCENE

The steel demand in India has so far been almost steady, in fact
showing positive signs of growth even in recent months. During April to
December 2008, the steel production for sale was 1.1 % higher than in
corresponding period in the previous year, whereas finished steel
consumption in the country was 37.84 mt, a decline of 2.3 per cent.
The core sector growth during the same period was 3.5% as
compared to the 5.9 percent in the previous year. However, all indications
are that the GDP growth in India should hover around 6.5 to 7.5 percent in the
coming year and in the near term. This can get better with the global
economic improvement, the signs of which are in the horizon already.
 As per the latest indications the steel demand in India in 2009 is
likely to be about a million ton more than in 2008, about 1.7 % increase. It will
thus reinforce the belief that the Indian market is large enough to sustain the
steel industry.
The government's desire to tide over the present global crisis by
injecting massive doses of investment into the infrastructure would be a very
relevant fillip and safeguard . Similarly the pressure on the power projects for
early completion is another positive factor which will enable economic
growth. The housing sector is also likely to recover due to the easing of the
interest rate regime and easier availability of bank funds.
In the light of the above scenario, it would be reasonable to
conclude that that steel demand will continue to grow, albeit at a lower rate
than the 7.5 and 8 % desired earlier.
This optimism is further reinforced by the fact that India offers one
of the largest growing markets for a reasonably period of time. The present
level of capacity in steel, when viewed against China, will be miniscule. That
China has been able to sustain consumption of almost 40 % of the world steel
production is a reflection of the real needs for large developing/semi
developed countries such as India. In this context therefore the projected 120
million tons capacity by 2016 by the MOS is not only realistic, but necessary
and achievable.

IMPACTS ARISING OUT OF THE DOWNTURN:

What are the real impacts arising out of the down turn ?
Production Cut backs,
Reduced market share,
Hold on current projects,
New Projects in backseat
Production Cut backs:
Fortunately this is not a serious factor in the Indian context.
Marginal adjustments have had to be made to factor in fluctuations and
exigencies arising of the uncertainties dictated by the decline, particularly the
export plans getting upset.

Reduced market share:

This also is not a serious domestic issue as the local demand is
likely to continue to grow. Exports however will be affected. Fortunately the
indian market being large enough to support the large steel industry, the
impact of this is considerably insulated. Availability of Iron ore and skilled
manpower are major USP’s which provide a solid base for competitiveness
This has to be reinforced by adoption of cutting edge technology and
economy of scale, and efficient project execution.

‘ Hold ’ on Current Projects:

The downturn and the export uncertainties has led to a slow down
or hold in the implementation of the projects in hand in a number of cases.
This quite understandable and there is a need to rewrite the ground rules in
the changed context.
In this situation L&T can play a positive role in getting these
projects off the ground. There is a need for evolving optimized project
concepts which will limit the initial investments to the essential minimum. This
can be followed by optimised engineering, fast track construction and
phasing the investment over a longer period, which can lead to significant
savings in interest costs , early returns on investment and improved cash
flow.
Expansion Projects & Future plans in Backseat :
The downturn has led to expansion plans and in some of the future
plans to be relegated to the back seat in a number of cases. This has
resulted in slowing down of the ordering processes for the new facilities, and
in extreme cases outright cancellation of projects. The capacity expansion
which was planned for a double digit growth of steel demand has taken a hit.

NEED OF THE HOUR

Sustained Steel Consumption
There is an urgent need for increasing the current per capita steel
consumption of about 48 Kg to a more decent 100 to 120 Kg to ensure all
round economic progress in the country. This will still be far below the 450-
500 kg level touched by China last year, but will be a positive step. This level
of consumption would require the steel capacity to be doubled in the next 5 to
10 years. Such level of consumption will provide a large enough domestic
market, practically insulated from the vagaries of the international scene
particularly in the developed world.
Projected Growth
There are clear indications that the Indian economy would march
ahead at the rate of 7 to 8 % in the coming years in spite of the world
economic downturn. Therefore the planning for steel expansion to meet the
future demand is as relevant as ever and warranted on priority.

The Indian steel market has grown to a fairly large size( 5 th largest
steel producer in the world) already . There is overall appreciation in all
quarters ( government, Planning commission, industry) that the growth of
steel is vital for economic growth and development. The initiatives taken in
the last 10 years in terms of creation of appropriate infrastructural support,
and policy framework have led to fast track growth in this sector. All
indicators point towards the industry being well poised to reach the second
position in the world ( 120 mt) behind China in the next 5 to 8 years. In the
Indian context, it would be right to say that the real consumption would be the
answer to the crisis.

POSITIVE ECONOMIC INDICATORS

The actions taken by the different countries including India are
apparently triggering optimism and to tentatively conclude that the worst may
be over. Specifically in India, the emphasis of the government on
infrastructure investments to be in tune with the projected 9% GDP growth in
the 11th Plan period ( 2007-08 to 2011-12) has laid an appropriate foundation.
The projected investment in the Infrastructure sector during this period is
about 475 billion dollars. The government has approved 37 infrastructure
projects worth Rs 70,000 Crs during August 2008 to January 2009. Under the
PPP model 54 central infrastructure projects totaling an investment of Rs
67700 crs have received in principle/final approvals, while 23 projects
amounting to Rs 27900 crs were approved for viability gap funding in 2008-
09.
The major projects targeted in the above investments in sectors
which have a direct impact on steel would cover
i. Power: 90,000 MW of additional power capacity
ii. National highways: 6 laning of 6500 km of National highway
(Golden quadrilateral) 4laning of 6736 km of National
highways, widening of 20000 km of National highways to 2
lanes
iii. Rural roads: 65,244 Km of new rural roads
iv. Railways: Dedicated freight corridors between Mumbai-Delhi
and Ludhiana – Kolkata, 10300 km of new rail lines, gauge
conversion and doubling of over 10000 km
 v. Ports: Additional capacity of 485 million tons in major ports
and 345 million tons on minor ports
The automotive sector has also taken very positive steps to
maintain continued growth through fuel efficient solutions, cost effective cars
and vehicles, and hybrid energy alternatives. Similarly the housing sector is
also poised to march ahead due to easing of the interest regimes, and
softening of the land prices.
It is well known that the demand for cement has in fact been
growing in spite of the various negatives. This has an impact on the steel
consumption as well. It has been noticed that the increase in power capacity
has been only about 30 % of what was sought in the 5 year plan. Many of the
projects which were conceived as part of the growth plan were fraught with
delays due to various reasons. In most cases the issues appear to have been
resolved/sorted out. As a result it would be reasonable to see a spurt in the
power and other infrastructure projects in the next few years.

2009 INDIA OUTLOOK

The trend observed in the first months of 2009 provides confidence
to conclude that there is a reasonably positive response to the various stimuli
packages planned and infused by the different countries. There is optimism
that the US may show positive increase in GDP in the year 2009 against the
negative growth in 2008.
The indian situation is certainly more moderate in terms of the
adverse impacts so far. The steel scene may not see double digit growth very
soon, but growth in the coming years seems very likely.
Thus it is an opportune time to move forward with the projects
already in the pipeline and also to plan for reasonable growth in the future.
GROWTH IMPERATIVES
However, in moving ahead with the new capacities and expansion
in brown field sites the following aspects would merit attention.
Technology
The adoption of efficient technologies ( cost, energy, productive,
low cost material usage) is vital for ensuring long term competitiveness.
Besides, there is enormous scope for optimising the project concepts and
consequently costs by adopting proven and well accepted solutions. One of
the glittering examples is the Tata Steel unit at Jamshedpur, where the
capacity is being scaled upto to 10 mt from the 3 million ton level through
extraordinary optimization in all areas.

Cost competitiveness
Right now, the principal issue to address is competitiveness. L&T
is working with world leaders in their respective areas to provide the optimum
solutions in the indian context. L&T can bring to fore its extraordinary abilities
and resources to customer's benefit. Fast track implementation of projects to
international bench marks, cost containment through optimisation of
construction quantities, coordinated installation and trouble free
commissioning and fast ramp up can lead to substantial savings in
investment& interest costs, early positive cash flow and profitability . L&T can
play a positive role in working with the client for finding the right solutions.
Policy reform
In this context, the Chinese example for policy reform in the steel
sector is very relevant. It may be recalled that the rules of steel projects have
been completely rewritten in China over the last 10 years. Uneconomic units (
mini BF’s, micro converters) , outdated technologies, energy guzzling
production methods are being phased out and replaced by efficient
technology and optimum units.
The Indian scene will also call for such measures in the not too
distant future if the quality demands, competitiveness and long term
sustainability are to be effectively addressed. It is worth noting that even now
the induction furnace process contributes to almost 30 % of the steel
production. There is also enormous scope for energy savings in many vital
areas. The large scale dependence on imported coal is also an aspect which
requires to be addressed effectively with appropriate alternative solutions.

A glance at the contribution of labour costs to steel production

would dispel the myth of low labour costs in India and the need for ensuring
high levels of productivity through effective use of technology, economy of
scale and process efficiencies cannot be overemphasised.

L&T APPROACH
L&T has been privileged to be associated with most of the leading
steel producers of the country. In the present context , L&T’s approach would
be to :
i. Find optimum solutions to current projects along with the clients
ii. Assist in fast track project implementation resulting in optimised
costs and better cash flow
iii. Hold hands as O&M to ensure fast ramp up forming the foundation
for profitability
iv. Work with the clients for optimising the projects of the future
adopting the well proven and efficient project solutions provided by
them already to a number of clients in the country
v. Leverage resources optimally to provide a win win for both.