STEEL SECTOR HISTORY & OUTLOOK

INTRODUCTION
Steel

is crucial to the development of any modern economy and is considered to be the backbone of human civilisation. It is a product of a large and technologically complex industry having strong forward and backward linkages in terms of material flows and income generation.

HISTORY

Stages in Global Production of Steel

Global Steel Industry

The current global steel industry is in its best position in comparing to last decades. The price has been rising continuously. The demand expectations for steel products are rapidly growing for coming years. The shares of steel industries are also in a high pace. The subprime crisis has lead to the recession in economy of different countries, which may lead to have a negative effect on whole steel industry in coming years. However steel production and consumption will be supported by continuous economic growth.

INDIA HIGHLIGHTS

INTRODUCTION

India is currently the fifth largest steel-producing nation in the world with production of over 54 MT. However, it has a very low per capita consumption of steel of around 46 kgs as against an average of 198 kgs of the world. This wide gap in relative steel consumption indicates that the potential ahead for India to raise its steel consumption is high. Being a core sector, steel industry tracks the overall economic growth in the long term. Also, steel demand, being derived from other sectors like automobiles, consumer durables and infrastructure, its fortune is dependent on the growth of these user industries.

The Indian steel sector enjoys advantages of domestic availability of raw materials and cheap labour. Iron ore is also available in abundant quantities. This provides major cost advantage to the domestic steel industry, with companies like Tata Steel being one of the lowest cost producers in the world
However, Indian steel companies have to bear additional costs pertaining to capital equipment, power and inefficiencies (low per employee productivity). This has resulted in the erosion of the edge they would have otherwise enjoyed due to availability of cheap labour and raw materials. The government has reinstated basic customs duty on steel imports in order to protect India from dumping of cheap steel products. It has also provided series of benefits to auto, housing and real estate sector in order to counter the slowdown

Steel Consuming sectors

Source: CRISIL Research

Construction & infrastructure contribute to >60% of steel consumption

Investment in Infrastructure
In $ billion

Source: Indian Economy, SAIL Research

Expected to cross $100 billion from 2011-12 onward

FY

Investment in Infrastructure (% of GDP)

Source: Juggernaut is starting to roll., India: Construction: Infrastructure, Goldman Sachs via Thomson Research, 11.10.10

Investment as % of GDP constantly rising

Opportunities across infrastructure sector

Sector Key Opportunities

Power

Government targets adding 100,000MW capacity by 2012 Both generation and transmission capacities being enhanced significantly

Oil & gas Road & highways Railways

Pipeline network, city gas distribution, refinery infrastructure installation & upgrading National Highway Development Program (NHDP) Plans to construct and upgrade >50,000 km of national highway by Dec 2015 Dedicated Rail Freight Corridor (DRFC) network expansion lagging freight growth; this needs to be expedited Port traffic is estimated to increase by a CAGR of about 12% during 2010-12 The Jawaharlal Nehru National Urban Renewal Mission is expected to increase steel consumption

Ports Water & waste management

ECONOMIC PARAMETERS ARE FAVOURABLE

PERFORMANCE PARAMETERS
Forex Reserve

GOOD
Overall GDP External Debt Financial Reforms
New Investment FDI Inflows Service sector Growth

Source : Citigroup estimates

13

FUTURE OUTLOOK

Savings inflation

Industrial Growth Economic reforms

Internal Debt Fiscal Deficit Agricultural Growth

BAD

CURRENT PERFORMANCE

GOOD

SWOT ANALYSIS
Strengths 1. Availability of iron ore and coal 2. Low labour wage rates 3. Abundance of quality manpower 4. Mature production base Weaknesses 1. Unscientific mining 2. Coking coal import dependence 3. Low R&D investment 4. Inadequate infrastructure

Opportunities 1. Unexplored rural market 2. Growing domestic demand 3. Exports 4. Consolidation

Threats 1. China becoming net exporter 2. Protectionism in the West 3. Dumping by competitors 4. Global economic slowdown

14

FACTORS HOLDING BACK THE INDIAN STEEL INDUSTRY

Energy

supply procuring raw material inputs transport system

Problems

Inefficient

RECENT

FINANCIAL CRISIS AND INDIAN STEEL INDUSTRY

CHINA HIGHLIGHTS

Key Points

1.Stable and relatively fast growing economy has proved to be the primary impetus behind China steel industry over the past decade. China steel industry is mainly based on domestic demand and its development has become the main driving force of global steel industry. 2.The rapid growth in China steel industry has contributed to global raw materials market boom. China and global steel industry is seriously damaged by top three iron ore giants because they changed pricing system and pushed up iron ore prices. 3.As Chinese government is accelerating the transformation of economic growth, actively promoting economic restructuring and striving to boost household consumption, crude steel consumption intensity per unit of GDP will decrease year by year. However, unbalanced development in different regions in China will sustain crude steel consumption at high level.

Key Points

4.China steel industry is now working on energy saving& emission cut and product mix adjustment, so capacity additions will grow slowly.

5.Chinas crude steel production and consumption will peak in 2012. We expect that China crude steel consumption will show downward trend after 2015 and might decrease to 600 million tonnes or even less by 2020. China steel imports and exports will maintain at a reasonable level and production will depend on global demand.

6.Chinas dependency on iron ore imports will gradually decrease since a) domestic iron ore capacity will further increase in the next five years as steel mills intensify domestic mining b) Chinese steel mills actively promote overseas mining projects to enhance resources supply capacity. c) Chinas reservoir of obsolete scrap will increase on rising cumulative steel consumption. 7.The pace of M&As in China steel industry is accelerating and concentration rate is increasing. 8 China 2011 steel market will see slowing production rise, basic balance of supply and demand, reasonable level of inventory, and higher price level than 2010.

China GDP and Growth in 2000-2010

450000 100mln 400000 350000 300000 250000 8 200000 150000 100000 50000 0 2000 GDP growth% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 99215 109655 120333 135823 159878 183868 210871 257306 300670 340903 397983 8.4 8.3 9.1 10.0 10.1 11.3 12.7 14.2 9.6 9.2 10.3 6 4 2 0 % 16 14 12 10

Data: NBS, SteelHome

In 2010, China GDP totaled CNY 39.8 trillion, four folds over 2000.

China Crude Steel Production & Apparent Consumption in 2000-2010

70000 60000 50000 40000 30000 20000 10000 0 Product ASC. P.growth% A.growth% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 12850 15103 18225 22241 28291 35239 42266 48966 50092 56784 62665 13977 16977 20577 25896 29675 35227 38793 43477 45328 56500 59936 3.7 17.5 20.7 22.0 27.2 24.6 19.7 16.8 2.1 13.5 9.3 2.6 21.5 21.2 25.9 14.6 18.7 10.1 12.1 2.9 25.2 5.0
Data: NBS, China Customs, SteelHome

10000t

30 25 20 15 10 5 0

In 2010, China crude steel production hit 627 million tonnes, increasing 4.9 folds from 2000; apparent steel consumption was 600 million tonnes, 4.3 folds from 2000.

China Steel Industry Based on Domestic Demand

China: Steel Products Import/Export in 2000-2010
7000 6000 5000 2000 4000 3000 2000 -2000 1000 0
Imp. Exp. Net Exp

China: Semis Import/Export in 2000-2010

5000 1000 900 800 700 600 500 0 -1000 400 300 200 100 0
Imp. Exp. Net Exp 2000 475 434 -41 2001 818 271 -547 2002 460 133 -327 2003 588 147 -441 2004 386 606 220 2005 131 707 575 2006 37 904 867 2007 24 643 619 2008 25 129 104 2009 459 4 -454 2010 64 14 -50

10000t

10000t

1000 % 800 600 400 200 0 -200 -400 -600 -800

4000 3000

1000

-3000
2000 1561 540 -1021 2001 1722 474 -1248 2002 2449 545 -1903 2003 3717 696 -3021 2004 2930 1423 -1507 2005 2582 2052 -530 2006 1851 4301 2450 2007 1687 6265 4578 2008 1539 5918 4380 2009 1764 2458 694 2010 1643 4256 2613

-4000

China: Crude Steel Import/Export in 2000-2010

8000 7000 6000 5000 4000 3000 2000 1000 0
Imp. Exp. Net Exp

China: Crude Steel Exports as a Share of Production in 2000-2010

6000 % 4000 60000 50000 2000 40000 0 30000 -2000 20000 -4000 10000 0
Production Exp. Rate%

10000t

70000

10000t

16 % 14 12 10 8 6 4 2 0

2000 2136 1009 -1127

2001 2649 775 -1874

2002 3066 714 -2352

2003 4542 887 -3655

2004 3503 2120 -1384

2005 2878 2890 12

2006 2006 5479 3473

2007 1819 7308 5489

2008 1661 6425 4763

2009 2335 2619 284

2010 1812 4542 2730

-6000

2000 12850 1009 7.8

2001 15103 775 5.1

2002 18225 714 3.9

2003 22241 887 4.0

2004 28291 2120 7.5

2005 35239 2890 8.2

2006 42266 5479 13.0

2007 48966 7308 14.9

2008 50092 6425 12.8

2009 56784 2619 4.6

2010 62665 4542 7.2

China crude steel exports take 7-15pct as a share of production since 2005. Source from NBS, Customs, SteelHo

China Crude Steel Production and Consumption May Approach or Reach the Peak in 2012

Forecast on China Crude Steel Production and Consumption in 2011-2020

80000 10000t 70000 60000 50000 40000 30000 20000 10000 0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Data Source: Steelhome

China crude steel consumption may reach or close to peak by 2012 when the crude steel production hit 700 million tonnes and consumption arrive at 680 million tonnes. In 2013-2015, China crude steel production and consumption may maintain around the level. Thereafter, China crude steel consumption may show downward trend. By 2020, China crude steel consumption may decrease to 600 million tonnes or below. And China crude steel production will be based on the international demand.

2020

China Obsolete Scrap Reservoir will Pick up Significantly

China Obsolete Scrap Reservoir will Pick up Significantly in 2011-2020

30000 25000 20000 15535 15000 10000 6071 5000 0 8853 10000t 27041

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Source from SteelHome

It is expected that obsolete scrap reservoir will amount to 155 million tonnes by 2015 and 270 million tonnes by 2020. Given the recycling rate of 70%, China scrap collection will be 100 million tonnes in 2015 and 190 million tonnes in 2020. By then, a tremendous increase will take place in scrap usage in the metallics charge.

2020

2011