Forecasting Steel Demand and Supply in India

Transcription

1 Forecasting Steel Demand and Supply in India By Deepa Karthykeyan, Asha Abraham, Sarin Paraparakath and Arnab Bhattacharya 1 Abstract This paper seeks to forecast the demand and supply gap of steel till Further, it aims to present the end use approach to forecasting steel demand. Under this approach, steel demand is calculated separately for every major steel consuming sector and then aggregated. Although, this approach consumes more time and effort than the more commonly used macro-economic approach, it was thought to be more appropriate for a country like India. The main findings of this paper are: Supply of steel was presented in two scenarios. In the reasonable scenario, supply was estimated to grow at a CAGR of 10.4% in the period to , while in the base case scenario, CARG of supply was 8.6%. Demand is forecasted to grow at a CAGR of 9.035% driven mainly by the construction, automobile and consumer durables sectors. The demand supply gap is expected to lie between a supply surplus of 4.47 MT in the reasonable scenario and a MT supply deficit in the base case scenario. Due to pressure from the construction sector, the demand for longs will continue to dominate the steel industry, while on the supply side, flats are expected to dominate. 1 All authors currently work as Consultants in Athena Infonomics India Pvt Limited

2 1. Introduction 1.1. Steel Industry in India Steel is traditionally considered the backbone of national economic development. It is a major input into sectors which support economic growth such as infrastructure, machinery, power and railways, as well as being important for fast growing sectors, in particular automobiles and consumer durables. The steel industry in India is currently at an inflexion point brought about by ambitious capacity expansion plans, entry of new players and increased competition on one hand and consistently rising and shifting demand patterns on the other. This rise in demand is expected to be driven by the construction, automobile and consumer durables sectors (OECD 2011). In the construction sector, Government spending in infrastructure is expected to surge during the twelfth plan period, thus driving up demand for steel used in construction. Similarly, rising incomes coupled with rapid urbanization have contributed to the increasing demand for automobiles and consumer durables. With respect to supply, the Compound Annual Growth Rate (CAGR) of crude steel production has doubled from 3% for the period to 6% in As a result, India has risen from being the seventh largest producer of steel in the world in 2005 to the third largest in 2009 (Spark Steel and the Economy Research Centre 2010). Most steel producers are planning major capacity expansions through both Greenfield and Brownfield expansions. This, coupled with the entry of new players such as the Pohang Iron and Steel Company (POSCO) and Arcellor Mittal, will result in a significant rise in steel production over the next ten years. There is also an increased emphasis among steel players on the production of special steels that were until now being imported. Despite this, however, there is still some apprehension on the capability of Indian steel suppliers to meet the expectations arising from increasing demand. Given this context, the objective of this report is to forecast the demand and supply of steel in India till Financial Year (FY) and estimate the size and the nature of the demand-supply gap. The gap will be estimated for finished steel as a whole, as well as for flat and non-flat (longs and pipes) steel separately. 2

3 1.2. Methodology While the need to estimate the demand-supply gap of steel cannot be questioned, some debate exists with respect to the methodology used to do so. Forecasting Supply Forecasting steel supply is normally done through an aggregation of the capacity expansion plans of all major steel producers till (Ministry of Steel 2011; OECD 2011). This paper takes the analysis further. 1. To estimate realistically when the additional production will go on stream, the likely commissioning date of all greenfield and brownfield steel projects were studied. This was done by examining each project s stage of completion and analysing the problems the project was encountering. 2. Based on the above analysis, the paper presents three scenarios of steel supply an optimistic, reasonable and a base case scenario. 3. The paper further examines the expansion plans of steel producers and estimates the types of steel that will be produced in future. The above methodology to estimate steel supply is further explained in the following section. Forecasting Demand Forecasting steel demand can be done through various methods. Approaches to forecasting steel demand can mainly be divided into two the macro-economic approach and the end use approach. These are briefly described below: Macro-Economic Approach: This is a more popularly used approach. It uses the relationship between steel consumption and macro-economic variables such as Gross Domestic Product (GDP) to forecast steel demand. (Rao 1984). This approach normally involves the formation of regression/time series equations to model the relationships between variables. The most popular macro-economic approach is the intensity of use method developed by Malenbaum (Chen et al 1991; Crompton 1999; Rao 1984). Intensity of use is defined as the amount of steel consumed per unit of GDP. This method models the relationship between the 3

4 intensity of use and per capita GDP. It assumes that this relationship can be represented by an inverted U shaped curve, ie, steel intensity will show a rapid increase with rising per capita GDP and then a slow reduction. End Use Approach: The end use approach is a bottom up model in which steel demand forecasts are separately estimated for each steel consuming sector and then aggregated (Rao 1984). Even though the end use approach requires a lot more time and effort, this paper advocates the use of this model in India rather than the macro-economic approach mainly for the following two reasons: Firstly, the success of the macro-economic demand estimation approach depends on the relationship between GDP and steel demand. The logic behind this model is as follows: steel is used in the production of goods that contribute to GDP. Thus, an increase in the value of the GDP will mean an increase in the production of goods and in turn an increase in the demand for steel. However, in a country like India, where around 55% of the GDP comes from the services sector, this transmission mechanism between GDP growth and steel consumption becomes less defined. Secondly, unlike the macro-economic model, the end use approach gives sector wise forecasts of steel demand. Thus, it is useful in estimating not only the total demand for steel, but also helps us in understanding which types of steel are being demanded. Very few papers in the public domain have attempted an end use method for forecasting steel demand in India. Thus, this paper is a preliminary step in better understanding the limitations and advantages of this methodology. Limitations This model makes two important assumptions: Firstly, we assume that the input-output technical coefficients that guide steel use remain constant over the period for which steel demand is being estimated. This is based on the assumption that there will be no substantial shift in the manufacturing processes and product design over the period for which steel is being estimated. 4

5 Secondly, the model does not entirely capture the price effect of steel and assumes that consumption patterns are relatively inelastic and non-responsive to changing prices in the short run. Outside of the limitations imposed by the model, the findings of the study are also restricted in its scope to select sectors on account of lack of access or non-availability of data Some of the important sectors that remain un-captured in this study include Defence, Kitchen Ware and Use by PWD/other important government works, among others Description of the Paper The rest of the report is structured as follows: section two forecasts supply of finished steel in India till It also calculates the supply of flats and non-flats for the same period. The demand for steel will be analysed in section three. Section four looks at the demand-supply gap. 2. Forecasting Steel Supply As mentioned in section one, the supply of steel till is forecasted through an examination of capacity expansion plans of all steel producers. Supply estimation involves the following two steps: 1. First, crude steel capacity in the country for the next ten years is calculated by aggregating the capacity expansion plans of all major and secondary steel producers. 2. Second, finished steel production is calculate after accounting for capacity utilization and production of semi-finished steel. The steel producers considered for the analysis are Steel Authority of India Limited (SAIL), Rashtriya Ispat Nigam Limited (RINL), TATA Iron and Steel Company Limited, Essar, JSW Steel Ltd, Jindal Steel and Power Limited (JSPL), JSW Ispat Steel Limited, Bhushan Power and Steel Limited, Bhushan Steel Limited and other secondary producers. Data on capacity expansion plans for each of these producers was gathered from their websites, annual reports, newspaper articles and through direct interviews with members in the selected companies i. 5

6 Expansion of crude steel capacity for all the above mentioned steel producers till is presented in three scenarios an optimistic, a reasonable and a base case scenario. Calculation of crude steel capacity under the three scenarios is given below: 2.1. Estimation of Crude Steel Capacity Crude steel capacity was estimated in three scenarios - an optimistic, a reasonable and a base case scenario. The three scenarios are defined below: Optimistic Scenario: In the optimistic scenario, all crude steel capacity expansion targets announced by steel companies are aggregated. Under this scenario, it was estimated that crude steel capacity will be MT in However, this will be possible only if the crude steel capacity targets, as announced by steel producers are met. However, while the steel producers have announced ambitious capacity expansion plans, concrete measures to meet the advertised targets through greenfield and brownfield expansions have not been specified in some cases. Reasonable Scenario: In order to account for the above difficulty, a second scenario (called the reasonable scenario) was estimated. This scenario takes into account only those capacity expansion targets that are backed by concrete brownfield or greenfield projects. The reasonable scenario is the same as the optimistic scenario till FY as plans to achieve the targets are clearly given till this year. However, for , this scenario estimates a more reasonable capacity of MT. Base Case Scenario: The base case scenario gives a lower bound crude steel capacity estimate. It accounts for delays in commissions of projects due to problems associated with land acquisition, obtaining environmental clearances, raw material availability, etc. The effect of these delays on the date of commissioning of projects was assessed through interviews with experts and a review of secondary literature. According to this scenario, crude steel capacity in the country in will be MT. Results of all three scenarios are presented in the figure below: 6

7 Million Tonnes Figure 1 Crude Steel Capacity Scenarios Source: Author s calculation based on data from company annual reports, newspaper articles, company websites, interviews with experts, etc 2.2. Production of Finished Steel Optimistic Scenario Reasonable Scenario Base Case Scenario From the crude steel capacity estimates given in the previous section, the production of finished steel can be calculated as follows Firstly, in order to calculate the actual production of crude steel, a capacity utilisation of 90 to 95% is assumed for the major producers and 85% for small secondary producers. Secondly, not all of this crude steel gets converted to finished steel. The remaining is sold as semi-finished steel products (blooms/billets). Finished steel as a percentage of crude steel is given below for the three major producers: 7

8 Million Tonnes Table 1 - Share of Finished Steel in Total Crude Steel Production (%) Steel Producer Average Bhilai Durgapur Rourkela Bokaro ISP Total SAIL TATA RINL Source: Spark Steel and the Economy Research Centre (2010) Total finished steel production in both the reasonable and the base case scenarios was estimated after the above deductions and are given in the figure below: Figure 2 Production of Finished Steel ( to ) Reasonable Scenario Base Case Scenario Source: Author s calculation 2.3. Types of Steel Having established the total production of finished steel in the country for the next ten years, this section examines the nature of steel that will be produced. This was again estimated from the plans of steel producers for the next ten years. However, for many projects that are planned, the 8

9 Percentage Percentage product mix has not yet been announced. Thus, in these cases the project mix of the company is assumed to remain constant even after expansion. Thus, these estimates are only indicative of the direction of supply of flats and non-flats. The actual production will depend on the demand for flats and non-flats in the future. The supply of flats and non-flats under both the reasonable and the base case scenarios are given below: Figure 3 Supply of Flats vs Non-Flats Reasonable Scenario 100% 80% 60% 40% 20% 0% Non-Flats Flats % 80% Base Case Scenario 60% 40% 20% 0% Non-Flats Flats Source: Author s calculation based on data from company annual reports, newspaper articles, company websites, interviews with experts, etc Currently, flats constitute around 45% of production and longs around 55% ii. However, due to increased demand both domestically and internationally, flats are projected to grow at a faster 9

10 rate. In both scenarios, it is expected that the production of flats will account for around 55% of production and by , its share will go up to around 60%. 3. Forecasting Steel Demand This section forecasts the demand for steel using the end use method introduced in section one. As mentioned, this is a comprehensive bottom up approach in which demand for steel is calculated separately for every steel consuming sector and then aggregated. The sectors that will be studied include construction (in real estate and infrastructure), machinery/equipment, automobile, railways, power, shipping, consumer durables and fasteners. The steps involved in forecasting demand are described below: 1. First, the growth in each sector till FY was estimated. Data on production in each sector was obtained from various sources and forecasted using time series models such as Autoregressive Integrated Moving Average (ARIMA) Models and Vector Autoregressive (VAR) Models. Due to problems of data availability, in sectors such as construction, growth in investment was forecasted. 2. Next, the steel intensity (steel consumption per unit of investment or per unit of output) was estimated for each sector. This is done through literature surveys and interviews with experts. 3. The total demand of finished steel in each sector was then determined by multiplying the steel intensity of the sector with the forecasted values of production/investment in each sector. The data sources and the methodology used to forecast growth in each sector are detailed in the next section. For each sector, the methodology is explained in the three steps explained above, ie, sector growth, steel intensity and total steel consumption. It should be noted that due to unavailability of data, a slightly modified methodology was used for the machinery, fasteners and consumer durables sectors. 10

11 3.1. Methodology Construction Real Estate Construction is the largest consumer of steel in the country (Spark Steel and the Economy Research Centre 2010). For the purpose of analysis, the construction sector has been divided into two Real estate and infrastructure. This section deals with real estate which has been further divided into residential, commercial and industrial real estate. Sector Growth The major problem with estimating growth in the real estate sector is the availability of data. Data is limited as this sector is not very well regulated and falls almost entirely in the unorganized sector. To forecast growth in the sector, this paper uses estimates of investment in residential, commercial and industrial real estate as provided by the CIDC for the years to This investment data was then extrapolated till The resultant CAGRs for these sectors are as follows: Table 2 Growth in Real Estate Sector CAGR ( to ) Residential Real Estate 9.1% Commercial Real Estate 2.2% Industrial Real Estate 9.1% Total Real Estate Sector 8.5% Source: Author s calculation, CIDC Steel Intensity The intensity of steel used per unit of investment was calculated using the following formula: Steel Intensity Ratio: Cost of Steel per sq ft/total Cost of Construction per sq ft The steel intensity ratio is the ratio of the cost of steel consumed per sq feet to the cost of construction per sq feet in a standard residential, commercial or industrial building. 11

12 The cost of steel per sq ft is calculated by multiplying the consumption of steel per sq ft in a standard residential, commercial and industrial building with the price of steel. After direct interviews with a number of civil engineers and construction contractors, the average consumption of steel per sq ft was established to be around 5 kg in standard residential buildings, 7 kg in commercial buildings and close to 14 kg per square feet in industrial buildings. The price of steel was taken to be the average price of joists, angles, sections, tor steel and TMT bars and was estimated to be an average of Rs 32 a kg. Total cost of construction per square feet in each of sector was again obtained from the Construction Industry Development Council (CIDC) and is given in the table below: Table 3 - Unit Construction Cost (Rs/sft) Residential Residential Commercial Industrial (Terrace) (High Rise) (Office) Standard Luxurious Standard Luxurious Standard Prestige Light Heavy (Oct) Source: CIDC Total Steel Consumption The steel intensity ratio gives us the percentage of the investment on real estate construction that is spent on the consumption of steel. This is multiplied with forecasted investments in real estate to get the total amount spent on steel till Dividing this amount by the price of steel gives the quantity of steel that will be consumed in this sector. 12

13 Construction Infrastructure The infrastructure sector consists of roads and bridges, airports, sea ports, water and sanitation and telecommunication. Demand for steel through construction activities taking place in railways and power sector (which are technically an integral part of the country s infrastructure) have been separately accounted for in these sectors respectively. Sector Growth The expected investments, both public and private, in each of the infrastructure sectors, were calculated for each of these sectors from planning commission estimates. It was estimated that investments in infrastructure would grow at a CAGR of around 13.5%, with majority of the investment going into the roads sector. Steel Intensity Similar to real estate, the percentage of total investment spent on steel was calculated using steel utilization norms as provided by a research report by ICICI titled Steel Sector published in May, Similar estimates were also given by Dun & Bradstreet. These are given in the table below: Table 4 - Steel Utilization Norms Sector Civil Construction (% of Investment) Steel Component(% of construction) Source: ICICI Direct (2009) Roads and Bridges Telecom Irrigation Water and Sanitation Ports/airports Total Steel Consumption Again like in real estate, multiplying the steel utilisation norms with total forecasted investment gives the total amount spent on steel till Dividing this amount by the price of steel gives the quantity of steel that will be consumed in this sector. 13

14 Railways Conventionally, the steel consumption of the railways is captured through proxies such as the growth in railways as a percentage of GDP and public expenditure. However, in the current study an attempt has been made to break down the railway sector into various steel consuming sub segments to arrive at a more accurate estimation of steel. Major areas in the railways where steel is predominantly used are rolling stock (which comprises of the locomotives, wagons and coaches), rail track material, concrete sleepers, clips to hold rails to sleepers, posts to carry overhead traction lines and construction in the railways. Sector Growth The methodology for calculating growth in production of each of these sectors along with the estimated CAGRs is given in the table below: 14

15 Table 5 - Railway Sector - Methodology Sector Methodology CAGR(%) Rolling Stock Rail Track Sleepers/ Clips/ Traction Posts Construction in Railways Time series data on production of coaches, locomotives and 7.6% wagons was obtained from the Ministry of Railways from to This data was extrapolated to estimate production till These estimates were backed from data provided by the Vision 2020 document of the Ministry of Railways. Annual data on the production of tonnes of railway tracks was 3.6% obtained from the World Steel Association from the year An ARIMA model was carried out on this data to forecast production of tracks till Data on the number of new tracks being laid was obtained from 13.35% the Ministry of Railways from onwards. Again, this data was extrapolated and the values were backed by estimates of the Vision 2020 document. Based on the requirement of new tracks, the production of sleepers, clips and traction posts were estimated. Investment in construction in the railways sector till % was estimated from figures provided in the Vision 2020 document, assuming 70% target achievement. Source: Author s Calculation, RBI Database on Indian Economy Steel Intensity and Total Steel Consumption Forecasted production was then multiplied with per unit steel consumption to obtain total steel consumed. Steel weight for each of the above components is given below: 15

16 Table 6 - Steel Intensity - Railways Item Steel Weight per unit Coaches 37.5 tonnes Locomotives 96 tonnes Wagons 20 tonnes Sleepers 20 kg Clips 1 kg Traction Posts 1 ton Source: Interviews with experts *Steel weight per rail track was not required as production data for rail track was already in terms of weight. Like in infrastructure, steel consumption in railway construction was determined using Steel utilisation norms of ICICI Power Power, like railways, is both an important consumer of steel and is essential for the economic growth of the country. Steel consuming areas in the power sector are construction of hydro, thermal and nuclear power plants and setting up of towers, power transformers and sub-stations. The growth of each of these components and their steel intensity is discussed below: Sector Growth Data on capacity additions for the hydro, thermal and nuclear sectors for the past ten years was obtained from the CEA. ARIMAs were performed on this data to get projections till These estimates were checked by comparing them to estimates brought out in the 12 th and the 13 th plan estimates. Estimated capacity additions in each sector are given in the table below: 16

17 Table 7 - Capacity Additions in the Power Sector Year Hydro Thermal Nuclear Source: Author s calculation, CEA, Annual Report With respect to growth in steel consuming components of the transmission sector, the forecasted values till were again obtained from the 12 th plan estimates and then extrapolated till Steel Intensity and Total Steel Consumption The amount of steel required i.e. Tonnes/MW in the case of a hydro, thermal or a nuclear plant has been formulated by the National Hydroelectric Power Corporation (NHPC) and Bharat Heavy Electricals Limited (BHEL) (CEA 2006). This formula is based upon the amount of steel that is required for electrical and mechanical packages (generators and turbines) and civil work. The table below gives the set norms in the case of hydro, thermal, gas and nuclear power projects: Table 8 - Steel Utilization Norms Hydro Power Plant Steel Type Steel Required (Tonnes/MW) Structural Steel 34 Reinforcement Steel 93 Total 127 Source: CEA (2006) 17

18 Table 9 - Steel Utilization Norms for Thermal, Gas and Nuclear Power Plants Type Imported Steel Indigenous Steel Total (Tonnes/ MW) (Tonnes /MW) Thermal Gas Powered Nuclear Source: CEA (2006) In India, on an average it takes five years to build a hydro power plant 2. Therefore, the consumption of steel will start five years before the date of commissioning of a hydro plant. Similarly, on an average it takes a minimum of three years to construct a thermal/nuclear project or a gas based power plant. Thus, the steel consumption by hydro power plants is assumed to be distributed over the previous five years in the ratio 10:10:20:30:30 while the steel consumption by thermal, nuclear and gas plants is distributed in the ratio 20:30:50. Steel utilisation norms for the components in the transmission sector are given below: Table 10 - Steel utilisation Norms Transmission Sector Voltage line Norms for weight of steel for Towers MT/Km Norms for weight of steel for Towers MT/Km Norms for special requirement for substations (MT/bay) HVDC Source: CEA (2006) Multiplying the above with growth in the three components gives total forecasted steel consumption. 2 Obtained through expert opinion 18

19 Machinery and Heavy Engineering The machinery sector is the second largest consumer of steel after construction (Spark Steel and the Economy Research Centre 2010). The machinery sector constitutes a large number of subsectors varying from industrial, textile, printing, office machinery to heavy construction and agricultural equipment such as agricultural implements, tractors, dumpers, cranes etc. Due to problems of data, the scope of the machinery sector was narrowed down to include only the following sample of equipment: Dumper Ball and roller Bearings Gear boxes Lifts Material handling equipment Cutting tools Machine Tools Valves Diesel Engines Electric Motors Sector Growth Data on the production for each of the sample equipment from to was obtained from the RBI databank iii. Independent ARIMA s were carried out on each of these sample equipments to forecast the production value/number of these equipments in After having forecasted output for each sample component, the growth rate in the production of these components was calculated for the year A weighted average of the various growth rates was taken to assess the overall growth in the machinery sector. It was estimated that over the next ten years the machinery sector will grow at an average growth rate of around 6% to 5%. Total Steel Consumption Due to the heterogeneous and complex nature of the machinery sector, an average steel intensity per unit of output was impossible to calculate. Thus, a different methodology had to be evolved to forecast steel demand from the machinery sector. 19

20 From estimates provided by the Spark Steel and the Economy Research Centre (SSERC) in its Steel Scenario Yearbook , it was established that the consumption of steel in for the sector was around 14.8 MT. This paper assumes a 1:1 relationship between growth in the number of units of equipment produced and the steel consumption, ie, the steel consumption is expected to grow at the same rate as the growth of production in the machinery sectors. Taking the machinery sector growth rates as established by the ARIMA, it was estimated that steel consumption would grow from 14.8 MT in to around 28.7 MT in Fasteners Steel consumed in the fasteners and hardware industry was calculated using a similar methodology as that used in machinery. Using time series models and past data on the production of nuts and bolts iv, forecasts and growth rates were obtained for the next ten years. The current consumption of steel by the fasteners and hardware industry is established to be 0.72MT. Using the forecasted growth rates, this is expected to grow up to 1.16 MT in Consumer Durables The consumer durables sector is currently one of the fastest growing sectors with a growth rate of 28% in It is expected that growth in this sector will continue to remain high due to rising incomes, rapid urbanization and increasing penetration in rural areas. Sector Growth In order to forecast growth in this sector, time series data on the index of production of consumer durables was obtained from the CSO. A regression analysis was performed on the above data to estimate growth in this sector. In this model, the index of production of consumer durables was regressed against GDP and inflation 3. The growth rates estimated from the model are as follows: 3 A VAR model was also tried, but the growth rates provided by it were unrealistically high. The regression model was thus selected as it provided the best results. 20

21 Total Steel Consumption Table 11 - Consumer Durables Sector Growth Rate Year Growth rate (%) Source: Author s calculation, RBI, Database on Indian Economy To estimate steel consumption, a similar strategy as used in machinery and fasteners was also adopted for the consumer durables industry. According to the Steel Scenario Yearbook, in , the industry was estimated to have consumed 0.78 MT of steel. Using the growth rates estimated by the regression model, this is expected to increase to around 6.8 MT by Automobiles The Automobile sector is expected to evolve as a major consumer of steel in the future. In order to predict the total demand for steel in this industry, the sector was divided into six components as specified in the National Industrial Classification Code by the Reserve Bank. The six components consisted of 1) Commercial Vehicles 2) Passenger Cars 3) Jeep Vehicles 4) Auto Rickshaw5) Motorcycles 6) Scooters. Sector Growth Data on the production for each of these categories from was obtained from the RBI databank. A Vector Auto Regression (VAR) model was used to predict the total number of units that will be produced till The VAR model includes the influence of aluminum prices, steel prices, inflation, per capita income, GDP and prices of crude oil in its forecast. CAGRs for the period for each category are given in the table below: 21

22 Table 12 - Automobiles Sector Growth Rate Category CAGR ( to ) Commercial 3.7% Vehicles Passenger Cars 15.6% Jeep Type Vehicles 4.5% Auto rickshaws 4.8% Motor Cycles 4.4% Scooters 19.9% Source: Author s calculation, RBI, Database on Indian Economy As can be seen maximum growth is expected from two wheelers (scooters) and passenger cars. Steel Intensity and Total Steel Consumption The steel weight is the weight of the steel used in the vehicle. This was established through interviews with various experts. These weights are given in the following table: Table 13 - Steel Weights in the Automobile Sector Type Per Unit Steel Weight in Tonnes Commercial Vehicle (CV) 3.5 Passenger Car (PC) 0.81 Jeep Vehicles (ZV) Auto Rickshaws (AR) 0.15 Motor Cycles(MC) Scooters (SC) Source: Compiled from expert opinions As with other sectors, multiplying the steel weight with total forecasted production gives total consumption of steel in the automobile sector. 22

23 Shipbuilding and Containers Given that India has one of the largest merchant shipping fleets among the developing countries, the shipping sector assumes an important role in the economy. Due to problems with the availability of data, only steel consumption by major ship building docks were considered. Future production of each type of ship from each dock was obtained from their order books. For ease of analysis, the ships were divided into four types based on their dead weight - small (<1000 Dead Weight Tonne (DwT)), medium ( ,000 DwT), large ( DwT) and ultralarge (> DwT). Steel Intensity and Total Steel Consumption The order books give the number of ships of each type that will be produced and the year in which they will be completed. Expert opinions from naval architects were used to identify the self-weight of ships (weight of the empty ship, which is approximately equal to the steel weight of a ship) and the time taken to complete building ships in each of these categories. This is shown in the table below: Type of ship Table 14 - Details of Shipping Industry Deadweight Tonne (DwT) Self-Weight as a percentage of DwT Project Completion Time (Minimum) Small <1000T 35% 6 months Medium T 25% 6 months -1 year Large T 15% 2 year Ultra Large > % >3 year Source: Compiled from expert opinions Order books of shipyards are available only till Using the self-weight of a ship and the data on types and number of ships being built, the total steel that will be consumed in was calculated. Taking into account the time used to complete a ship, this amount was distributed among the years. Due to unavailability of data, steel consumption in the shipping industry after was estimated through an extrapolation of past trends. 23

24 Others All major steel consuming sectors have been analysed above. Steel consumption by all other sectors left out in the above methodology is included in the others category and is estimated here. In order to do so, we estimate the degree of inclusiveness of our model by applying our demand estimation methodology to the year The actual demand for the year is stated to be 60 MT (Spark Steel and Economy Research Centre 2010). The demand for steel as estimated by our methodology for was estimated at MT. The sectoral divisions are given in the table below: Table Sectoral Steel Consumption ( ) Sector Demand (million tonne) Real estate 25.4 Infra 6.8 Machinery 13.4 Fastners 0.69 Consumer durables 0.7 Auto 4.83 Power 1.4 Railways 2.1 Containers 1.1 Total Source: Author s calculation This gives us a forecast error of 6%. The sectors that have been considered under the current model are only 94% inclusive. Thus, an additional 6% margin has been added to the total demand estimate under the others category in order to make our model more inclusive Results Total Finished Steel Aggregating steel consumption by all sectors considered above, we get the total demand for finished steel in India till This is shown in the table below. 24

25 Currently, demand for finished steel in India is estimated to be around 70 MT. This is expected to more than double to 166 MT by As can be seen from the table, this demand will mainly be driven by the construction (real estate and infrastructure), automobile and consumer durables sectors. It must be noted that this figure includes only domestic demand for steel. Demand from international markets will further push this figure up. 25

26 Table 16 - Estimated Demand for Finished Steel in India (MT) Year Real Estate Infrastructure Railways Power Machinery Fasteners Consume r Durables Automobiles Shipping Containers Others Total Deman d Source: Author s calculation 26

27 Flat vs Non-Flat Steel As mentioned in the introduction, a major advantage of the end use method is that it can also be used to estimate the nature of steel demand, ie, it can be used to estimate demand for different types of steel. Thus, in this section, the total demand for finished steel in India is split into demand for flat steel and long steel. In order to do this, the proportion of flat steel used to non-flat steel used in each sector was estimated. This is shown in the table below. The total steel consumed by each sector was then split accordingly. Table 17 - Proportion of Flat to Non-Flat in Each Sector Sectors Flat (%) Non-Flat (%) Construction Railways Power Machinery Fasteners Consumer Durables Automobiles Shipping Containers Others Source: Spark Steel and Economy Research Centre 2010, Expert opinion The total demand for flats and non-flats till is given in the figure below. From the figure it can be seen that the proportion of flats demanded to non-flats demanded is expected to remain almost the same over the next ten years. Non-flat steel will continue to dominate domestic demand. This is mainly due to the demand for non-flat steel arising from the construction sector, which accounts for around 60% of the total demand. 27

28 Percentage Source: Author s calculation Figure 4 Demand for Flats and Non-Flats, to % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Non-Flats (MT) Flats (MT) Demand-Supply Gap 4.1. Total Finished Steel The total supply and demand of finished steel in India till was estimated in the previous sections. This section compares the two sets of values and estimates the demandsupply gap. This is shown in the following table: Table 18 - Demand Supply Gap: Total Finished Steel Year Total Reasonable Base Case Demand Scenario Supply Gap Supply Gap Source: Author s calcualtion *negative sign indicates a supply deficit A perusal of the above tables reveals some interesting trends. The supply estimates are given for two scenarios a reasonable scenario and a base case one. As explained in section 2, the 28

29 reasonable scenario includes all brownfield and greenfield expansions that have been planned by steel producers, while the base case scenario also accounts for delays due to problems of land acquisition, raw material availability, etc. Both scenarios show a supply deficit in In , the reasonable scenario shows a supply surplus of around 4 MT, while the base case scenario indicates a supply deficit of around 21 MT. This has implications for imports and exports of steel. India is currently a net importer of steel. Under the base case scenario, India will continue to be a net importer for the coming ten years Flat Steel vs. Non-Flat Steel The next step is to estimate whether the demand deficit arises from flat steel or non-flats. The demand-supply gap for flats and non-flats is given in the tables below for the reasonable and the base case scenarios: Table 19 - Demand-Supply Gap: Flat Steel Year Total Reasonable Base Case Demand Scenario Supply Gap Supply Gap Table 20 - Demand-Supply Gap: Non-Flat Steel Year Total Reasonable Base Case Demand Scenario Supply Gap Supply Gap Source: Author s calculation *negative sign indicates a supply deficit 29

30 The above tables reveal that the supply deficit is only in the production of longs. For flat steel, a supply surplus is expected for each year. The reason for this is that most expansion plans are geared towards the production of flats. However, 60% of the demand for steel comes from the construction sector, which mainly uses longs. However, as mentioned in section 2, many steel producers have not yet announced their future product mix (especially after ). Thus, it is possible that in response to the demand for longs, some steel producers may increase the production of longs, thus increasing the overall supply of longs in FY

31 References CEA (2006): Requirement of equipment and material for development of power sector, viewed on 2 September 2011 ( CEA ( ): Annual Report Chen, Dongling, Kenneth W. Clements, E. John Roberts and E. Juerg Weber (1991): Forecasting steel demand in China, Resources Policy 17(3): Crompton, Paul (1999): Forecasting Steel Consumption in South-East Asia, Resources Policy, 5(2): ICICI Direct (2009): Steel Sector, viewed on 2 September 2011 ( Ministry of Steel ( ): Annual Report OECD (2011): Indian Steel Industry: An Overview, viewed 2 September 2011 ( Rao, T.R (1984): Scenarios for the Indian Iron and Steel Industry, Long Range Planning, 17(4): Spark Steel and the Economy Research Centre ( ): Steel Scenario Yearbook i The secondary sources through which data was collected are as follows: Bhushan Steel ( ): Annual Report Business Line (2009): ArcelorMittal yet to submit clearances for mining lease in Jharkhand, 15 December, viewed on 2 September 2011 ( Business Line (2009): Tata Steel hopes to get control of land in Orissa soon, 15 September, viewed on 2 September 2011 ( 31

32 Business Line (2010): Work on JSW Bengal's Salboni plant to start in Jan, 12 October, viewed on 2 September 2011 ( Business Line (2011): Vizag Steel Expansion Work Apace, 26 April, viewed on 2 September 2011 ( Business Standard (2005): Tata Steel signs MoU for plant in Chhattisgarh, 6 June, viewed on 2 September 2011 ( Business Standard (2010): JSW buys Ispat, to make it profitable in one year, 22 December, viewed on 2 September 2011 ( Business Standard (2011): Tata Steel Orissa plant output by Mar 2013, 21 February, viewed on 2 September 2011 ( Giriprakash, K (2011): Land acquisition for ArcelorMittal, Posco plants on track, Business Line 1 July, viewed on 2 September 2011 ( JSPL (2010): Corporate Presentation, August, viewed on 2 September 2011 ( Kumar, Anil (2011): It's smooth go for ArcelorMittal, The Times of India 13 July, viewed on 2 September 2011 ( Patnaik, Nageshwar (2011): RINL unveils Rs 44,500 crore expansion plan to add 8.4 mtpa additonal capacity, The Economic Times 6 February, viewed on 2 September 2011 ( RINL ( ): Annual Report Saha, Smita (2011): Steel Consumption set to grow beyond 10%: SAIL, The Financial Express 18 Apr, viewed on 2 September 2011 ( 10-sail/777344/) SAIL (2011): Corporate Presentation, January, viewed on 2 September 2011 ( SAIL (2011): Raw Material Security for the Steel Industry, Paper presented at the international conference on Indian metal industry, viewed on 2 September 2011 ( 32

33 Sanyal, Santanu (2011): Tata Steel's Orissa plant to make flat products, Business Line 6 February, viewed on 2 September 2011 ( TATA Steel Ltd ( ): Annual Report The Economic Times (2011): Posco proposes modification in original project plan, 17 May, viewed on 2 September 2011 ( The Economic Times (2011): Tata Steel to treble capacity to 21 mt, 16 April, viewed on 2 September 2011 ( The Hindu (2011): Jindal Steel to set up 6 mt plant in Orissa, 26 February, viewed on 2 September 2011 ( The Telegraph (2008): ArcelorMittal faces paperwork hitch, 4 November, viewed on 2 September 2011 ( ii RBI, Database on Indian Economy, iii RBI, Database on Indian Economy, iv RBI, Database on Indian Economy, 33