Indian steelmakers risk over-expansion

Indian consumption was just over 30m tonnes of finished steel in 2005. To reach 200m tonnes by 2020 would require a compound growth rate in excess of 13% for a 15-year period. The previous 15 years has seen a compound growth rate of less than 5%.

Chinese consumption compound growth over the last fifteen years was 12%. Have Indian bureaucrats simply looked at the Chinese performance over the last fifteen years and said that we can do the same? If they have, then they could be setting themselves up for a fall.

For steel consumption to grow at 13% or so, GDP would have to grow by around 9-10% per annum, while fixed asset investment would have to grow by 20% plus. Historically, India has been nowhere near those numbers.

Taking a more reasonable long term forecast of 6.5% and steel consumption growth would be 9%, which is still strong. On a compound basis that would take demand in 2020 to around 110m tonnes - the previous forecast.

Why won't India reach the 13% growth level? Manufacturing in India only accounts for around 25% of GDP, compared to 60% in China. Services in India account for 50% and this is not steel-intensive.

Infrastructure investment will be the driving force for steel consumption. It has been rising in India over the last three years, but is now at around 10-15% year-on-year growth - not the 30% plus seen in China. With infrastructure investment subject to bureaucratic delays as well as the complexities of Indian federal versus state politics and the fact that the private sector is responsible for a significant proportion of the investment, the chance of reaching a sustained Chinese growth rate is unlikely, which was primarily state-directed. Could India push through a Three Gorges-type project in the same time? I think not.

I think the 13% compound growth target is overoptimistic. Steelmakers building to this run the risk of creating substantial overcapacity. Based on a very conservative view of planned capacity coming on-stream and steel consumption growth of 9%, India will build a structural excess of steel of more than 10m tonnes in the next five years that it will be seeking to export. That will be in competition with rising Chinese steel exports and continued protectionism in the target markets of the USA and Europe.