INDIAN STEEL OUTLOOK

IISI-OECD CONFERENCE Date: 16th May, 2006

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CONTENTS • MACRO ECONOMIC ENVIRONMENT • STEEL : DEMAND ANALYSIS • STEEL : SUPPLY ANALYSIS • SUMMARY
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MACRO ECONOMIC ENVIRONMENTINDIA IISI-OECD CONFERENCE

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ECONOMIC PARAMETERS ARE FAVOURABLE
PERFORMANCE PARAMETERS
Forex Reserve

GOOD FUTURE OUTLOOK

Overall GDP External Debt Financial Reforms New Investment FDI Inflows Savings inflation

Current Account Service sector Growth

Industrial Growth Economic reforms Internal Debt Fiscal Deficit Agricultural Growth

BAD
Source : Citigroup estimates

CURRENT PERFORMANCE

GOOD
4

& SECTOR WISE GROWTH IS LIKELY TO BE ROBUST...
17.0% 15.3% 15.9% 15.5% 15.0% 15%

13.3% 13.9% 14.0% 14.5% 10.5% 10%

FY03

FY04

FY05

FY06(E) FY07(F)

FY11(F)

FY03

FY04

FY05

FY06(E) FY07(F)

FY11(F)

AUTOMOBILE

11.6%

14.4% 12.5% 13.5% 10%

CAPITAL GOODS 12.0% 12.0%

7.4%

7.0% 5.2%

9%

FY03

FY04

FY05

FY06(E) FY07(F)

FY11(F) FY03 FY04 FY05 FY06(E) FY07(F) … FY11(F)

-6.2%
CONSUMER DURABLES

CONSTRUCTION

5

Source: Tata Steel

INDIAN ECONOMY IS EXPECTED TO SURPASS JAPAN BY 2032

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IN SUMMARY THE FUTURE IS UPBEAT
• Ranked 4th in the world on GDP - Purchasing Power Parity basis, 11th in absolute terms. (IMF) • > 8% GDP growth targeted in 2006-07 - second only to China; aspirational 10 % growth looks possible • • • • Continuously improving macro economic factors A strong demographic profile : with a large consumer base Growing urbanization Stable social and political environment
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STEEL : DEMAND ANALYSIS, INDIA IISI-OECD CONFERENCE

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INDIA HAS A POTENTIAL FOR EXPONENTIAL GROWTH IN STEEL CONSUMPTION
Peak Point Point of Saturation Singapore
Japa n EU

USA Point of Inflection Trigger Point
Japan

Ch in a

06

EU 15 Australia Singapore USA

20

00 -

India

China India 0 100 200 300 400 500 600 700 800

Per capita in KG

India will be a part of The new Steel world …

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CONSTRUCTION & AUTOMOTIVE ARE THE KEY SEGMENTS TO WATCH
Othrs: 4.0 Cons Dur : 1.0 Packaging : 1.7

Galv 6% CR 12% HR 26%

Auto : 2.7 Cap Goods : 3.7

Bars & Rods 43%

Construction : 21
Rails 3% Structurals 10%

FY06: 34.1 million tonnes
All fig in million tonnes; Tata Steel Estimates

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GROWTH IN CONSTRUCTION IS LEAD BY RAPID GROWTH IN HOUSING SECTOR & …
Home Loan Disbursement (Rs bn)
3000 2200 1400
24

2460
15

CAGR in %

38 %
600 -200

987

197
FY 00

224
FY 01

294

517

FY 02

FY 03

FY07 (P) FY12 (P)

• • • •

A growth of 24% expected till FY 07, with an expenditure of Rs 1,400 bn Housing shortage of 41 million units estimated as per 10th five year (02-07) There is a need to invest over Rs.4,000 bn over 10 years Estimated that every INR 1 invested in housing / construction adds 78 paise to the GDP
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Source: National Housing Bank, HDFC, Cris-Infac, www.dwge.com

.. INVESTMENT IN INFRASTRUCTURE SEGMENT
PROJECTED INVESTMENT Till 2012 by Committee on Infrastructure
RS Billion Airports Irrigation Ports Power Railways Roads Telecom Urban Infra. FY 03 20 151 7 232 121 206 133 162 FY 04 15 139 5 312 135 190 126 174 FY 05 15 208 5 340 153 199 89 184 FY 06 24 222 10 350 146 212 116 220 FY 07 F 25 252 20 346 140 213 116 250 Planned Exp in next 5 years 400 1300 500 2000 750 1700 800 1400

India has potential to absorb US $ 150 billion in next five years in the infrastructure sector alone. The tenth plan investment in infrastructure has been revised to Rs. 11,088 Billion from earlier 10,894 Billion during mid term appraisal.
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WHILE AUTOMOTIVE WOULD REGISTER THE HIGHEST GROWTH
8000

in '000 nos

7000 6000 5000 4000 3000 2000 1000 0 1960 1970 1980 1990 2000 2005 2010 2015 2020

PV

CV
GR CA 15 %

PV – Passenger Vehicle CV – Commercial Vehicle

CAGR 7 %

• Government focus on infrastructure & Roads • Availability of consumer finance at low interest rates • Excise Duty reduction & Tax SOP’s by government to boost demand • Higher disposable income – Double working households on the rise
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THE OVERALL GROWTH IN DEMAND OF STEEL IS THEREFORE HEALTHY

ADC : INDIA (till FY-12)
12

CAGR in %

70 60 50 40 30 20 10 0 FY03 FY04 FY05 FY06 FY07 26.7
10.9

9 6.7

65.0

51.1
23.5

56.9
30.0

28.8
11.9

31.2
13.2

34.1
15.0

36.9
16.5

26.2

15.8

16.9

18.0

19.2

20.4

Pess.

27.6

Most Likely

30.7

Opt.

LONG
All fig in million tonnes Source : Tata Steel Estimates

FLAT

FY-12

35.0

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STEEL : SUPPLY ANALYSIS, INDIA IISI-OECD CONFERENCE

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STEEL PRODUCTION HAS JUMPED SINCE THE ECONOMIC LIBERALIZATION
42

YEAR

CAGR (%)

38.4

1950-’93 1993-’05

6.5 8.8
23.8 21.4 15.2 13.0 7.5 5.1 29.7 30.6

All fig in million tonnes

1.1

2.4

1950 1960 1970 1980 1990 1993 1995 1998 2000 2001 2004 2005

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CRUDE STEEL PRODUCTION IN INDIA (million tonnes)

6 MAJOR PRODUCERS ACCOUNT FOR 66% OF TOTAL FINISHED PRODUCTION
ISPAT 12% OTHERS 4%

SAIL 38%

Others 12.3

FLAT

JSW 13%

ISPAT 2.1 JSW 2.2 ESSAR 2.6 RINL 3.0 TSL 4.6

ESSAR 15%

TATA STEEL 18%

SAIL 15%

TATA STEEL 8%

LONG
OTHERS 61% RINL 16%

SAIL + IISCO 9.2

All fig in million tonnes Source : JPC, Team Analysis

FLAT PRODUCT IS MORE CONSOLIDATED WHEREAS 17 LONG PRODUCT IS HIGHLY FRAGMENTED.

CAPACITY UTILIZATION ARE STRETCHED..

SECTOR BF/BOF Steel CRUDE STEEL EAF Indn. Fce Corex TOTAL

No. of Units

Total Capacity

Working Capacity

10 38 750 1

21 13 16 1.6

21 7 12.4 1.6
42.0

All fig in million tonnes

18

Source : JPC, Tata Steel est.

THUS SIGNIFICANT CAPACITIES ARE EXPECTED IN THE MEDIUM TERM
Both by Capacity Expansion by existing players * . . . .
and

New Entrants with the Greenfield projects…

* Incl their Greenfield Projects

Capacity Addition projected : ~ 50 Mill T in next decade.

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THIS MAY LEAD TO EXCESS SUPPLY SITUATION IN THE COUNTRY (by FY-12)

100

90
GAP: ~ 20-25 mn T

80

65
60

42
40

34

20

0 Current Demand
All fig in million tonnes

Projected Demand

Capacity Addition (P)

Current Supply
20

DEMAND SIDE

SUPPLY SIDE

BEING INHERENTLY COMPETITIVE….

367

370

355

343

343

329

313

• Abundant Natural resources • Human Resources • Strategic Location

271

USA

Europe

Japan S Korea Global Avg

China

India

CIS

Brazil

COST OF PRODN OF HRB (USD/MT)

252

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INDIA WOULD EMERGE AS A GLOBAL HUB

India to play the Key role in Steel Market dynamics
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IN SUMMARY.. IISI-OECD CONFERENCE

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IN SUMMARY..
• The economic indicators are all favorable for Growth. • Indian steel industry exudes optimism • Investment in infrastructure is crucial to step up demand for steel. • Supply may have to be rationalized in line with the demand (Dom + exports) • Integrated Mills would hold the key in future growth of Indian Steel supplies. • New technologies to use indigenous natural resources would have to be developed.

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THANK YOU

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Backup

• India will become the fastest growing economy out of 34 developed and emerging markets and 3rd larget economy by 2020. • Current GDP per capita is USD 2500 and expected to be USD 5000 in 2020. • Poverty ratio dropped from 50% of population in 1950 to 26% in 2005. • Economic growth rose from 3.7% in 50s & 60s to +6% in 1980s. • Current population growth rate of 1.5% to decrease to 1.3% in 2020.
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Backup

• Household savings rate to increase to 30% from current 23%. • About 100,000 MW new capacity (90% of present) will be added in power sector in next 7 years. This should also act as strong driver of steel growth. • The Fiscal Responsibility and Budget Management Act, 2002 binds fiscal managers to specific deficit targets each year with a goal to bring down the total deficit and revenue deficit to 3% and 0% of the GDP by 2008-09.
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Backup

• Literacy standards in 1951 was 18% and currently it is 65%. • FDI inflow is 0.5% of GDP (USD 3 bn) in recent years as compared to 4% of GDP for China (USD 45 bn) • One of the lowest electricity consumption at 365 units per capita as compared to 893 in China and 1729 in Brazil.
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The Global Economic Forecast: Asia poised to be the emerging power house of growth
Message

Unit of measure

• In 2020, the US and China will still be the two largest economies in the world (in PPP) • India leaves Japan behind and moves up to 3rd place • India, Malaysia and China will post the highest GDP growth rates (above 5%) over 2006-20 • Ireland, the US and Spain are the rich countries expected to grow the most
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* Footnote Source: Sources

Steel Consumption Vs. GDP
Steel consumption (kg/capita) 10000

Message

Steel Consumption and GDP per Capita in 2004

Unit of measure
1000

China
100

S.Korea

Taiwan

Japan US

India
10 0 5000 10000 15000 20000 25000 30000

Other Africa
35000 40000

GDP per capita (US$000 at PPP rates)

Bubble size represents the population

The growth in BRIC will double the steel demand by 2050
* Footnote Source: Sources

Source: internal analysis

30

Growth in key sectors will drive the steel demand
Message

UAE – 1252
Unit of measure

Apparent Steel consumption of countries

> 150 MT, The present gap
World Avg. – 170 India – 33

Key Sectors driving growth
• Infrastructure development

• Housing and urban development • High degree of urbanizations • High demand in the auto sector
* Footnote Source: Sources

Only awaiting the right trigger.
31

• Capacity building in steel making

Global Steel Demand Is Expected To Grow At ~3% Till 2015

Global steel demand Million tons
Message
Decade of 1990’s Decade of 2000 Future outlook

Decade of 1980’s

Unit of measure
CAGR = 2.8%

1,231
CAGR = 4.2% CAGR = 2%

1,113 887

CAGR = 10%

785 658

789

834

582

582

644

1980

1985
*

1990
Footnote

1995

2000

2001

2002

2003

2010E

2015E

Source:

IISI Factbook; McKinsey analysis Source: Sources 32

Message

Unit of measure

* Footnote Source: Sources

33

Message

Unit of measure

* Footnote Source: Sources

34

Message

Unit of measure

* Footnote Source: Sources

35

Raw Material demand in India to increase by 13% to meet the rise in steel demand
Sectoral Share % in 2004 - GDP Message growth 6%
Sectoral Share % in 2010 - GDP growth 8%
14

24.6

Unit of measure

24.4

Agriculture Services Industry 51

34

Agriculture Services Industry 52

Imperatives for 8% GDP Growth  Manufacturing must grow at 11%  This means a growth of 13% for Mining Industry if it has to contribute 5% to GDP by 2010 instead of 2.5% at present.  13% growth in mining has to be driven by few lead minerals such as coal, iron 36 ore, supported by other minerals.
* Footnote Source: Sources

Robust growth in infrastructure, power, construction and steel sectors will drive the Steel Demand
Investment in construction sector (Rs m)
Message
2500 2000 1500 1000 500 0

Unit of measure

Construction sector will grow at CAGR of 15%.

FY'03

FY'04

FY'05

FY'06 E FY'07 E FY'08 E FY'09 E FY'10 E

Source: SSKISept’05 issue

Incremental Steel demand for Power Sector
Incremental Consumption in '000 tons
1200 1000 800 600 400 200 0

Expenditure on Infrastructure

'04

'06E

* Footnote '08E '10E Source: Sources

'12E

In addition there will be investment for additional 25 mt capacity in steel itself37 by 2010. Potential for steel - 25-30% of the investment cost.

60 50 % of GDP 40 30 20 10 0

Message

Sectoral Share in GDP

Unit of measure

Share Industry Share Agri.

* Footnote Source: Sources

Year : 1971-2004

Share Services
38

Message

Unit of measure

* Footnote Source: Sources

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Global steel demand poised for robust growth
Crude Steel Production (Million Tonnes) 1,200 1,000 800 600 400 200
CAGR 5% CAGR 2% CAGR 7% CAGR 1%

The Early Years

The 1st Plateau

The 1st Surge

The 2nd Plateau

The 2nd Surge

CAGR 5 %

Great WW 2 Depression WW 1

Oil Crisis

0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020

Fall of USSR Asian Financial Crisis

40

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