Mumbai: Apersistent demand slump that has seen steel making capacity idled worldwide for nearly a year is pushing top global producers to expand their footprint in India, which along with China is a rare bastion of growth.
Strong local demand driven by infrastructure building and rebounding car sales has led big foreign steel makers to seek out investments among a fragmented local industry after efforts to develop standalone projects met with delays.
“India is on the radar of most companies given the lucrativeness of the market,” said Rakesh Arora, analyst at Macquarie Research. “India has both demand growth and cheap iron ore going for it.”
Mid-level firms including Usha Martin Ltd, Electrosteel Castings Ltd, Bhushan Steel Ltd and Monnet Ispat are seen as attractive targets for joint ventures or acquisitions by foreign firms keen to enter a market beset by regulatory hurdles and land acquisition issues. Smaller, less-competitive domestic firms, however, could see their market positions under threat as global players increase their presence in the country.
Burning hot: A Tata Iron and Steel foundry in Jamshedpur. Global steel offtake slumped by more than a tenth in the past year, but India’s 55 mt steel market has seen demand grow by nearly 10%. Santosh Verma / Bloomberg
Earlier this month, global leader ArcelorMittal said it would acquire a one-third stake in Indian re-roller Uttam Galva Steels Ltd, and more such deals are expected given the difficulty of going it alone in India.
“It is very difficult for someone coming from outside to set up a greenfield project,” Nittin Johari, chief financial officer of Bhushan Steel said. “Foreign firms have realized it’s not possible to do business standalone in India.”
Bhushan is in talks with Japan’s Sumitomo Metal Industries Ltd to jointly build a steel plant in India.
Global steel offtake slumped by more than a tenth in the past year, but India’s 55 million tonne (mt) steel market has seen demand grow by nearly 10% as its $1 trillion (Rs48 trillion) economy focuses on building physical infrastructure and as auto sales revive.
Still, absolute demand remains far below global levels, with per capita steel consumption at 44kg per year, compared to 100kg in Brazil and a global average of 198kg.
“India will continue to see growth. Per capita consumption is very low, so the potential is very high,” Tata Steel Ltd chairman Ratan Tata told shareholders last month.
The world’s No. 8 steel maker expects demand in India to rise 25% annually, and is raising its local capacity by a third to 9.8 mt. Other local producers are also expanding.
Smaller steel firms, which make up nearly half the industry in India, are attractive targets given their value-added steel capacity and coal and ore reserves.
“Many small steel companies have cornered large iron ore and coal resources and are pursuing large steel projects. If there’s a partnership or a stake sale, they can see a large jump in valuations,” Macquarie’s Arora said.
Global steel producers have long coveted—and been frustrated in—Asia’s third largest economy.
ArcelorMittal and South Korea’s Posco, which plan to spend a combined $24 billion to build 24 mt of capacity in eastern India, have yet even to secure land more than two years after announcing their plans.
Both have faced delays in allocation of mining leases and on protests from local farmers against land acquisitions.
With foreign players eyeing smaller firms as a way into India, domestic players may face stiffer competition, given the fragmented nature and small size of the market.
“Any such move would be potentially negative to the Indian integrated steel producers given the entry of a large competitor and also the potential loss of a customer,” broker JPMorgan said in a note to clients after the Arcelor-Uttam Galva deal.
India’s steel making capacity, only a tenth of China’s, is dominated by large local producers Tata Steel, Steel Authority of India Ltd and JSW Steel Ltd, leaving a large number of makers of higher-end re-rolled steel with less than 1 mt of capacity each.