Over the last decade, China witnessed exponential growth in its steel industry, registering a growth rate of 17.2% in production and 14.3% in consumption. In absolute terms, China is expected to produce 630 million tonnes of steel in 2010 – around 47% of global steel production.
The ongoing debate is whether India should aspire to grow to such levels and, if required, whether it can replicate China's growth model in the sector.
The following indicators provide vital clues:
China's reforms began 13 years before India's. Even at the start of its reform process, China was a more industrialized economy. “Industry and construction” constituted 48% of its GDP, in comparison to 27% for India when reforms began in 1991.
China has continued to focus on infrastructure. Its share of GDP expenditure accelerated from 38% to 48% during the reform journey, while India's GDP grew from 25% to 32%.
In 1991, China produced 71 million tonnes of steel, which grew to 127 million tonnes by 2000. In the same period, India grew from its steel production from 17 million tonnes to 26 million tonnes.
In China, steel production picked up pace after 2000, growing to around 630 million tonnes in 2010. Although India registered significant growth during this decade, in absolute terms, China's steel production is 12.3 times that of India's.
Based on India's GDP data, we believe the economy is on a strong growth path. In the coming years, we anticipate steel consumption growing in line with GDP growth in the expected 8%-plus range.
While India does not need to emulate the volume achieved by China, production must accelerate to meet the robust growth in demand. The extent of production growth will depend on how well stakeholders address the market's challenges.
Abundance of iron ore reserves
India is the world's fourth-largest producer of iron ore after China, Australia and Brazil. It has about 25 billion tonnes of good quality iron ore reserves, ― the sixth-highest in the world – with a reserves base of 9.8 million. Although lower than Brazil and Australia, this is considered abundant and is one of the key advantages of India's domestic steel industry.
Coking coal deficiencies
While India has the fourth-largest proven coal reserves in the world, they are low quality and coking coal makes up only 17% of the total reserve. In FY10, India imported 23 million tonnes of coking coal to meet its total requirement of around 40 million tonnes, 34%1 of total coal imports.
The demand for coking coal will only increase as new steel capacity comes online, with India's coking coal requirement expected to reach 90 million tonnes by FY20.2
Looking forward, we expect access to coking coal to have a huge impact on the margins of steel manufacturers. This will be less of an issue for integrated steel players (ISP), which operate captive coke capacities, producing around 40% of total coke in India annually.
However, secondary steel producers (SSP), which require around 10 million tonnes of coking coal per annum, will be largely dependent on imported coke.
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1Coal India Ltd, Company profile, December 2010
2Coal Sector – The impending coal crisis in India, Credit Suisse, via Thomson Research, 10 August 2010