Posted on 03 Nov 2014
India's
steel demand is expected to rise by 4-5 per cent this year and will touch 15
per cent CAGR after FY17 as the country has the potential to emerge as the
second largest steel consuming market after China during FY15-20, Deutsche Bank
said in its research report.
With expectations of the new government's thrust on jump starting stalled
projects initially followed by pushing large flagship projects, including the
freight and industrial corridors, it is expected that India will begin moving
back on the path of materials intensive growth by the end of this year.
"We expect steel demand to rise by 4-5 per cent this year as against
average of 2 per cent over FY13-14, 8 per cent in FY16 and a 15 per cent CAGR
after FY17 when policy initiatives of the new government begin to impact
materials demand, meaningfully.
"Based on our growth forecasts, India has the potential to emerge as the
second largest steel consuming market, behind China during FY15-20," the
report said.
The report expects that India will emerge as a large importer of steel
particularly in FY19-20 with the imports of as much as 24 million tonne of
steel - equivalent to 17 per cent of its consumption. The domestic steel
production is estimated to rise by 48 per cent by 2020, it said.
"We also estimate India's iron ore requirements to rise by 53 per cent and
coking coal requirements by 39 per cent by 2020," the report said.
India is likely to import 15.5 million tonne of iron ore - its highest ever
imports - in FY15.
"We do not see a risk to India's iron ore self sufficiency on a longer
term basis and country is likely to import 15.5 million tonne of iron ore - its
highest ever imports - in FY15.
"However, this remains contingent on easing of regulatory restrictions. A
timely resolution can support domestic supply ramp up to meet demand from new
steel capacities between now and 2020, it said.
Deutsche Bank forecast India to become a net exporter of iron ore again from
FY16. However, the magnitude of exports is likely to be only a fraction of its
historical levels.
"During our forecast period till 2020, we expect India's iron ore exports
to stay range bound between 15-35 million tonnes, relative to a range of 80-120
million tonne during FY05-10," the report said.
"The new Modi government's initiatives clearly point to India embarking on
an economic model used by the East Asian economies to rapidly modernise
themselves. The Indian steel and iron ore sector lies at the forefront of the
Modi administration's move to the East Asian model of growth.
"We expect the sector to be a direct beneficiary of the two most important
elements of the East Asian model - the move to materials intensive growth from
an aggressive focus on heavy infrastructure build out and revitalising
manufacturing, and equally importantly and a conscious attempt to keep the
currency weak," as per the report.
The report says that currency may emerge as an important tool rather than just
a passive exchange rate that drifts towards 'fair value'.
"We have assumed an average annual depreciation of 3 per cent for our
forecasts. We believe that a depreciating currency could emerge as competitive
advantage vs imports and cushion Indian steel-makers from global steel price
volatility as domestic steel prices are benchmarked to landed cost of imports,"
it said.
The report also pointed out that there is a strong empirical evidence that
economies see a visible inflection point in materials intensive growth within a
few years of GDP per capita, on a PPP basis reaching threshold levels of around
USD 2,500-3,000. This trend has been observed across various countries starting
with the post-war industrialisation of Japan in the fifties and most recently
in China, a decade ago.
"India reached this inflection point in 2006 and was on the path of strong
materials demand until 2011-12, when the economy started slowing due to a
combination of policy paralysis, coalition politics, stalled parliament and a
slow moving bureaucracy," the report said.
