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The Olympic effect on Indian steel
By Indrajit Basu

KOLKATA - What do the 2008 Summer Olympics have to do with the rising discontent between steel manufacturers and users in India? Plenty, if you ask the country's government and its steel industry.

In its race to modernize and show the world how the Olympics should be hosted, China - home to a fifth of the world's population - is now rushing to modernize by embarking on a mammoth infrastructure overhaul, and as a result has become the largest buyer of steel - and other metals - in the history of the world. But while the Middle Kingdom sucks out most of the world's exportable steel, India included, it is causing steel prices to shoot through the roof, forcing India's steel manufacturing and user industries to step up an intense lobbying battle with the government.

While Indian steel makers, after years of losses and tight margins, attempt to dissuade the government from taking steps that could silence their ringing cash registers, the user industries are trying to prove that skyrocketing steel prices - a politically sensitive issue that can unsettle the ruling government - are unhealthy for India's economy, as well as for the Bharatiya Janata Party-led government's electoral prospects in the upcoming polls (April/May).

Last week, both lobbies demonstrated their clout when their pestering forced the government to announce a series of cleverly crafted sops which, at a cost of over US$1.5 billion a year to the exchequer, would not only cool down steel prices, but also reduce input costs, which would help maintain steel-makers' current profit margins. The sops included the reduction of import duties by 5 percent on finished steel and steel products (that will directly help user industries), and on key producers' inputs - pig iron, scrap steel and metallurgical coke - which will help lower steel makers' costs, and hence, also the prices of their products.

Besides these reductions, the government also halved excise duties - a duty it charges on finished steel products - to 8 percent and said that it has asked two state-owned steel companies, Steel Authority of India Ltd (SAIL) and Rashtriya Ispat Nigam Ltd, to cut down exports of finished steel products.

"We hope these [sops] would go a long way in bringing in a soothing effect on domestic steel prices here," said steel minister Braja K Tripathy. "We also tried to balance the act by reducing input costs so that steel makers can reduce their prices while retaining profit margins," he added, admitting that at the end of the day though, "prices are market determined and we cannot really do much except try moral persuasion by discussing with the major players".

Indeed, driven by an economy that is reportedly growing at over 8 percent, combined with the colossal facility and infrastructure development in preparation for the 2008 Olympic Games in Beijing, China has emerged as the largest steel consumer, accounting for one quarter of the world's total steel usage which in turn has resulted in the global demand for steel vaulting to record highs. Global prices for finished steel - hot rolled coils - has almost doubled to a peak of $580 per ton in the past nine months.

In India, too, the rise of steel prices has been equally spectacular. Industry sources say that steel prices rose 12 times in the past year, but the rise has been particularly sharp since August last year. Prices of hot rolled coils, the key ingredient for downstream steel products, shot up from $400 per ton in August 2003 to $511 per ton in the beginning of February. And in one of the highest one-time price hikes in recent years, domestic steel manufacturers increased the price of hot rolled coil by up to $90 per ton last week, to take it to the all time high of $600, effective from March. That's a 17 percent rise in less than a month.

Small wonder then that the impact of China's huge appetite for steel on the India's steel industry has perhaps been greater than any other steel industry elsewhere in the world. But there's yet another reason why China's hunger for steel has rattled the country: despite the fact that at almost 255 million tons per year, China's steel consumption is almost eight times than that of India's, the country has had the highest rate of increase in market share of Chinese steel imports in 2003. In other words, India's steel exports have increased multifold over the past few years, thanks solely to Chinese demand, which is also flushing out some of the steel meant for the domestic market.

India's gain from growth in the Chinese steel market has been so lucrative that presently, reckon industry sources, about half of India's 5.5 million tons of annual steel exports go to China. This had caused the trade balance to swing in India's favor for the first time in 2003. Chinese demand today accounts for a major part of the country's largest steel makers' exports: 29 percent of Tata Steel's exports, 35 percent of SAIL's and 35 percent of Essar Steel's.

Nonetheless, it isn't only steel that China is influencing globally. With a population of 1.3 billion people, the country's demand for other metals like aluminum, zinc and copper is also resulting in prices vaulting to record highs. On the London Metal Exchange, which is seen as the benchmark for global metal prices, aluminum is quoting at a three-year high of over $1,700 per ton; zinc at a near three-year high of $1,128 per ton; and copper at a seven-and-a-half year high of $2,985 per ton. Lead and tin, too, have climbed to highs not touched for years.

The Chinese appetite has also stretched to other globally influential commodities like oil and petrochemicals. In December, China's crude oil imports climbed by nearly 80 percent from the previous year. The year 2003 ended with China importing more crude oil than Japan, and this is poised to climb much higher. One country that is gaining significantly from oil-guzzling China is Russia. Reportedly, China plans to transport 12 million tons of oil by rail from Russia by 2006. That will be up from 3 million tons in 2003.

For the past few years, the petrochemicals industry has been plagued by overcapacity and resultant falling prices. Now the petrochemicals industry is looking forward to the possibility of boom times once again - courtesy of the Chinese demand. Analysts reckon that by 2010 China will be the world's second largest user of plastics after the United States.

Meanwhile, most of Southeast Asia has benefited from the Chinese behemoth. In 2003, two-way trade between China and the Association of Southeast Asian Nations countries - represented by Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines Singapore, Thailand and Vietnam - climbed by 42 percent from the year before. "Every country in the region from Malaysia to Singapore is now heavily dependent on this trade," said an international trade analyst adding, "In fact, China has taken over from Japan as the locomotive that is tugging Asia behind it."

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Mar 3, 2004

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