THE slow growth of key segments of the economy including infrastructure, real estate, construction and automobiles during much of 2012 has impacted the Indian steel sector.

The World Steel Association (WSA), which represents steel producers in over 170 countries and who account for 85 per cent of global production, lowered its forecast for growth in steel consumption in India from 6.9 per cent made earlier in the year to 5.5 per cent.

According to the WSA revised estimates — which held its 46th annual conference in New Delhi last week — India’s steel demand will grow by five per cent in 2013 to 77.3 million. India’s steelmakers have a production capacity of nearly 90 million tonnes per annum.

Of course, the global steel industry is also facing problems of slackening demand because of the continuing slowdown in the US, Europe and China. According to the WSA’s forecasts for 2012, steel consumption is expected to grow by a mere 2.1 per cent, sharply lower than 6.2 per cent achieved in 2011. Next year, steel demand is expected to rise by 3.2 per cent to 1,455 million tonnes.

“Earlier this year we were seeing some signs of recovery from the slowdown of the last quarter of 2011 and we expected a better second half performance in 2012,” remarked Hans Jürgen Kerkhoff, chairman, economics committee, WSA. “However, the economic situation deteriorated during the second quarter of this year due to continued uncertainty arising from the debt crisis in euro zone and a sharper than expected slowdown in China.”

Demand for the metal in China is expected to grow by just 2.5 per cent to 639.5 million tonnes in 2012, again a sharp drop from 6.2 per cent registered in 2011. China’s apparent steel use is expected to be up marginally by 3.1 per cent in 2013.

The worst hit was the European Union, where apparent steel consumption will fall by 5.6 per cent in 2012. Next year, the WSA estimates growth in the euro zone region could at 2.4 per cent.

In fact, Tata Steel Europe (TSE), part of India’s Tata group, plans to continue cutting jobs and production in the continent in view of the low demand for steel. Karl-Ulrich Kohler, CEO and managing director, TSE, says job cuts are expected to continue for some time. The company had earlier announced retrenchment of 1,500 workers in Europe.

TSE, whose capacity is also being reduced to 18 million tonnes from 14 million tonnes, is looking at newer markets outside of Europe including Africa and even India.

Kerkhoff of the WSA, however, is confident that things would improve in 2013 for the steel sector. He notes that global steel demand remained positive right from 2008, despite the international economic crisis.

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ICRA, an associate of Moody’s investor service, and a leading Indian credit rating agency, expects the margins of Indian steel producers to remain under pressure over the near term. The agency last week warned that a surge in cheaper imports into India will put pressure on domestic steel prices and squeezing margins of local manufacturers.

“International steel prices have been on a downward journey in the current year so far, reflecting the weakness in major steel consuming regions like China, the US and the euro-zone,” says Jayanta Roy, senior vice-president and co-head for corporate sector ratings, ICRA. “Consequently, a surge in cheaper imports has exerted significant pressure on domestic steel prices, which are expected to remain under check in the near-term.”

Additionally, limited iron ore availability and a weakening rupee – this trend has, however, been reversed in recent weeks – have offset the easing of international coking coal prices and kept the price of raw materials at relatively elevated levels, he adds.

Iron ore production in India has been adversely affected following the clampdown on illegal mining in states including Karnataka. Several top politicians of the southern Indian state have been accused of encouraging illegal mining in some of the iron ore-rich districts. Iron ore production is expected to decline by 17 per cent in the current fiscal.

Ironically, while international iron ore prices fell during the year, domestic prices have been going up sharply because of supply constraints.

ICRA notes that steel imports grew by 40 per cent during the first quarter of the year, hurting domestic producers. Despite the government hiking import duty on hot rolled coils and the weakening rupee, the landed cost of imported steel is still cheaper than the domestic price of the metal.

Imports and slackening demand have resulted in capacity utilisation plunging to 79 per cent during the year. They have also led to a build-up in stocks. According to D.R.S. Choudhary, the steel secretary, inventory levels have risen to 45 days compared to 15 days earlier.

Analysts also expect a glut in steel capacity as most of the existing players have invested large sums in capacity expansion.

Though India’s per capita steel consumption is increasing gradually — the WSA estimates it has increased from 45.8 kg in 2007 to 57 kg in 2011 — it is still way below global standards. While the world average is at 214.7 kg, other Asian economic giants are way ahead of India in terms of per capita consumption: in China it is 459.8 kg, Japan at 506.7 and South Korea at 1,156.6 kg.

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THOUGH India’s steel production capacity has shot up from 66 million tonnes in 2009 to 90 million tonnes at present, it is unlikely to touch the 200 million-tonne-mark by 2020. Steel minister Beni Prasad Verma is confident the 200 million-tonne figure would be achieved over the next eight years, making India the second-largest steel producer in the world (it is today the world’s fourth-largest).

H.M. Nerurkar, managing director, Tata Steel, however, feels that it would be difficult for India to meet the 200 million tonne target. “The predictions of 200 million tonnes by 2020 earlier appeared to be absolutely on track,” says Nerurkar. “But the way the greenfield projects in India are getting delayed, in a way the economy has not grown the way it was growing, I feel, the 200 million tonnes by 2020 target appears to be difficult now.” He feels the country may reach 170 million tonnes capacity by 2020.

Verma is confident that the national steel policy, which is being formulated by the government, would help boost production and consumption. But the government itself is facing major problems in getting state governments – and even its own environment ministry – from giving quick clearances for projects.

Many international producers, including Posco of South Korea, ArcelorMittal of the UK and Severstal of Russia have planned ambitious greenfield projects in eastern India. But most of these multi-billion-dollar projects have been stuck because of the failure of state governments to allocate land, or of the federal environment ministry to give the necessary clearances.

Though Posco had signed an agreement with the government of Orissa in 2005 to set up a $12 billion steel plant in the state, the project has still not taken off because of opposition from people in the region and delays in acquiring land. ArcelorMittal and Tata Steel are also facing difficulties in land acquisition and getting the environmental clearances for their projects.

Lack of clarity on land issues and delays in getting environmental clearances are slowing down the growth of the Indian steel industry.