THE global economic slowdown and the rapid deceleration of growth in the Indian economy have stunned domestic steelmakers, who were expecting 2009 to be a good year.

Unfortunately, the current year - like 2008 - is likely to see the industry go through a roller-coaster ride.

Demand for steel has dropped sharply, especially with the major consuming sectors - infrastructure, housing and construction and automobiles - recording anaemic (or even negative) growth. Analysts fear that the next two years could prove to be the worst ones for the steel sector.

Global and domestic steel majors - including ArcelorMittal, South Korea's Posco and Tata Steel - are delaying the billions of dollars of planned investments in greenfield and brownfield projects in the sector.

ArcelorMittal, for instance, plans to delay completion of its $20 billion - relating to two 12 million-tonne integrated steel plants in Jharkhand and Orissa - by two years to 2014. “The delay is because of the global financial crisis and delays in securing mining rights, land and other regulatory approvals,” says Vijay Bhatnagar, CEO, ArcelorMittal India.

The steel industry in India expanded at a dramatic pace in 2007 and in the first half of 2008. Groups like ArcelorMittal, owned by UK-based Indian Lakshmi Mittal, had ambitious plans to acquire scores of steel companies around the globe, besides investing billions of dollars in new projects.

Even the Tata group had acquired global giant Corus Steel, out-smarting many international bidders. Domestic steel majors had also unveiled ambitious expansion plans, especially in the eastern states of Orissa, Jharkhand and Bihar.

Virtually all the sectors that consume steel - infrastructure, housing, automobile, white goods - were doing well during the first half of 2008, leading to record prices for steel, which peaked at $1,250 a tonne. Consequently, the raw material costs too soared, and fearing a further rise in prices, most of the players signed long-term contracts for the purchase of iron ore, coking coal and other raw materials.

But when the global financial meltdown occurred in September 2008, with the Lehman Brothers episode, the industry was ill-prepared to meet the challenges. As the liquidity crunch set in - both internationally and in India - most of the consuming sectors got affected.

Steel inventories began building up, though producers had to continue paying high prices for raw materials. Worse, overseas steel producers began dumping cheap steel into the domestic market, hurting their revenues.

The government was also slow in reacting to the crisis - while import duties on steel remained low, export incentives that had been withdrawn to curb the escalating price of steel, were not re-introduced.

The impact was almost immediate on both top-line and bottom-line growth of the steel companies. State-owned steel major SAIL and private sector giant Tata Steel, have both seen net profit plunge by over 50 per cent in the third quarter of the current fiscal (October to December 2008), while JSW Steel reported a loss.

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LAST week, the steel industry heaved a sigh of relief when the government announced an across-the-board two per cent cut in excise duties on all manufactured products. This was part of the government's third stimulus package, which hopes to kick-start the economy. The government also brought down the service tax by two per cent.

India's gross domestic product (GDP), which has expanded by an average of over nine per cent over the past four years, is expected to slowdown to just around seven per cent in the current fiscal ending March 31, 2009. Forecasts for fiscal 2009-10 project an even slower growth rate of between five and 5.5 per cent.

Over the past three months, the government has unveiled two stimulus packages, while the Reserve Bank of India, the country's central bank, has initiated rate cuts, hoping to inject more liquidity into the economy. But demand for steel has continued to stagnate despite the reduction in interest rates and the huge spending on infrastructure and housing.

Steelmakers are expected to slash prices by about Rs600 a tonne, following the two per cent cut in excise, hoping to boost demand from the real estate and construction sectors.

Steel prices have declined sharply by over 40 per cent over the last six months and are set to fall further. Demand has picked up, especially since January, but it is nowhere near the early 2008 levels. Steel production fell by almost one per cent in December and during the April-December 2008 period grew by a mere 2.7 per cent (as against six per cent during the same period in the previous fiscal).

But the industry is clamouring for more concessions from the government. It wants import duty to be increased to 15 per cent from the present five, to prevent alleged dumping by Chinese and Ukrainian suppliers. It is also demanding the lifting of curbs on exporting steel, that were imposed when prices were soaring last year.

The government, however, is unlikely to raise tariffs as steel imports have started declining. During the April 2008-January 2009, imports fell by 16 per cent. The international price of steel has also fallen to less than $500 a tonne, a more than 50 per cent fall in about six months.

Shoeb Ahmed, director, commercial, SAIL, believes that 2009-10 will be a bad year for the sector. The turnaround in the industry's fortunes is expected to happen only in the last quarter of fiscal 2010-11, says Ahmed. According to him, the government will have to boost infrastructure spending to help bail the industry.

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STEEL minister Ram Vilas Paswan, however, feels that the steel industry should not postpone its planned expansion in view of the current slowdown. “In the last five years, India's steel industry benefitted greatly from the rising investments in infrastructure, expansion in industrial capacity of the economy and a booming capital goods sector growing at around 20 per cent per quarter, construction activities at around 15-16 per cent a quarter, a resurgent consumer durables sector and a steady growth in the transportation sector,” says the minister. “The current credit crunch and the consequent slowdown in economic activities have led to lower demand for steel in all the major steel consuming sectors.”

India produces about 55 million tonnes of steel every year. This is expected to touch 85 million tonnes by 2011-12, if the planned expansion goes according to schedule. SAIL, which currently produces about 15 million tonnes of steel, plans to expand its capacity by another 10 million tonnes.

Despite the impressive production figures, India still figures low in the global rankings in terms of per capita consumption, which is 44 kg per person.

The shrinking domestic demand for steel has coincided with the financial crisis in the major export markets for the industry - the US, Europe, South East Asia and the Middle East. Paswan says the government has come to the industry's rescue by extending export incentives, re-imposing tariffs on imports and boosting spending on infrastructure.

However, Indian steel producers are dependant on imported raw materials and most of them continue paying high prices for them. SAIL, for instance, has to import about 80 per cent of its coking coal requirements. Coking coal prices, which had peaked at $715 a tonne last year, have fallen to $150, but many of the steel producers continue paying the contracted rates.

Iron ore too is being acquired on long-term contracts and even state-owned suppliers like NMDC Ltd are reluctant to review the contracts. Rana Som, NMDC chairman, says the company will consider renegotiating its long-term contracts with steel producers in the new financial year beginning April.

Paswan, however, sees a revival of the Indian steel industry on the back of the resurgence of the economy. “We have the natural resources, the skill base, technological acumen and the financial capability to make this industry a centrepiece of Indian economic achievements,” he notes. “The underlying conditions that make us hopeful about the impending upturn in the Indian macro-economy also holds good for the steel economy.”