Funding the main challenge for Indian steel growth

India’s steel production is expected to almost double by 2025 and M&A activity could result in a leaner industry, but headwinds remain, including tight credit lines and exposure to raw material prices.

S&P Global Platts spent a week in India in November, mainly to host our Steel Markets Asia conference in Mumbai, but also to meet with companies and visit operations. There was plenty of positivity about the state of the local steel market, as well as a few notes of caution.

S&P Global’s Indian subsidiary CRISIL predicts steel demand will grow around 7%-8% CAGR in coming years, driven by significant infrastructure investment, new affordable housing developments and strong auto sector growth. The industry consolidation process currently underway will make the steel industry more efficient and robust, and provide a more solid growth platform, most believe.

Once all of the bigger assets, such as Essar Steel and Bhushan Steel, have been acquired and integrated, another round of M&A among smaller “secondary” producers – which comprise at least 40% of the total industry in terms of output – is expected to take place.

This year Indian monthly crude steel production sneaked past that of Japan, making it the second-largest producer after China. India produced 88.4 million mt of crude steel over January-October, up 5.5% on last year, compared with 87.2 million mt from Japan over the same period, according to World Steel Association data.

Privately-owned JSW Steel expects India’s annual crude steel production to reach 195 million-200 million mt by 2025 on the back of large brownfield expansions by the larger steel producers. To meet the Indian government’s ambitious capacity target of 300 million mt/year by 2030 – the key plank of its National Steel Policy – would require the development of large greenfield projects, which have always proved troublesome in India due to a lack of access to land, red tape and difficulty in securing project approvals.

Financing conundrum

One of the major challenges that India faces is how to finance its infrastructure program. One speaker at the Platts conference estimated there would be a funding gap of around 30% over the medium term. GDP would need to grow at 8% to pay for all the bridges, roads, ports and smart cities planned by the government.

Credit remains tight in India. Indeed, there was a face-off between the Reserve Bank of India and the government on November 19. The government wanted to pry open the central bank’s purse and unleash more liquidity into the system – particularly with an election due in April. Meanwhile, the private sector is largely sitting on the sidelines, meaning the public sector needs to shoulder most of the funding burden. Prime Minister Modi had hoped that significant public investment in public works would entice the private sector to participate, but it hasn’t happened. Further, India’s government does not have the “deep pockets” enjoyed by China. As a result, nobody is quite sure how India will pay for its infrastructure plans and therefore project completions are likely to be pushed way beyond scheduled timelines.

New Delhi has sped up infrastructure development ahead of the election in early 2019. There is a 90-day moratorium on new project approvals before an election, which has also contributed to the urgency on view now. Work could slow slightly after the general election, which is expected in April or May, and there may be some easing of economic growth until momentum picks up again.

Therefore, while the growth trajectory is undoubtedly strong and long term, the curve may be slightly flatter than many in India would like.

On the raw materials side, India is still susceptible to coking coal price spikes, being almost wholly dependent on imports. The country is expected to import around 50 million mt this year, up around 5 million-6 million mt on last year.

Though India does have significant iron ore reserves, upcoming auctions in 2020 are expected to result in some supply shortages while licenses are renewed. This year, India could import around 10 million mt of iron ore, mainly from Australia's Fortescue Metals Group. Some at the conference were tipping imports of around 20 million mt in 2019.