Government's increased emphasis on infrastructure coupled with the strong demand from housing and automobile sectors will ensure that the steel consumption reaches a few hundred million tonnes a few decades from now. Infact, if we are to bridge the gap between the domestic per capita consumption of 39 kgs and global average of 150 kgs, then demand will have to grow by atleast 10% to achieve the target by the year 2020.

Further, with the supply not in a position to be able to catch up with the demand atleast until few years from now, we could see the continuation of the current robust steel cycle in the medium term.  Availability of iron ore, however, may come under threat if the government continues to permit indiscriminate exports of the same.

Industry wish list

FICCI's wishlist

• Ad valorem duty to be imposed on exports of iron ore from the country
• Removal of customs duty on scrap, iron ore as well as metcoke
• Reduction of customs duty on zinc as it is the key raw material for production of galvanized sheets and also used majorly for irrigation and water supply related pipes.

Budget over the years

Budget 2005-06

• Duty on coking coal with high ash content reduced from 15% to 5%.
• Duty on primary and secondary metals reduced from 15% to 10%.
• Customs duty reduced from 20% to 15% on ferro alloys, stainless steel and other alloy steel, excluding seconds and defectives.
• The budget was silent on the restoration of the duty entitlement pass book (DEPB) scheme applicable to steel exporters.
• A surcharge of 2% on account of education cess will be imposed on corporate tax.

Budget 2006-07

• Customs duty on ferro alloys, stainless steel and other alloy steel has been reduced from 10% to 7.5%

Budget 2007-08

• Duty on coking coal fully exempted.
• The customs duty on primary steel and ferro-alloys stainless steel has been reduced from 7.5% to 5 %.
• The duty on seconds and defectives of steel reduced from 20% to 10%.
• Export duty has been imposed on iron ores and concentrates at Rs 300 per tonne and on chrome ore and concentrates at Rs 2,000 per tonne.
• Dividend distribution tax to be hiked from 12.5% to 15%.

Key positives

Lustrous demand ahead: Amongst all the metals, steel arguably has the highest co-relation with a country GDP growth. Thus, if we expect India's GDP to grow in the region of 7% to 8% in the foreseeable future, then the consumption of steel has to increase at a proportionate rate. As per industry reports, between 2003 and 2015, the demand for steel is expected to triple, translating into a healthy CAGR in the region of 10%.

India advantage: Indian steel producers are one of the lowest cost producers in the world, which provides them with a hedge against fall in prices. Further, relatively efficient and vertically integrated companies like Tata Steel [Get Quote] are likely to be in a better position to weather any steel downturn.

Improved financial health: The robust steel cycle that started in 2003 has enabled a lot of domestic companies to pare significant amounts of debt and make their balance sheet stronger. Infact, even a lot of new capacities that are being planned will have a healthy mix of debt and equity, thus enabling these companies to weather any downturn in a much better way than managed in the past.

Global outlook: Be it acquisition of downstream technology or enhance raw material security, Indian steel companies have started looking outward for augmenting their growth plans, thus highlighting their commitment towards the downstream sectors, which otherwise will have to depend on imports as well as their shareholders. We believe the sector should see many more deals along the lines of Tata Steel's acquisition of Corus and Jindal Steel and Power's acquisition of iron ore mines in Bolivia.

Key negatives

Iron ore availability: Export of iron ore continues unabated from the Indian shores under the misconception that we have abundant reserves. But nothing could be further from the truth. Iron ore availability in India on a per capita basis remains among the lowest in the world and thus if exports are not stopped, we might lose the edge that we have in terms of being self-sufficient in iron ore.

Capacity constraints: It is indeed ironical that despite being among the lowest cost producers of steel in the world, India has to export its iron ore and at the same time, become a net importer of steel in recent times. This is because major domestic steel producers are facing capacity constraints and new capacities are not coming up fast enough. Unless capacities come on stream quickly, some of the benefits of robust growth in the industry might be lost.