Hastening slowly

The reduction in the customs duty on steel has drawn a sharp response from spokesmen for the Indian steel industry. They have claimed that this will prove to be a disincentive for expanding steel-making capacity in the country.

With steel prices ruling so high, it's worth ignoring that argument. The fact is almost every steel producer in the country has lined up plans to expand capacity, and the Indian Steel Alliance has said that the industry could see an investment of over Rs 75,000 crore in the next seven to eight years.

It's not only the big steelmakers such as Tata Steel and SAIL that are increasing capacity. Jindal Iron and Steel and Essar Steel have also announced expansion plans. There's foreign interest, too.

BHP Billiton Ltd and Korean steelmaker Posco are reported to be in talks with the Orissa government for developing iron ore mines and setting up steel mills in the state. Under these circumstances, the real issue to ponder is not whether capacities will come up, but whether there will be too much of it some years down the line, when steel prices start cooling off.

Such a scenario appears far-fetched at a time when steel producers are rushing to keep pace with exploding demand. Nevertheless, it would pay to be cautious. Consider, for instance, the amount of global capacity that is planned.

China's steelmaking capacity is estimated to rise around 60 per cent by 2005, climbing from 193 million tonnes in 2002 to 312 million tonnes. China's steel output rose 21 per cent in the first half of this calendar, adding production almost equivalent to the whole of South America over the same period. Brazil is preparing to increase its total capacity by 30 per cent by 2008.

Steelmaking in Russia is also set to rise dramatically in the next two years, with up to 12 new steel plants being planned. In Indonesia, a new 2.2"�2.4 million tonne hot strip mill is being built. Posco plans to increase annual production to 32 million tonnes by 2008.

This is not to say that Indian steel companies should sit tight and do nothing. They shouldn't. But they have to plan with the global supply"�demand equation in sight. For one, Chinese demand remains very much a wild card.

If its government succeeds in slowing down the economy, or if new Chinese capacity emerges fast to not only take care of domestic demand but also start exports, global steel prices could tank. It also needs to be remembered that much of the current rise in prices is due to the shortage of raw materials such as iron ore, steel scrap and coking coal.

There are also supply bottlenecks in shipping and port facilities. Once these bottlenecks ease, prices could ease. Indian steel manufacturers must, thus, tread warily and weigh the pros and cons of having more greenfield investment as against expanding through acquisitions.

Invest they have to, but this is not the same as saying that all the money must go to greenfield projects at home. They need to invest globally in raw material sources and buy steel capacity that comes with a reasonable price tag. But acquisitions work best when you are at the bottom of the economic cycle and not at its crest. That is the strategy that paid off very well for Lakshmi Mittal.