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Despite negative implications for FDI inflows in view of ArcelorMittal and POSCO scrapping their $18 billion projects in India, their exit would prove beneficial for domestic players like SAIL and Tata Steel, global credit rating agency Moody's said today.
"These two foreign steelmakers' decision to shelve their projects will mean that the overcapacity situation seen in China is less likely to occur in India... The cancellation of the plants will also be beneficial for domestic producers such as SAIL (unrated) and Tata Steel," Moody's said in a statement.
India's capacity utilisation is relatively high, at about 85% compared to 72% in China in 2012.
"While this (POSCO and ArcelorMittal withdrawal) has negative implications for foreign direct investment (FDI) inflows into India and for the long-term growth of the country's steel sector, it is credit positive for domestic players such as Tata Steel, which are in the midst of substantially expanding their own capacity," Moody's said.
Tata Steel and SAIL plan to add around 60% to their March 2013 capacities over 3-5 years and can now look forward to a less crowded market than would have been the case had the inward investment initiatives proceeded, it added.
Currently, Tata Steel's European unit accounts for two- thirds of its total production at about 24 MT. Last year, it had added a new 3 MTPA capacity at the Jamshedpur plant and is in the process of commissioning a new mill in Odisha.
POSCO and Arcelor's greenfield projects were expected to produce initial capacities of 6 million tons per annum (MTPA) and 12 MTPA respectively.
Both the companies, earlier this month had abandoned their two projects after long delays caused by a combination of local opposition to their plans, difficulties over acquiring land, and the limited availability of coke, iron ore and power linkages.
While such hurdles are not uncommon in India's industrial and extractive sectors, they do little to encourage FDI into manufacturing and infrastructure, the rating agency said.
It added that government steel capacity target seems ambitious.
"In terms of the Indian steel industry as a whole, we believe the government's steel capacity target, as detailed in its draft National Steel policy announced in February, is too high, because it is based on a sustained GDP growth rate of 8%, which is estimated to result in a crude steel requirement of 300 MTPA by March 2026," it said.
By contrast, the GDP growth is expected to be closer to 5.5% in FY2014, given the 5% recorded in FY2013, it added.
Moody's notes that these steel production figures are far higher than the crude steel output in FY 2012 of 88.4 MT.
