Steel majors up expansion ante with an eye on iron ore

The flurry of announcements made by domestic as well as global steel majors on setting up new plants may not hammer down steel prices as many steel companies privately admit that the expansion plans are unlikely to be completely implemented.

The expansion plans are part of the strategy "" at least for some companies "" to secure rights over iron ore mines before the natural resources are exhausted.

The companies that have announced massive expansion plans include the world's largest steel company Mittal Steel, South Korean giant Posco and virtually all domestic steel majors led by Tata Steel - Steel Authority of India, Essar Steel, Jindal Vijaynagar Steel, JSPL, Ispat Industries and Rashtriya Ispat Nigam.

Even smaller companies like Bhushan Steel, Visa Industries and the TI group have joined the bandwagon. The collective investment commitment of these companies stands at Rs 2,62,000 crore.

Production capacity is also set to expand from 35 million tonne this year to 89 million tonne in 2012, 120 million tonne in 2015 and cross 155 million tonne by 2020. Taken into account an 8 per cent GDP growth, imports and exports of steel will also go up substantially. In spite of this, the gap between production and consumption will widen, with consumption expected to be just at 110 million tonne by 2020.

Also, Russia's largest steel company Magnitogorsk Iron and Steel Works plans to set up a 10 million tonne project in Orissa. The greenfield project, which may be announced within six months, will only add to the stockpile or surplus.

"We remain bearish on steel stocks in the long term, not because of slower demand but because of rising supply," said Rajeev Das, executive director, Goldman Sachs.

Hinting that the steel sector might be at its peak right now, he said, "Cyclical highs have coincided with announcements of major capacity additions." "The sector may be in for a correction after the high, as every business is cyclical," he added.

An analyst said the service-dominated Indian economy may not be in a position to absorb the added capacities. With China's booming infrastructure sector set for a correction, the size of exports market may also shrink. For the first time this year, China turned a net exporter.

Indian steel companies are aware of the supply glut, but they do not want to miss the opportunity, a senior executive of a domestic company said.

"The industry is facing a peculiar situation: Invest now or at least make an announcement or you will perish. Many companies are announcing aggressive expansion plans even though they are aware that these plans may not materialise," the analyst added.

Iron ore, the most important raw material for steel production, is probably playing a crucial role behind all announcements. The supply of iron ore, like any natural resource, cannot be structured with the rise in demand.

That's why the companies want to reserve iron ore before it is too late. "Announce expansion plans, sign a memorandum of understanding with the state government, implement the first phase of the project and get the mining lease over iron ore are what their strategy is," said a sector analyst.

In other words, some of the companies are adopting a preemptive strategy to block competition from gaining control over mining lease.