Emerging Markets – India, Vietnam, Bangladesh, Pakistan and Iran

The balance of power in the world of steel appears to be on the threshold of a tectonic shift as countries which were once considered to be fringe elements in the global steel market gradually begin to create ripples in the delicately poised industry.    

China altered the course of the steel industry with its meteoric rise in the past decade, disrupting market equilibrium and thus establishing itself as a dominant entity in steel. And now a similar situation seems to be arising as the industry inches closer to yet another defining era.     

Analyzing potential for growth in consumption, opportunities for increasing production and the global economic scenario, we take an in-depth look at five emerging steel markets which are most likely to be at the forefront of the transformation in steel.    

India, Iran, Pakistan, Bangladesh and Vietnam have emerged as the most promising markets for steel in days to come for various reasons. We have closely studied their domestic environment with regard to politico-economic circumstances, availability of resources, scope of domestic demand growth and export potential.

A young population, an abundance of natural resources and a strong agenda for reform are few of the many factors which are driving the sector and infrastructure projects within these regions.

IRAN

IRAN, with its vast reserves of key natural resources, large manufacturing potential and its policy to bolster both production and exports deserves a place in this list. It is an economy which is in resurgence after partial resolution of long standing geo-political differences. Even the government of Iran appears to be determined at propelling growth and has chosen the manufacturing sector to lead its economic development. Although, the country’s domestic steel consumption is on a decline, it is Iran’s export oriented push towards production, abundance of iron ore and most importantly the availability of gas at cheap prices that makes Iran a key player in the steel market.     

The uncertainty in coking coal prices which have fluctuated vigorously over the past few years gives a significant edge to gas based steel production, which is Iran’s primary source. Not only does this shield Iran from uncertainty but also gives Iran an opportunity to reap the benefits of one of its key natural resources. According to data from Iranian petroleum ministry the country has 29.6 trillion cubic metres of gas reserves which is 15.8 per cent of world’s total reserves and places Iran second on the list of countries by proven natural gas reserves. Iran is also placed 11th on the list of largest producers of Iron ore adding to its production supremacy.    

 The oil and gas power house, long sidelined from International markets by the US, has shifted its focus towards bolstering steel output to feed the massive global demand for semi finished products.     
 
 CEO of JTC iron-Ore Company and an internationally acknowledged expert on Iran’s Iron and Steel industry, Mr. Keyvan Jafari Tehrani while speaking to Steel-360 gives an inside look into the Middle Eastern giant’s steel markets, present outlook and future possibilities.
 
SCOPE FOR EXPORT REVENUE

Mr. Tehrani believes that the scope for increasing export revenue is vast and the country has adapted to the requirements of the world markets. “There are import duties on end products such as rebars and the country is trying to therefore increase billet export. Efforts are being made to export to countries where there is no anti dumping” Mr. Tehrani asserted. According to him, “altogether Iran is trying to increase exports. Last year it was 6 mnt and this year it might be above 8 mnt”. “Obviously a big part of the increase would be of billet” Mr. Tehrani added.     

However, when it comes to Iron ore exports, the prospects according to Mr. Tehrani have diminished considerably in the last two years after India began exporting. According to him, “before September 2016 Iran enjoyed high export volumes for medium to low grade Iron ore, sometimes even as low as below 50 per cent. However, now with India back in the market there is a considerable amount of fine cargo in the international market driving Iran out”.     

Mr. Tehrani, giving an example of diminished export to China informed, Iran’s share of total Iron ore export to China was above 2 per cent in 2013 but now it has fallen below 1.5 per cent.  
 
CHALLENGES AHEAD

En-route to rebuilding its economy after international sanctions were lifted, Iran stares at a long and challenging road ahead. Speaking about these challenges Mr. Tehrani stressed on the need for optimum capacity utilization as a key factor in reaching the goals for the country’s vision. “Presently capacity utilization is quite low”, Mr. Tehrani elaborated. He further explained in detail the gaps being felt towards building up steel production. “There exists a requirement of 57 mnt of Pig Iron where as the active generation and plants in progress account for merely 28 mnt and 20 mnt respectively, leaving a shortage of 9 mnt. Similarly, to reach a target of 55 mnt by 2025, there exists a deficit of 5 mnt of pellets and 32 mnt of Iron ore out of which 16 mnt is Iron ore concentrate. A plant would have to be put in place to bridge this deficit”.

BANGLADESH

THE consistency at which Bangladesh has grown in the past decade narrates a story of strong administrative reforms and a dedicated development agenda placing the Country among emerging steel markets with considerable potential for growth. The country’s economy has grown at an average of 6.5 per cent since 2004 and is slated to hit more that 7 per cent growth rate in 2017. The International Monetary Fund has bestowed upon Bangladesh the title of second fastest growing major economy in the world after India.    

Bangladesh is also the largest ship breaker in the world driving a major part of its raw material requirements from scrap. The country presently stands as net importer of steel but plans to end its dependence on imports in coming years. Another major reason why Bangladesh deserves a place on this list is anticipated domestic growth. The country presently has a per capita steel consumption of about 26 Kg against a world average of around 208 Kg per person. With the economy continuously strengthening there is a possibility of a drastic increase in consumption. The densely populated urban areas of Bangladesh are in dire need of vertical infrastructural growth and development of transport facilities. The rapidly growing GDP is likely to fuel the steel industry here.    

Bangladesh is one of Asia’s leading emerging steel markets and has a growing need for raw materials and steel making technologies. Even the World Bank forecasts that average GDP growth in Bangladesh in the period from 2016 to 2018 will be 6.8%, which is significantly higher than that of many other emerging markets.  

PRODUCTION CAPACITY

In terms of production capacity for both finished and semifinished (billet) steels Bangladesh is now self-sufficient. Presently, in Bangladesh, steel melting capacity stands at 3.5 mnt, and is expected to increase to 5 mnt in the years to come.    

Mr. Mohammad Imtiaz Uddin Chowdhury, Head- SCM Group, BSRM and a pioneer in the steel industry of Bangladesh, asserted that the steel industry is in the right path and is likely to grow significantly in years to come.

GROWING STEEL PRODUCTION & CONSUMPTION

Mr. Chowdhury believes that Bangladesh GDP growth has been more than 6% for last 10 years which indicates that economy is getting better. According to him, “Per Capita Income is now more than $1600 which was a third of what it is today a decade back. Physical infrastructure like flyovers, bridges and roads are being developed at an astonishing pace. One of the major challenges remains low per capita steel consumption which stands as one of the lowest as compared to world average. It is to improve consumption that the government has been pushing infrastructure development and steel use. Government’s duty structures for scrap vs billets too are encouraging steel plants.

VAT LAW DEFERRED, MARKETS OPEN UP

Bangladesh Government’s decision to withdraw the 15% uniform VAT on steel rods, which was proposed in the federal budget, came as relief for the steel industry. Mr. Chowdhury commented that “Government stepped back from implementing VAT Law 2012 which was supposed to be effective from July 1, 2017.

It would have a major impact on the industry in the beginning but could be absorbed ultimately. Sooner or later we have to have a progressive system integrated tax structure in place to ensure transparency and balancing distribution of resources”

IMPORTS UNDER CHECK

According to Mr. Chowdhury import of rebars are quite low as production capacity for rebars in Bangladesh is higher than the demand. Moreover, the manufacturers here are producing superior quality rebar which is compatible with international standards, so there remains no reason for importing. But there is certainly some room for billet import as there is a gap between rolling capacity and steel production capacity right now. However, chances of big import are thin as the vast duty differences discourage importing billets over locally produced.

ROAD AHEAD

The challenges are greater for Bangladesh as the country’s economy is growing. Mr. Chowdhury points out that “the port facilities are not sufficient to support the volume of import/export. The lack of port facilities for importing raw materials has now become a limiting factor for growth especially for heavy industries like steel”. Shedding light on the need for power Mr. Chowdhury explained, “Energy sector is growing but not at the pace required. Big plants for steel cannot be planned for want of energy in coming few years. Other small problems are there too which we expect to fade away with economic advancement”.

PAKISTAN

THE long beleaguered Pakistani economy has undergone a landmark transformation over the past couple of years thanks to a USD 64 billion investment from China under the ambitious China Pakistan Economic Corridor (CPEC). Steel manufacturers based in Pakistan estimate an above 12 per cent increase in steel consumption over the next three years which would make Pakistan one of the largest consumers of steel in the subcontinent.     

Not only has the massive investment from China helped Pakistan ascend in the global steel markets but has also opened doors to new frontiers of trade through the China backed One belt One Road (OBOR) project. Although the eventual success of CPEC and OBOR remain shrouded in ambiguity, there is no denial that steel and infrastructure sector in Pakistan is bound to reap significant benefits from these. The influx of foreign workers, growth in population and establishment of new industries is likely to fuel housing development as well.    Moreover, the present economic condition of the country, its GDP growth and its debt position seems to be improving which further validates Pakistan’s position as an emerging market.  

 

Recently Morgan Stanley Capital International (MSCI) an international investment decision support tool upgraded Pakistan as emerging market from a frontier market status in its recent SemiAnnual Index Review. Pakistan gained this status after nine long years, with now its doors open to foreign investors. The index became effective from June 2017.

Pakistan’s economic position has improved sharply since it came close to default in 2013.     

Pakistani economy has made significant progress in the last three years. This is an important signal given the changing global landscape, where economic dynamism has gradually been shifting from advanced to emerging market economies.    

The surge in steel demand led by the economic growth and construction activities stemming from the onset of China-Pakistan Economic Corridor (CPEC), has increased imports of steel during the past few years. As per World Steel Association (WSA) steel use in 2015 was 7.1 million tonnes in Pakistan, translating to a per capita use of 37.5 kg. Going forward, it is expected that Pakistan’s steel requirement would swell over 12 million tonnes, taking Pakistan’s per capita requirement to 62 kg by 2019.    

To get to the details on offset of Pakistan’s bullish steel industry, Steel 360 talked to Mr. Khurram Javaid chief executive officer of Mughal Iron & Steel Industries Ltd–one of Pakistan’s largest steel producers, about demand, consumption as well as overall outlook for the Country.

CHANGING POLICY & SURGING DEMAND

Mr. Javaid highlighted that recently an anti-dumping duty of 24.4% on Chinese origin steel billets was imposed, encouraging and enabling the environment for a CAPEX in Pakistan.     

“Earlier this year similar duties were imposed on Chinese imports of finished steels. All this is encouraging local steel plants to come up. The government is vigilant on putting tariff as well as non-tariff barriers to help guard against imported materials. Power is also now available 24 hours so steel units are better equipped to step up production. Electricity prices were hiked some years ago and at present there is no issue regarding prices, heightened demand is led by various infrastructure projects coming up particularly coal based power projects and dams.”    

“Also, the CPEC (China-Pakistan Economic Corridor) that will be completed in the next three years, and the Silk Road (proposed road project between Gwadar in Pakistan to Kashgar in the Chinese region of Xinjiang) will contribute to it. Demand is expected to grow by 25%-30% year on year. The products in demand are mainly rebars in long rolled segment. Hence, current per capita consumption from 30-32kg against world average about 210kg is expected to reach 40kg in coming year unleashing a growth not experienced in the steel sector of Pakistan.”

GROWING NEW CAPACITIES & CONSUMPTION

According to Mr. Javaid, “The government’s pledge to help facilitate capital investments, regulatory measures to help stabilise local industry, inflow from international market on infrastructural projects is helping the local industry which is quite responsive and adaptive to the changes. World’s largest industry players such as Primetals , NCO, Daneillie, Mitsui etc have already bagged good business recently in long and flat rolled industries, followed only by melting and smelting upstream business. Other than the growth in infrastructure, in Pakistan, the retail market is opening up. There are 200 million people in Pakistan and the population is growing rapidly, so the market will grow as well. Just like in India, where there has to be construction of multi-storied buildings to accommodate people, so in Pakistan, buildings have to go multi-storied.”

VIETNAM

THE sheer pace at which Vietnam has risen in terms of both production and consumption of steel in the past 4 years has baffled industry observers. Propelled by rapid urbanization, infrastructural growth and soaring domestic steel demand, Vietnam’s steel industry has sky rocketed at an astonishing rate of 21.64 per cent growth in production and is expected to grow between 12 to 14 per cent over the next five years.  During the period 2013 2016 not only the steel production grew at a phenomenal rate the steel consumption also grew at 25.7%.     

Vietnam Steel Association (VSA), Vice President Mr. Nguyen Van Sua while speaking to Steel360 about the prospects of the industry shared that the per capita steel consumption of the country stands at 195Kg (as in 2015). He believes there exists a huge scope for increasing per capita steel consumption and bring it to the levels of developed countries of the world.

According to him despite commencement of production by Formosa Steel and increased production by other steelmakers, the imports are likely to grow further in 2017-2018.    

Mr. Sua asserted, “The country will still fall short of about 15 million tonnes of steel in 2020. Vietnam imported around 18 million tonnes of steel in 2016 and expected to import 16-16.5 million tonnes in 2017”.    

Vietnam has enjoyed strong and sustained growth to become the largest steel consumer in the ASEAN region. It has the fastest demand growth and it is now a hub for investment in new capacity.

GROWTH

Vietnam has been considered to be the new rising sun for steel markets. After challenges in the wake of the financial crisis Vietnam is now getting back on track. There seem to be limitless opportunities in a rising market. To many, Vietnam also represents a production hub for Asia.

BIGGEST STEEL PRODUCER IN ASEAN REGION

Vietnam overtook Thailand in 2015 to become the largest steel user in the ASEAN region, with apparent steel consumption jumping 26% y-o-y to 18.3 million metric tons. Analysts believe Vietnam has the potential to double its steel consumption over the next decade or so. The Vietnam Iron & Steel Association has forecast steel consumption of 20 mnt in 2017.    

Vietnam has stepped up its trade measures against steel imports, particularly from China, and no doubt more battles lie ahead as it tries to carve out space for domestic producers to benefit from the country’s ongoing development.

CHALLENGES

Challenges undoubtedly remain from overcapacity, competition from China, high inflation and a less-than robust banking sector. But Vietnam is a country on the move. The future looks bright for this South East Asian country of almost 90 million people. Infrastructure and property investment will provide strong demand for steel, as will manufacturing if and when Vietnam transforms from assembly and light manufacturing to primary production.

INDIA

RIDING ON THE WAVE OF GROWTH

THERE is no denial of the fact that balance of power in the world of steel is shifting swiftly and if there is a country which would likely lead this transformation it would be India. The reforms that have been brought about by the present government and its support for the steel industry have been unprecedented.     

Already a major producer of steel, India deserves a place in the list of emerging steel markets for its estimated increase in production and consumption. The country’s economy, although one of the largest in the world, is still growing at a staggering pace and it would take decades before growth rate flattens. It presently stands as the fastest growing major economy and is likely to hold this title for the next few years.    

The government has made relentless efforts to increase revenue and then subsequently transfer these funds towards infrastructure development. A total of INR 40 trillion has been allocated for infrastructure development in the country over the present fiscal alone and atleast 10 per cent of this is likely to go towards steel. The government policy for preferential procurement of Indian steel has acted as a protective shield for the domestic steel industry and is set to drive production significantly.    

Poised to be the second largest producer of steel, surpassing Japan in the next couple of years, India has fired up production significantly in last few years and would continue to do so for the next decade. As part of India’s

National Steel Policy the country has set for itself an ambitious steel production target of 300 Mnt by 2030.    

Unlike China, the emergence of India in the world of steel has been slow but the industry rests on a firm foundation, carefully built over the past four decades with both private and public enterprises developing the sector simultaneously. With the National economy on an ascent the Indian government has concentrated its efforts on further consolidating its dominant position.

CHALLENGES AHEAD

Despite registering a phenomenal rate of growth over the past few decades in India steel manufacturers continues to struggle with mounting debt. The lenders’ patience running thin on more than a dozen major producers, the steel industry stands on sticky ground. Recently, a consortium of lenders initiated bankruptcy proceeding against many of the defaulter. To what extent would the debt crisis hit total production remains to be seen in months to come. However, beside debt ridden steel enterprises there are many other companies that have been performing exceedingly well and have chalked out a promising growth map for future.    

The low per capita steel consumption, which stands around 63 kg, is well below the world average of 234 kg. The possibility of swift growth in consumption in the short to medium term also appears to be bleak with GDP growth lingering around the 7 per cent mark. Moreover, conflicts with neigbouring Nations is likely to affect trade to some extent in coming years.  

EXPORT POSSIBILITIES

In the medium to short term the prospects for raking in revenue from exports are quite strong as China continues to cut down production from obsolete plants and reduce production. In addition to this, many countries across the globe have taken a stern stance against Chinese steel and have imposed tariff and non tariff barriers against its export, opening up new avenue for India. However, most developing countries are making relentless efforts to expand their own steel industry to develop domestic economy and maintain a healthy balance of payment. This would eventually make the global steel market more competitive and thus affect long term prospects for India and its pricing power.

Source: Steel 360 Magazine Aug’17 Issue