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India is forecast by CRU to be the largest contributor to growth in global steel demand over the next 20 years. Strong economic growth potential, urbanisation and a fast-growing population - which the UN forecasts at 1.5 billion by 2030 - will drive the rise in steel consumption.
A successful bid by ArcelorMittal for Essar Steel would give exposure to the Indian steel market, which is likely to be the fastest-growing in the world over the next two decades.
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Essar Steel is the fourth-largest steel producer in India with a capacity of 10 million tonne. It is also among India's highest-cost producers, with hot-rolled coil (HRC) averaging $ 485/tonne in 2017 — over $ 100/tonne more than the lowest-cost producer, according to CRU cost estimates.
However, Essar Steel is a relatively high-cost producer in the Indian market, and is likely to require substantial investment to improve operating efficiency and make higher production volumes cost effective, said a report published by Fitch Rating agency and CRU.
The credit impact of a winning bid would also depend upon the transaction amount and the structuring of the deal, which are currently unknown.
India's forecast by CRU to be the largest contributor to growth in global steel demand over the next 20 years. Strong economic growth potential, urbanisation and a fast-growing population — which the UN forecasts at 1.5 billion by 2030 — will drive the rise in steel consumption. India's steel intensity is just 61 kg per capita compared with China's 647 kg, CRU expects it to rise toward 200 kg over the next two decades.Despite India being the third largest steel producer in the world, the domestic market for steel faces hurdles when it comes to raw materials, energy supply and the overall business environment. However, CRU expects the steel output to reach around 200 million tonne by 2031 from 103 million tonne in 2017 due to debottlenecking, capacity additions and greenfield projects.
“Government has supported the industry through minimum import prices, anti-dumping duties, improved railway logistics, and steps to resolve bad debt, but there have been impediments to projects. For example, land acquisition was a key obstacle for ArcelorMittal in previous attempts to set up a greenfield steel plant,” the report said.
However, the rating agency believes that the domestic prices will follow suit after the global benchmark prices, unless the price collapses by more than 20%, at which point India's anti-dumping duties would become effective again, and de-couple domestic and international prices.
Fitch is of the opinion that the investment by Essar will increase the production volume and lower the cost in the near-term on domestic steel prices which would weaken Essar’s new owners.