Automobile sector to remain steel's fastest growing demand point

Defence hardware procurement across the globe remains largely unaffected even when a country's economy is not doing well. This was much in evidence in the years following the 2008 global economic crisis. It will be some time before the demand for ferrous and non-ferrous metals and linked minerals in the upstream picks up. Incidentally, metal producers have not experienced any major demand change from defence-related industries through recent difficult times. India has a programme to spend $130 billion over a seven-year period to equip the army with modern weapons.

However, how will this major defence procurement programme benefit local steel, aluminium and copper producers when the country, according to a PwC report, is nearly 70 per cent import dependent? Benefits in terms of incremental metals demand are to accrue on account of obligation for suppliers under the offset programme to procure locally at least 30 per cent value of contracts. India is the world's largest buyer of weapons accounting for about 15 per cent of global arms imports. The National Democratic Alliance government is keen to upend this dubious distinction by building a strong military hardware and software production base. This will support local defence procurement and export as is the case with China for a good number of years.

In fact, the defence sector is an important focus area of the government's 'Make in India' programme. This is as it should be since 40 per cent of the annual defence budget is used for capital acquisition. Seeing the potential of defence-related business, leading industrial houses such as Tatas, Reliance Industries, Reliance ADAG, Mahindras and Larsen & Toubro have thrown their hats into the ring. From Boeing to Airbus to Dassault, every foreign group out to claim an increasingly big share of India's defence pie will be engaging with Indian companies to promote local components and sub-assemblies production, but to rigorous quality specifications. Therein lies the challenge for Indian metal producers to make 'zero rejection supplies' to defence components makers. India has an excellent plate making capacity, which is now reinforced by new plate mills at Rourkela Steel Plant and JSPL's Angul unit. Locally-produced steel plates have found application in warships, tanks and space vehicles. At the same time, capacity has to be built for electrical steel of very high grades like cold rolled non-grain oriented kind.

Defence industry now on a fast lane to growth holds much promise for metals makers. Of all steel products, demand growth for auto grade steel will remain the fastest for a good number of years. The automobile industry accounting for seven per cent of the country's GDP and providing direct and indirect employment to nearly 19 million people is yet another focal point of Make in India programme. Prime minister Narendra Modi told Ford Motor Company chief executive officer Mark Fields that he would "much appreciate if the company could make India a good export hub."

Ford will not disappoint Modi since the company's India vision is to "triple exports" from 77,000 vehicles in 2014 over the next five years and make this country a "global centre of excellence for small vehicles, small cars and small displacement engines."

In a demonstration of its "strengthening of Make in India resolve", Honda is to make another round of large investment to raise the capacity of two-wheelers and cars. The automobile sector faced demand blips in the past couple of years. However, this is not proving a deterrent to automakers from preparing themselves for better days in future.

In view of the recent industry performance, market research company JD Power has scaled down its forecast of India achieving nine million passenger vehicles by 2020 to seven million. The consensus, however, is that tremendous growth in automobile will happen in India and China. The industry road map for the period 2016-26 will be available in a few months when the automotive mission plan under the Make in India programme is released. On an average, steel has a share of 50 per cent in the kerb weight of an India made car. However, steel is facing increasing competition from aluminium, plastic and other materials. This is due to automobile companies coming under increasing pressure to cut vehicle weight to improve fuel efficiency and thereby lower CO2 emissions.

"Global steel industry is making steady headway in light weighting steel even while increasing its tensile strength. In India, too, demand for high strength and exceptionally anti-rusting steel is set to grow at a rapid rate," says C S Verma, chairman, Indian Steel Association.

BRIGHT PROSPECTS

• The automobile industry accounting for 7 per cent of the country's GDP and providing direct and indirect employment to nearly 19 million people is yet another focal point of Make in India programme
   
• The industry road map for the period 2016-26 will be available in a few months when the automotive mission plan under the Make in India programme is released
  

 

The consensus amongst industry experts is that tremendous growth in automobile will happen in India and China
 

On average steel has a share of over 50 per cent in the kerb weight of an India-made car