steel forecasting

Forecasting Steel Demand and Supply in India

By

Deepa Karthykeyan, Asha Abraham, Sarin Paraparakath and Arnab Bhattacharya1

Abstract

This paper seeks to forecast the demand and supply gap of steel till 2020-21. Further, it aims to

present the end use approach to forecasting steel demand. Under this approach, steel demand is

calculated separately for every major steel consuming sector and then aggregated. Although, this

approach consumes more time and effort than the more commonly used macro-economic

approach, it was thought to be more appropriate for a country like India.

The main findings of this paper are:

Supply of steel was presented in two scenarios. In the reasonable scenario, supply was

estimated to grow at a CAGR of 10.4% in the period 2010-11 to 2020-21, while in the

base case scenario, CARG of supply was 8.6%.

Demand is forecasted to grow at a CAGR of 9.035% driven mainly by the construction,

automobile and consumer durables sectors.

The demand supply gap is expected to lie between a supply surplus of 4.47 MT in the

reasonable scenario and a 21.21 MT supply deficit in the base case scenario.

Due to pressure from the construction sector, the demand for longs will continue to

dominate the steel industry, while on the supply side, flats are expected to dominate.

1 All authors currently work as Consultants in Athena Infonomics India Pvt Limited

2

1. Introduction

1.1. Steel Industry in India

Steel is traditionally considered the backbone of national economic development. It is a major

input into sectors which support economic growth such as infrastructure, machinery, power and

railways, as well as being important for fast growing sectors, in particular automobiles and

consumer durables.

The steel industry in India is currently at an inflexion point brought about by ambitious capacity

expansion plans, entry of new players and increased competition on one hand and consistently

rising and shifting demand patterns on the other.

This rise in demand is expected to be driven by the construction, automobile and consumer

durables sectors (OECD 2011). In the construction sector, Government spending in infrastructure

is expected to surge during the twelfth plan period, thus driving up demand for steel used in

construction. Similarly, rising incomes coupled with rapid urbanization have contributed to the

increasing demand for automobiles and consumer durables.

With respect to supply, the Compound Annual Growth Rate (CAGR) of crude steel production

has doubled from 3% for the period 2000-04 to 6% in 2005-09. As a result, India has risen from

being the seventh largest producer of steel in the world in 2005 to the third largest in 2009 (Spark

Steel and the Economy Research Centre 2010).

Most steel producers are planning major capacity expansions through both Greenfield and

Brownfield expansions. This, coupled with the entry of new players such as the Pohang Iron and

Steel Company (POSCO) and Arcellor Mittal, will result in a significant rise in steel production

over the next ten years. There is also an increased emphasis among steel players on the

production of special steels that were until now being imported.

Despite this, however, there is still some apprehension on the capability of Indian steel suppliers

to meet the expectations arising from increasing demand. Given this context, the objective of this

report is to forecast the demand and supply of steel in India till Financial Year (FY) 2020-21 and

estimate the size and the nature of the demand-supply gap. The gap will be estimated for

finished steel as a whole, as well as for flat and non-flat (longs and pipes) steel separately.

3

1.2. Methodology

While the need to estimate the demand-supply gap of steel cannot be questioned, some debate

exists with respect to the methodology used to do so.

Forecasting Supply

Forecasting steel supply is normally done through an aggregation of the capacity expansion plans

of all major steel producers till 2020-21 (Ministry of Steel 2011; OECD 2011). This paper takes

the analysis further.

1. To estimate realistically when the additional production will go on stream, the likely

commissioning date of all greenfield and brownfield steel projects were studied. This was

done by examining each projects stage of completion and analysing the problems the

project was encountering.

2. Based on the above analysis, the paper presents three scenarios of steel supply an

optimistic, reasonable and a base case scenario.

3. The paper further examines the expansion plans of steel producers and estimates the

types of steel that will be produced in future.

The above methodology to estimate steel supply is further explained in the following section.

Forecasting Demand

Forecasting steel demand can be done through various methods. Approaches to forecasting steel

demand can mainly be divided into two the macro-economic approach and the end use

approach. These are briefly described below:

Macro-Economic Approach: This is a more popularly used approach. It uses the relationship

between steel consumption and macro-economic variables such as Gross Domestic Product

(GDP) to forecast steel demand. (Rao 1984). This approach normally involves the formation of

regression/time series equations to model the relationships between variables.

The most popular macro-economic approach is the intensity of use method developed by

Malenbaum (Chen et al 1991; Crompton 1999; Rao 1984). Intensity of use is defined as the

amount of steel consumed per unit of GDP. This method models the relationship between the

4

intensity of use and per capita GDP. It assumes that this relationship can be represented by an

inverted U shaped curve, ie, steel intensity will show a rapid increase with rising per capita GDP

and then a slow reduction.

End Use Approach: The end use approach is a bottom up model in which steel demand forecasts

are separately estimated for each steel consuming sector and then aggregated (Rao 1984).

Even though the end use approach requires a lot more time and effort, this paper advocates the

use of this model in India rather than the macro-economic approach mainly for the following two

reasons:

Firstly, the success of the macro-economic demand estimation approach depends on the

relationship between GDP and steel demand. The logic behind this model is as follows: steel is

used in the production of goods that contribute to GDP. Thus, an increase in the value of the

GDP will mean an increase in the production of goods and in turn an increase in the demand for

steel. However, in a country like India, where around 55% of the GDP comes from the services

sector, this transmission mechanism between GDP growth and steel consumption becomes less

defined.

Secondly, unlike the macro-economic model, the end use approach gives sector wise forecasts

of steel demand. Thus, it is useful in estimating not only the total demand for steel, but also helps

us in understanding which types of steel are being demanded.

Very few papers in the public domain have attempted an end use method for forecasting steel

demand in India. Thus, this paper is a preliminary step in better understanding the limitations and

advantages of this methodology.

Limitations

This model makes two important assumptions:

Firstly, we assume that the input-output technical coefficients that guide steel use remain

constant over the period for which steel demand is being estimated. This is based on the

assumption that there will be no substantial shift in the manufacturing processes and

product design over the period for which steel is being estimated.

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Secondly, the model does not entirely capture the price effect of steel and assumes that

consumption patterns are relatively inelastic and non-responsive to changing prices in the

short run.

Outside of the limitations imposed by the model, the findings of the study are also restricted in

its scope to select sectors on account of lack of access or non-availability of data Some of the

important sectors that remain un-captured in this study include Defence, Kitchen Ware and Use

by PWD/other important government works, among others.

1.3. Description of the Paper

The rest of the report is structured as follows: section two forecasts supply of finished steel in

India till 2020-21. It also calculates the supply of flats and non-flats for the same period. The

demand for steel will be analysed in section three. Section four looks at the demand-supply gap.

2. Forecasting Steel Supply

As mentioned in section one, the supply of steel till 2020-21 is forecasted through an

examination of capacity expansion plans of all steel producers. Supply estimation involves the

following two steps:

1. First, crude steel capacity in the country for the next ten years is calculated by

aggregating the capacity expansion plans of all major and secondary steel producers.

2. Second, finished steel production is calculate after accounting for capacity utilization and

production of semi-finished steel.

The steel producers considered for the analysis are Steel Authority of India Limited (SAIL),

Rashtriya Ispat Nigam Limited (RINL), TATA Iron and Steel Company Limited, Essar, JSW

Steel Ltd, Jindal Steel and Power Limited (JSPL), JSW Ispat Steel Limited, Bhushan Power and

Steel Limited, Bhushan Steel Limited and other secondary producers. Data on capacity

expansion plans for each of these producers was gathered from their websites, annual reports,

newspaper articles and through direct interviews with members in the selected companiesi.

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Expansion of crude steel capacity for all the above mentioned steel producers till 2020-21 is

presented in three scenarios an optimistic, a reasonable and a base case scenario. Calculation of

crude steel capacity under the three scenarios is given below:

2.1. Estimation of Crude Steel Capacity

Crude steel capacity was estimated in three scenarios - an optimistic, a reasonable and a base

case scenario. The three scenarios are defined below:

Optimistic Scenario: In the optimistic scenario, all crude steel capacity expansion targets

announced by steel companies are aggregated. Under this scenario, it was estimated that crude

steel capacity will be 259.11 MT in 2020-21. However, this will be possible only if the crude

steel capacity targets, as announced by steel producers are met. However, while the steel

producers have announced ambitious capacity expansion plans, concrete measures to meet the

advertised targets through greenfield and brownfield expansions have not been specified in some

cases.

Reasonable Scenario: In order to account for the above difficulty, a second scenario (called the

reasonable scenario) was estimated. This scenario takes into account only those capacity

expansion targets that are backed by concrete brownfield or greenfield projects. The reasonable

scenario is the same as the optimistic scenario till FY 2015-16 as plans to achieve the targets are

clearly given till this year. However, for 2020-21, this scenario estimates a more reasonable

capacity of 210.11 MT.

Base Case Scenario: The base case scenario gives a lower bound crude steel capacity estimate. It

accounts for delays in commissions of projects due to problems associated with land acquisition,

obtaining environmental clearances, raw material availability, etc. The effect of these delays on

the date of commissioning of projects was assessed through interviews with experts and a review

of secondary literature. According to this scenario, crude steel capacity in the country in 2020-21

will be 178.8 MT.

Results of all three scenarios are presented in the figure below:

7

Figure 1 Crude Steel Capacity Scenarios

Source: A company annual reports, newspaper articles, company

websites, interviews with experts, etc

2.2. Production of Finished Steel

From the crude steel capacity estimates given in the previous section, the production of finished

steel can be calculated as follows Firstly, in order to calculate the actual production of crude

steel, a capacity utilisation of 90 to 95% is assumed for the major producers and 85% for small

secondary producers. Secondly, not all of this crude steel gets converted to finished steel. The

remaining is sold as semi-finished steel products (blooms/billets). Finished steel as a percentage

of crude steel is given below for the three major producers:

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2020-21

Optimistic Scenario 78.4 90.5 103.8 117.5 124.04 133.04 259.11

Reasonable Scenario 78.4 90.5 103.8 117.5 124.04 133.04 210.11

Base Case Scenario 78.4 88.5 100.8 111.2 115.44 124.44 178.8

0

50

100

150

200

250

300M

illio

n T

on

ne

s

8

Table 1 - Share of Finished Steel in Total Crude Steel Production (%)

Steel Producer 2005-06 2006-07 2007-08 2008-09 2009-10 Average

Bhilai 64.15 67.36 71.28 69.52 69.52 68.37

Durgapur 37.53 37.83 35.84 35.54 33.88 36.12

Rourkela 97.23 97.59 98.81 94.28 92.29 96.04

Bokaro 84.44 89.82 87.62 91.36 93.97 89.44

ISP 57.14 66.74 69 76.26 82.5 70.33

Total SAIL 68.1 71.87 72.51 73.39 74.43 72.06

TATA 81.31 85.49 89.19 80.48 76.46 82.59

RINL 85.32 86.99 92.65 86.33 92.32 88.72

Source: Spark Steel and the Economy Research Centre (2010)

Total finished steel production in both the reasonable and the base case scenarios was estimated

after the above deductions and are given in the figure below:

Figure 2 Production of Finished Steel (2010-11 to 2020-21)

2.3. Types of Steel

Having established the total production of finished steel in the country for the next ten years, this

section examines the nature of steel that will be produced. This was again estimated from the

plans of steel producers for the next ten years. However, for many projects that are planned, the

63.473.9

83.493.8 98.5

106.1

170.6

63.472.1

81.389.5 92.7

100.3

144.9

0

20

40

60

80

100

120

140

160

180

2010-11 2011-12 2012-2013 2013-14 2014-15 2015-16 2020-21

Millio

n T

on

ne

s

Reasonable Scenario Base Case Scenario

9

product mix has not yet been announced. Thus, in these cases the project mix of the company is

assumed to remain constant even after expansion. Thus, these estimates are only indicative of the

direction of supply of flats and non-flats. The actual production will depend on the demand for

flats and non-flats in the future.

The supply of flats and non-flats under both the reasonable and the base case scenarios are given

below:

Figure 3 Supply of Flats vs Non-Flats

Source: A

websites, interviews with experts, etc

Currently, flats constitute around 45% of production and longs around 55%ii. However, due to

increased demand both domestically and internationally, flats are projected to grow at a faster

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2020-21

Non-Flats 34.71 36.39 40.11 43.83 46.56 46.03 61.24

Flats 28.68 37.48 43.33 50.00 51.97 60.11 109.35

0%

20%

40%

60%

80%

100%

Pe

rce

nta

ge

Reasonable Scenario

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2020-21

Non-Flats 34.71 36.39 40.11 42.82 44.86 46.51 60.38

Flats 28.68 35.68 41.17 46.69 47.88 53.83 84.54

0%

20%

40%

60%

80%

100%

Pe

rce

nta

ge

Base Case Scenario

10

rate. In both scenarios, it is expected that the production of flats will account for around 55% of

production and by 2020-21, its share will go up to around 60%.

3. Forecasting Steel Demand

This section forecasts the demand for steel using the end use method introduced in section one.

As mentioned, this is a comprehensive bottom up approach in which demand for steel is

calculated separately for every steel consuming sector and then aggregated. The sectors that will

be studied include construction (in real estate and infrastructure), machinery/equipment,

automobile, railways, power, shipping, consumer durables and fasteners.

The steps involved in forecasting demand are described below:

1. First, the growth in each sector till FY 2020-21 was estimated. Data on production in

each sector was obtained from various sources and forecasted using time series models

such as Autoregressive Integrated Moving Average (ARIMA) Models and Vector

Autoregressive (VAR) Models. Due to problems of data availability, in sectors such as

construction, growth in investment was forecasted.

2. Next, the steel intensity (steel consumption per unit of investment or per unit of output)

was estimated for each sector. This is done through literature surveys and interviews with

experts.

3. The total demand of finished steel in each sector was then determined by multiplying the

steel intensity of the sector with the forecasted values of production/investment in each

sector.

The data sources and the methodology used to forecast growth in each sector are detailed in the

next section. For each sector, the methodology is explained in the three steps explained above, ie,

sector growth, steel intensity and total steel consumption. It should be noted that due to

unavailability of data, a slightly modified methodology was used for the machinery, fasteners

and consumer durables sectors.

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3.1. Methodology

3.1.1. Construction Real Estate

Construction is the largest consumer of steel in the country (Spark Steel and the Economy

Research Centre 2010). For the purpose of analysis, the construction sector has been divided into

two Real estate and infrastructure. This section deals with real estate which has been further

divided into residential, commercial and industrial real estate.

Sector Growth

The major problem with estimating growth in the real estate sector is the availability of data.

Data is limited as this sector is not very well regulated and falls almost entirely in the

unorganized sector. To forecast growth in the sector, this paper uses estimates of investment in

residential, commercial and industrial real estate as provided by the CIDC for the years 2004-05

to 2009-10. This investment data was then extrapolated till 2020-21. The resultant CAGRs for

these sectors are as follows:

Table 2 Growth in Real Estate

Sector CAGR (2010-11 to 2020-21)

Residential Real Estate 9.1%

Commercial Real Estate 2.2%

Industrial Real Estate 9.1%

Total Real Estate Sector 8.5%

alculation, CIDC

Steel Intensity

The intensity of steel used per unit of investment was calculated using the following formula:

Steel Intensity Ratio: Cost of Steel per sq ft/Total Cost of Construction per sq ft

The steel intensity ratio is the ratio of the cost of steel consumed per sq feet to the cost of

construction per sq feet in a standard residential, commercial or industrial building.

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The cost of steel per sq ft is calculated by multiplying the consumption of steel per sq ft in a

standard residential, commercial and industrial building with the price of steel. After direct

interviews with a number of civil engineers and construction contractors, the average

consumption of steel per sq ft was established to be around 5 kg in standard residential buildings,

7 kg in commercial buildings and close to 14 kg per square feet in industrial buildings. The price

of steel was taken to be the average price of joists, angles, sections, tor steel and TMT bars and

was estimated to be an average of Rs 32 a kg.

Total cost of construction per square feet in each of sector was again obtained from the

Construction Industry Development Council (CIDC) and is given in the table below:

Table 3 - Unit Construction Cost (Rs/sft)

Residential

(Terrace)

Residential

(High Rise)

Commercial

(Office)

Industrial

Standard Luxurious Standard Luxurious Standard Prestige Light Heavy

1997 825 1100 650 1100 625 950 600 800

1998 870 1200 650 1100 625 950 600 850

1999 890 1300 650 1100 625 950 600 850

2000 865 1350 640 1150 610 1050 600 870

2001 875 1370 685 1225 640 1225 615 890

2002 918 1430 719 1286 672 1286 646 934

2003 964 1502 755 1350 705 1350 678 981

2004 1012 1577 793 1417 740 1417 712 1030

2005 1050 1600 805 1500 760 1500 750 1080

2006 1123 1712 861 1065 813 1606 802 1155

2007 1202 1830 920 1717 870 1717 858 1236

2008 1286 1960 986 1837 931 1837 918 1323

2009 1376 2097 1055 1966 996 1966 983 1415

2010(Oct) 1470 2244 1130 2103 1065 2103 1051 1514

Source: CIDC

Total Steel Consumption

The steel intensity ratio gives us the percentage of the investment on real estate construction that

is spent on the consumption of steel. This is multiplied with forecasted investments in real estate

to get the total amount spent on steel till 2020-21. Dividing this amount by the price of steel

gives the quantity of steel that will be consumed in this sector.

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3.1.2. Construction Infrastructure

The infrastructure sector consists of roads and bridges, airports, sea ports, water and sanitation

and telecommunication. Demand for steel through construction activities taking place in railways

and power sector (which are technically an integral part of the countrys infrastructure) have

been separately accounted for in these sectors respectively.

Sector Growth

The expected investments, both public and private, in each of the infrastructure sectors, were

calculated for each of these sectors from planning commission estimates. It was estimated that

investments in infrastructure would grow at a CAGR of around 13.5%, with majority of the

investment going into the roads sector.

Steel Intensity

Similar to real estate, the percentage of total investment spent on steel was calculated using steel

utilization norms as provided by a research report by ICICI titled Steel Sector published in

May, 2009. Similar estimates were also given by Dun & Bradstreet. These are given in the table

below:

Table 4 - Steel Utilization Norms

Sector Roads

and

Bridges

Telecom Irrigation Water and

Sanitation

Ports/airports

Civil Construction (% of

Investment)

100 15 50 60 40

Steel Component(% of

construction)

14 20 15 18 25

Source: ICICI Direct (2009)


Again like in real estate, multiplying the steel utilisation norms with total forecasted investment

gives the total amount spent on steel till 2020-21. Dividing this amount by the price of steel gives

the quantity of steel that will be consumed in this sector.

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3.1.3. Railways

Conventionally, the steel consumption of the railways is captured through proxies such as the

growth in railways as a percentage of GDP and public expenditure. However, in the current

study an attempt has been made to break down the railway sector into various steel consuming

sub segments to arrive at a more accurate estimation of steel. Major areas in the railways where

steel is predominantly used are rolling stock (which comprises of the locomotives, wagons and

coaches), rail track material, concrete sleepers, clips to hold rails to sleepers, posts to carry

overhead traction lines and construction in the railways.

Sector Growth

The methodology for calculating growth in production of each of these sectors along with the

estimated CAGRs is given in the table below:

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Table 5 - Railway Sector - Methodology

Sector Methodology CAGR(%)

Rolling

Stock

Time series data on production of coaches, locomotives and

wagons was obtained from the Ministry of Railways from 2001-

02 to 2009-10. This data was extrapolated to estimate production

till 2020-21. These estimates were backed from data provided by

the Vision 2020 document of the Ministry of Railways.

7.6%

Rail Track Annual data on the production of tonnes of railway tracks was

obtained from the World Steel Association from the year 1987.

An ARIMA model was carried out on this data to forecast

production of tracks till 2020-21.

3.6%

Sleepers/

Clips/

Traction

Posts

Data on the number of new tracks being laid was obtained from

the Ministry of Railways from 2001-21 onwards. Again, this

data was extrapolated and the values were backed by estimates

of the Vision 2020 document. Based on the requirement of new

tracks, the production of sleepers, clips and traction posts were

estimated.

13.35%

Construction

in Railways

Investment in construction in the railways sector till 2020-21

was estimated from figures provided in the Vision 2020

document, assuming 70% target achievement.

23.7%

Database on Indian Economy

Steel Intensity and Total Steel Consumption

Forecasted production was then multiplied with per unit steel consumption to obtain total steel

consumed. Steel weight for each of the above components is given below:

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Table 6 - Steel Intensity - Railways

Item Steel Weight per

unit

Coaches 37.5 tonnes

Locomotives 96 tonnes

Wagons 20 tonnes

Sleepers 20 kg

Clips 1 kg

Traction Posts 1 ton

Source: Interviews with experts

*Steel weight per rail track was not required as production data for rail track was already in terms of

weight.

Like in infrastructure, steel consumption in railway construction was determined using Steel

utilisation norms of ICICI.

3.1.4. Power

Power, like railways, is both an important consumer of steel and is essential for the economic

growth of the country. Steel consuming areas in the power sector are construction of hydro,

thermal and nuclear power plants and setting up of towers, power transformers and sub-stations.

The growth of each of these components and their steel intensity is discussed below:

Sector Growth

Data on capacity additions for the hydro, thermal and nuclear sectors for the past ten years was

obtained from the CEA. ARIMAs were performed on this data to get projections till 2020-21.

These estimates were checked by comparing them to estimates brought out in the 12th

and the

13th

plan estimates. Estimated capacity additions in each sector are given in the table below:

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Table 7 - Capacity Additions in the Power Sector

Year Hydro Thermal Nuclear

2011-12 2200 9653.7 1050

2012-13 3209.133 4005.949 1080.256

2013-14 4877.494 4983.871 1343.965

2014-15 5853.423 6041.693 1629.221

2015-16 6545.855 7326.736 1975.749

2016-17 7082.948 8791.751 2370.809

2017-18 7521.784 10476.96 2825.248

2018-19 7892.815 12548.07 3383.749

2019-20 8214.217 15086.58 4068.29

2020-21 8497.713 17508.48 4866.329

Source: CEA, Annual Report 2009-10

With respect to growth in steel consuming components of the transmission sector, the forecasted

values till 2017-18 were again obtained from the 12th

plan estimates and then extrapolated till

2020-21.


The amount of steel required i.e. Tonnes/MW in the case of a hydro, thermal or a nuclear plant

has been formulated by the National Hydroelectric Power Corporation (NHPC) and Bharat

Heavy Electricals Limited (BHEL) (CEA 2006). This formula is based upon the amount of steel

that is required for electrical and mechanical packages (generators and turbines) and civil work.

The table below gives the set norms in the case of hydro, thermal, gas and nuclear power

projects:

Table 8 - Steel Utilization Norms Hydro Power Plant

Steel Type Steel Required (Tonnes/MW)

Structural Steel 34

Reinforcement Steel 93

Total 127

Source: CEA (2006)

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Table 9 - Steel Utilization Norms for Thermal, Gas and Nuclear Power Plants

Type Imported Steel

(Tonnes/ MW)

Indigenous Steel

(Tonnes /MW)

Total

Thermal 18.89 111.707 130.597

Gas Powered 6.36847 44.53545 50.90392

Nuclear 19.14 111.67 130.83

Source: CEA (2006)

In India, on an average it takes five years to build a hydro power plant2. Therefore, the

consumption of steel will start five years before the date of commissioning of a hydro plant.

Similarly, on an average it takes a minimum of three years to construct a thermal/nuclear project

or a gas based power plant. Thus, the steel consumption by hydro power plants is assumed to be

distributed over the previous five years in the ratio 10:10:20:30:30 while the steel consumption

by thermal, nuclear and gas plants is distributed in the ratio 20:30:50.

Steel utilisation norms for the components in the transmission sector are given below:

Table 10 - Steel utilisation Norms Transmission Sector

Voltage line Norms for

weight of steel

for Towers

MT/Km

Norms

for

weight of

steel for

Towers

MT/Km

Norms for

special

requirement

for

substations

(MT/bay)

765 65 0.4 75

500 HVDC 38.3 - -

400 23.5 0.4 50

220 10.1 0.5 35

132 9.1 0.8 25

Source: CEA (2006)

Multiplying the above with growth in the three components gives total forecasted steel

consumption.

2 Obtained through expert opinion

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3.1.5. Machinery and Heavy Engineering

The machinery sector is the second largest consumer of steel after construction (Spark Steel and

the Economy Research Centre 2010). The machinery sector constitutes a large number of sub-

sectors varying from industrial, textile, printing, office machinery to heavy construction and

agricultural equipment such as agricultural implements, tractors, dumpers, cranes etc. Due to

problems of data, the scope of the machinery sector was narrowed down to include only the

following sample of equipment:

Dumper

Ball and roller Bearings

Gear boxes

Lifts

Material handling equipment

Cutting tools

Machine Tools

Valves

Diesel Engines

Electric Motors

Sector Growth

Data on the production for each of the sample equipment from 1994-95 to 2010-11 was obtained

from the RBI databankiii

. Independent ARIMAs were carried out on each of these sample

equipments to forecast the production value/number of these equipments in 2020-21. After

having forecasted output for each sample component, the growth rate in the production of these

components was calculated for the year 2020-21. A weighted average of the various growth rates

was taken to assess the overall growth in the machinery sector. It was estimated that over the

next ten years the machinery sector will grow at an average growth rate of around 6% to 5%.


Due to the heterogeneous and complex nature of the machinery sector, an average steel intensity

per unit of output was impossible to calculate. Thus, a different methodology had to be evolved

to forecast steel demand from the machinery sector.

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From estimates provided by the Spark Steel and the Economy Research Centre (SSERC) in its

Steel Scenario Yearbook 2009-10, it was established that the consumption of steel in 2009-10 for

the sector was around 14.8 MT. This paper assumes a 1:1 relationship between growth in the

number of units of equipment produced and the steel consumption, ie, the steel consumption is

expected to grow at the same rate as the growth of production in the machinery sectors.

Taking the machinery sector growth rates as established by the ARIMA, it was estimated that

steel consumption would grow from 14.8 MT in 2009-10 to around 28.7 MT in 2020-21.

3.1.6. Fasteners

Steel consumed in the fasteners and hardware industry was calculated using a similar

methodology as that used in machinery. Using time series models and past data on the

production of nuts and boltsiv

, forecasts and growth rates were obtained for the next ten years.

The current consumption of steel by the fasteners and hardware industry is established to be

0.72MT. Using the forecasted growth rates, this is expected to grow up to 1.16 MT in 2020-21.

3.1.7. Consumer Durables

The consumer durables sector is currently one of the fastest growing sectors with a growth rate

of 28% in 2010-11. It is expected that growth in this sector will continue to remain high due to

rising incomes, rapid urbanization and increasing penetration in rural areas.

Sector Growth

In order to forecast growth in this sector, time series data on the index of production of consumer

durables was obtained from the CSO.

A regression analysis was performed on the above data to estimate growth in this sector. In this

model, the index of production of consumer durables was regressed against GDP and inflation3.

The growth rates estimated from the model are as follows:

3 A VAR model was also tried, but the growth rates provided by it were unrealistically high. The regression model

was thus selected as it provided the best results.

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Table 11 - Consumer Durables Sector Growth Rate

Year Growth rate (%)

2010-11 28.74

2011-12 24.95

2012-13 25.91

2013-14 25.29

2014-15 23.95

2015-16 22.36

2016-17 20.75

2017-18 19.24

2018-19 17.86

2019-20 16.62

2020-21 15.50

Source: RBI, Database on Indian Economy


To estimate steel consumption, a similar strategy as used in machinery and fasteners was also

adopted for the consumer durables industry. According to the Steel Scenario Yearbook, in 2009-

10, the industry was estimated to have consumed 0.78 MT of steel. Using the growth rates

estimated by the regression model, this is expected to increase to around 6.8 MT by 2020-21.

3.1.8. Automobiles

The Automobile sector is expected to evolve as a major consumer of steel in the future. In order

to predict the total demand for steel in this industry, the sector was divided into six components

as specified in the National Industrial Classification Code by the Reserve Bank. The six

components consisted of 1) Commercial Vehicles 2) Passenger Cars 3) Jeep Vehicles 4) Auto

Rickshaw5) Motorcycles 6) Scooters.

Sector Growth

Data on the production for each of these categories from 1994-95 was obtained from the RBI

databank. A Vector Auto Regression (VAR) model was used to predict the total number of units

that will be produced till 2020-21. The VAR model includes the influence of aluminum prices,

steel prices, inflation, per capita income, GDP and prices of crude oil in its forecast. CAGRs for

the period 2020-21 for each category are given in the table below:

22

Table 12 - Automobiles Sector Growth Rate

Category CAGR (2010-11 to 2020-

21)

Commercial

Vehicles

3.7%

Passenger Cars 15.6%

Jeep Type Vehicles 4.5%

Auto rickshaws 4.8%

Motor Cycles 4.4%

Scooters 19.9%

Source:

As can be seen maximum growth is expected from two wheelers (scooters) and passenger cars.


The steel weight is the weight of the steel used in the vehicle. This was established through

interviews with various experts. These weights are given in the following table:

Table 13 - Steel Weights in the Automobile Sector

Type Per Unit Steel Weight in

Tonnes

Commercial Vehicle (CV) 3.5

Passenger Car (PC) 0.81

Jeep Vehicles (ZV) 1.625

Auto Rickshaws (AR) 0.15

Motor Cycles(MC) 0.055

Scooters (SC) 0.035

Source: Compiled from expert opinions

As with other sectors, multiplying the steel weight with total forecasted production gives total

consumption of steel in the automobile sector.

23

3.1.9. Shipbuilding and Containers

Given that India has one of the largest merchant shipping fleets among the developing countries,

the shipping sector assumes an important role in the economy.

Due to problems with the availability of data, only steel consumption by major ship building

docks were considered. Future production of each type of ship from each dock was obtained

from their order books. For ease of analysis, the ships were divided into four types based on their

dead weight - small (100000 DwT).


The order books give the number of ships of each type that will be produced and the year in

which they will be completed. Expert opinions from naval architects were used to identify the

self-weight of ships (weight of the empty ship, which is approximately equal to the steel weight

of a ship) and the time taken to complete building ships in each of these categories. This is

shown in the table below:

Table 14 - Details of Shipping Industry

Type of ship Deadweight Tonne

(DwT)

Self-Weight as a

percentage of

DwT

Project Completion

Time (Minimum)

Small 100000 12-15% >3 year

Source: Compiled from expert opinions

Order books of shipyards are available only till 2015-16. Using the self-weight of a ship and the

data on types and number of ships being built, the total steel that will be consumed in 2015-16

was calculated. Taking into account the time used to complete a ship, this amount was

distributed among the years.

Due to unavailability of data, steel consumption in the shipping industry after 2015-16 was

estimated through an extrapolation of past trends.

24

3.1.10. Others

All major steel consuming sectors have been analysed above. Steel consumption by all other

sectors left out in the above methodology is included in the others category and is estimated

here.

In order to do so, we estimate the degree of inclusiveness of our model by applying our demand

estimation methodology to the year 2009-10. The actual demand for the year is stated to be 60

MT (Spark Steel and Economy Research Centre 2010). The demand for steel as estimated by our

methodology for 2009-10 was estimated at 56.42 MT. The sectoral divisions are given in the

table below:

Table 3.15 - Sectoral Steel Consumption (2009-10)

Sector Demand (million tonne)

Real estate 25.4

Infra 6.8

Machinery 13.4

Fastners 0.69

Consumer durables 0.7

Auto 4.83

Power 1.4

Railways 2.1

Containers 1.1

Total 56.42

This gives us a forecast error of 6%. The sectors that have been considered under the current

model are only 94% inclusive. Thus, an additional 6% margin has been added to the total

demand estimate under the others category in order to make our model more inclusive.

3.2. Results

3.2.1. Total Finished Steel

Aggregating steel consumption by all sectors considered above, we get the total demand for

finished steel in India till 2020-21. This is shown in the table below.

25

Currently, demand for finished steel in India is estimated to be around 70 MT. This is expected

to more than double to 166 MT by 2020-21. As can be seen from the table, this demand will

mainly be driven by the construction (real estate and infrastructure), automobile and consumer

durables sectors.

It must be noted that this figure includes only domestic demand for steel. Demand from

international markets will further push this figure up.

26

Table 16 - Estimated Demand for Finished Steel in India (MT)

Year Real

Estate

Infrastructure Railways Power Machinery Fasteners Consume

r

Durables

Automobiles Shipping Containers Others Total

Deman

d

2010-11 28.46 8.13 2.30 1.72 16.85 0.90 1.00 6.29 0.26 0.12 3.96 69.98

2011-12 31.27 9.24 2.51 1.79 17.74 0.94 1.25 6.34 0.31 0.12 4.29 75.79

2012-13 34.29 10.46 2.71 1.90 18.86 0.99 1.58 6.90 0.29 0.12 4.69 82.79

2013-14 37.53 11.80 2.97 2.21 20.00 1.06 1.98 7.52 0.37 0.12 5.13 90.70

2014-15 40.99 13.30 3.27 2.55 21.15 1.13 2.45 8.35 0.41 0.12 5.62 99.34

2015-16 44.69 14.96 3.60 2.92 22.34 1.20 3.00 9.24 0.48 0.11 6.15 108.69

2016-17 48.60 16.80 3.99 3.24 23.56 1.28 3.62 10.20 0.56 0.11 6.72 118.68

2017-18 52.77 18.86 4.44 3.43 24.81 1.36 4.32 11.25 0.65 0.11 7.32 129.33

2018-19 57.14 21.15 4.97 3.55 26.09 1.44 5.09 12.43 0.75 0.11 7.96 140.69

2019-20 61.76 23.71 5.59 3.66 27.40 1.52 5.94 13.72 0.87 0.11 8.66 152.94

2020-21 66.60 26.57 6.31 3.75 28.74 1.61 6.86 15.17 1.00 0.11 9.40 166.13

27

3.2.2. Flat vs Non-Flat Steel

As mentioned in the introduction, a major advantage of the end use method is that it can also

be used to estimate the nature of steel demand, ie, it can be used to estimate demand for

different types of steel. Thus, in this section, the total demand for finished steel in India is

split into demand for flat steel and long steel. In order to do this, the proportion of flat steel

used to non-flat steel used in each sector was estimated. This is shown in the table below. The

total steel consumed by each sector was then split accordingly.

Table 17 - Proportion of Flat to Non-Flat in Each Sector

Sectors Flat

(%)

Non-Flat

(%)

Construction 26.21 73.79

Railways 31.67 68.33

Power 26.72 73.28

Machinery 40.00 60.00

Fasteners 14.09 85.91

Consumer Durables 94.89 5.11

Automobiles 91.13 8.87

Shipping 75.00 25.00

Containers 99.82 0.18

Others 27.74 72.26

Source: Spark Steel and Economy Research Centre 2010, Expert opinion

The total demand for flats and non-flats till 2020-21 is given in the figure below. From the

figure it can be seen that the proportion of flats demanded to non-flats demanded is expected

to remain almost the same over the next ten years. Non-flat steel will continue to dominate

domestic demand. This is mainly due to the demand for non-flat steel arising from the

construction sector, which accounts for around 60% of the total demand.

28

Figure 4 Demand for Flats and Non-Flats, 2010-11 to 2020-21

Source:

4. Demand-Supply Gap

4.1. Total Finished Steel

The total supply and demand of finished steel in India till 2020-21 was estimated in the

previous sections. This section compares the two sets of values and estimates the demand-

supply gap. This is shown in the following table:

Table 18 - Demand Supply Gap: Total Finished Steel

Year Total

Demand

Reasonable

Scenario

Base Case

Supply Gap Supply Gap

2010-11 69.98 63.39 -6.59 63.39 -6.59

2011-12 75.79 73.87 -1.92 72.07 -3.72

2012-13 82.79 83.44 0.65 81.27 -1.51

2013-14 90.70 93.83 3.13 89.52 -1.18

2014-15 99.34 98.54 -0.80 92.74 -6.60

2015-16 108.69 106.14 -2.55 100.34 -8.35

2020-21 166.13 170.60 4.47 144.92 -21.21

Source:

*negative sign indicates a supply deficit

A perusal of the above tables reveals some interesting trends. The supply estimates are given

for two scenarios a reasonable scenario and a base case one. As explained in section 2, the

2010-11

2011-12

2012-13

2013-14

2014-15

2015-16

2016-17

2017-18

2018-19

2019-20

2020-21

Non-Flats (MT) 42.81 46.61 50.88 55.67 60.81 66.35 72.24 78.47 85.08 92.17 99.77

Flats (MT) 27.17 29.18 31.90 35.02 38.53 42.34 46.44 50.86 55.62 60.78 66.36

0%10%20%30%40%50%60%70%80%90%

100%P

erc

en

tag

e

29

reasonable scenario includes all brownfield and greenfield expansions that have been planned

by steel producers, while the base case scenario also accounts for delays due to problems of

land acquisition, raw material availability, etc.

Both scenarios show a supply deficit in 2015-16. In 2020-21, the reasonable scenario shows a

supply surplus of around 4 MT, while the base case scenario indicates a supply deficit of

around 21 MT. This has implications for imports and exports of steel. India is currently a net

importer of steel. Under the base case scenario, India will continue to be a net importer for

the coming ten years.

4.2. Flat Steel vs. Non-Flat Steel

The next step is to estimate whether the demand deficit arises from flat steel or non-flats. The

demand-supply gap for flats and non-flats is given in the tables below for the reasonable and

the base case scenarios:

Table 19 - Demand-Supply Gap: Flat Steel

Year Total

Demand

Reasonable

Scenario

Base Case


2010-11 27.17 28.68 1.51 28.68 1.51

2011-12 29.18 37.48 8.30 35.68 6.50

2012-13 31.90 43.33 11.43 41.17 9.26

2013-14 35.02 50.00 14.97 46.69 11.67

2014-15 38.53 51.97 13.45 47.88 9.36

2015-16 42.34 60.11 17.78 53.83 11.49

2020-21 66.36 109.35 43.00 84.54 18.18

Table 20 - Demand-Supply Gap: Non-Flat Steel

Year Total

Demand

Reasonable

Scenario

Base Case


2010-11 42.81 34.71 -8.10 34.71 -8.10

2011-12 46.61 36.39 -10.22 36.39 -10.22

2012-13 50.88 40.11 -10.77 40.11 -10.77

2013-14 55.67 43.83 -11.84 42.82 -12.85

2014-15 60.81 46.56 -14.25 44.86 -15.96

2015-16 66.35 46.03 -20.33 46.51 -19.84

2020-21 99.77 61.24 -38.53 60.38 -39.39

*negative sign indicates a supply deficit

30

The above tables reveal that the supply deficit is only in the production of longs. For flat

steel, a supply surplus is expected for each year.

The reason for this is that most expansion plans are geared towards the production of flats.

However, 60% of the demand for steel comes from the construction sector, which mainly

uses longs.

However, as mentioned in section 2, many steel producers have not yet announced their

future product mix (especially after 2015-16). Thus, it is possible that in response to the

demand for longs, some steel producers may increase the production of longs, thus increasing

the overall supply of longs in FY 2020-21.

31

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