Much has been made of China’s insatiable appetite for the world’s natural resources but demand growth from another Asian giant is changing the dynamics of the global steel market. Indian demand for steel grew 10 percent last year, helping push global demand to a record 1.4 billion tons in 2010.
Over the past two years, India’s renewed economic growth has brought a dramatic increase in the country’s steel production as well as domestic consumption. This rise has been driven by the Indian government’s focus on building out the nation’s infrastructure. According to an Urban Land Institute (ULI) and Ernst & Young publication, “Infrastructure 2011,” initiatives in India have been extensive: an ultramodern subway line in New Dehli, a metro rail system in Bangalore, new airports and an airport terminal. Over the next four years, the Transport Ministry wants to build 12 miles of road per day, totaling 30,000 miles.
The future looks bright as well. The Wall Street Journal reported in April that the country is planning to spend $1 trillion on the country’s ports, houses, power plants and factories from 2012 to 2017. This adds up to about 9 percent of its GDP.
The head of Tata Steel says this increase in infrastructure spending “should offset any reduction in demand” from the auto and white goods (appliances) sectors, both of which are vulnerable to inflation.
What could this mean for iron ore, a key component in steel production? Higher prices.
India, the world’s fourth-largest producer of iron ore, has historically been a big exporter of iron ore. From 2004 to 2009, iron ore exports more than doubled as the domestic economy wobbled. However, going forward, exports are expected to be cut in half.
India’s exports to China have already declined from 20 percent of China’s total iron ore imports in 2008 to 17 percent in 2009, according to Reuters.
The government recently moved to keep a larger portion of India’s iron ore within the country’s borders. Deutsche Bank reports that iron ore exports from the Paradip Port, India’s second-largest port, fell nearly 14 percent during the second quarter of this year. Deutsche Bank says this coincides with stringent government regulations and a four-fold increase in export taxes in the state of Orissa, India’s largest iron ore producing region.
The country is also looking outside its borders for additional sources of supply. Earlier this year, SAIL, the state-run Steel Authority of India Ltd., announced a $12 billion plan to expand India’s steel production into Mongolia, Indonesia, South Africa and Oman.
However, ULI and Ernst & Young say “progress is falling short in keeping up with India’s expanding population, which is nearly 1.2 billion and on track to surpass China as the world’s largest by 2025.” The sustainability of this demand relies on the government’s devotion to bringing the country’s infrastructure into the modern age. If it continues, Indian activity and demand could become a key indicator to measure vitality in the global steel market.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. None of U.S. Global Investors Funds held any of the securities mentioned in this article as of 3/31/2011.
