Indian steel prices high despite capacity increases

India is continuing to attract foreign investment on steel industry both thanks to its high demand for steel and its proximity to China and Middle East, while an overcapacity production is out of question at least for the next few years. It has been reported this week that Russian Magnitogorsk Iron and Steel Company (MMK) is going to set up a 10 million metric tons per annum capacity steel plant in Gopalpur city of Orissa province with approximately $5.25 billion project. Rotterdam based Mittal Steel, and South Korean Pohang Iron & Steel Company (POSCO) are two other major steelmakers investing in Orissa. Orissa is also rich in terms of iron ore deposits. Meanwhile domestic steelmakers are carrying out efforts to increase their production capacities. As a last example, Essar Steel started constructing a blast furnace. Essar has been using electric arc furnace (EAF) technology so far, but now the company also wants to make use of rich iron ore resources in the country. The 5 percent import duty brought on the scrap was also influential in the company's decision. According to the Economic Research Unit of Indian Ministry of Steel, financial institutions will only support global steelmakers in financing steel related investments. Therefore only the capacities of major steelmakers are expected to increase in India in the following years. However, those steelmakers investing in India are also willing to export Indian ore for their plants in other countries, while the Indian government is against such a practice. The government has concerns about the protection of domestic steelmakers. Therefore the increase in steel production will not be very quick. Yet, only the Orissa government has so far signed memoranda of understanding with 43 companies to produce 58 million metric tons per annum steel which requires around 90 million metric tons of iron ore annually. Currently the supply and demand for steel in India is even. Nevertheless the country is going through a development stage with many infrastructural projects, therefore the demand for steel will also continue to increase. After the imposition of the 5% scrap import duty on March 1, 2006, sponge iron prices increased from Rupee 8,800/mt ($198) to Rupee 9,600-9,700/mt ($216-218), pig iron prices rose from Rupee 11,400-11,500/mt ($257-259) to Rupee 12,000-12,200/mt ($270-275) and billet prices went up from Rupee 19,400 -20,800/mt ($437-469) to Rupee 19,600-21,200/mt ($441-478), all prices including the consumer tax and VAT. These prices are already above the levels in other countries. Meanwhile the housing prices have also increased around 2 percent in March according to the reports.