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The steel industry plays a fundamental role in not only driving economic growth, but also other complementary industries such as transportation, energy, heavy engineering and construction. The global steel industry, second in size only to oil and gas, produced 1,665 million tonnes of steel and had an estimated turnover of 900 billion USD in 2014. Despite dynamic shifts in the global scenario, the steel industry continues to be a source of employment for over 50 million people.

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The global steel industry is currently undergoing a transition. The majority of both global production and consumption of steel was driven by China’s meteoric growth throughout the 2000s. The growth rate of the global steel industry jumped from 2.5% in 1995-2000 to 6.2% in 2000-05. In fact, 7 of the top 15 steel companies operating today are based in China.

3However, the recent slowdown in China’s economic growth lead to a corresponding decline in steel sales, which contributed to a fall in steel prices. Consequently, the market shrank by 1.7% in 2015.

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Currently, China occupies over 49% of the global market share in production and 46% of the market share in consumption, but this is expected to decline over time. As developing economies continue to grow, such countries will eventually drive new demand for steel. At the moment, there is a global supply surplus of over 100 million tonnes of crude steel, which is contributing to the falling steel prices.

 

The Growing Local Industry

With an estimated market size of 300 Billion BDT, the steel industry in Bangladesh is currently experiencing an upsurge in demand. This growth is driven mostly by government spending on infrastructure projects, which accounts for 40% of steel consumption in Bangladesh. As with the global market, there is also a supply surplus in the local steel industry: the current demand is around 4 million tonnes, while the total capacity is around 8 million tonnes.

The steel industry in Bangladesh produces mainly two classes of products: flat steel (mainly CI sheet and CR coil) and long steel (MS rod/TMT bar). Although there are currently over 400 active firms in the industry, the top 20 companies service more than half of the demand.

5BSRM, the market leader, currently produces around 0.6 million tonnes of steel per year, with plans to scale up production capacity by 0.3-0.4 million tonnes a year. As BSRM and other top firms such as AKS, GPH and Bashundhara Steel expand their capacity and improve their technological capabilities, the industry is becoming increasingly more monopolistic.

The Need for Stronger Backward Integration

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Of the over 400 steel re-rolling mills operating in Bangladesh, around 350 mills primarily source their raw materials from shipbreaking.

However, recent regulatory crackdown by the EU has put the shipbreaking industry in dire straits. New EU rules require that EU-registered ships to be recycled only at sustainable facilities approved by the EU. It is unlikely that ship-breaking facilities in South Asia (including those in Bangladesh), which often experience worker-related accidents, will receive this approval.

Furthermore, sourcing from shipbreaking makes the production more expensive compared to the cheap Chinese steel currently flooding the global market. Thus there is a supply-driven pressure on the local steel industry to shift away from shipbreaking as a raw material source in order to streamline its production.

Consequently, top players such as BSRM, GPH, RSRM, Rahim Steel and Bashundhara Steel are already producing the main raw material, billets. Although the country currently imports 1.2 million tonnes of billets each year, the annual demand for billets stands at 4 million tonnes. With the right strategies, local players can fill this large demand gap.

The Case for Growth

According to the SteelMint group, production capacity of the Bangladesh steel industry has more than tripled during FY14-15. Actual production is expected to double by 2022.7

The steel industry in Bangladesh is still largely dependent on domestic growth drivers such as government infrastructure projects and the real estate industry. At the moment, per capita steel rebar consumption in Bangladesh is only 25 kg, compared to 57 kg in India and the world average of 217 kg in 2012. This is expected to grow to 50 kg by 2022.

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Although there is a lot of room for growth in the domestic market, focusing on steel exports is key to future development of the industry. Already the production surplus is more than 50% of the total domestic demand.

Currently, Bangladesh exports 57.9 Million USD worth of iron and steel products and raw materials. Although big markets such as India currently feature among Bangladesh’s top export destinations for steel products, focusing more on other growing Asian markets as well may be key to future exports growth. As the global steel industry continues to transition to a new phase, the local sector has the prime opportunity to not only grow to satisfy the domestic demand but also secure position in the emerging export markets of tomorrow.

This research has been conducted by MS Rayed, Research Associate at LightCastle Partners. To learn more about the steel sector, contact us here: info@lightcastlebd.com. You can download relevant sector specific reports from the LightCastle Drive: www.lightcastledata.com/drive