The oversupply in the domestic steel industry is expected to turn into a deficit in 2006-07, according to a report done by rating agency Crisil for the Confederation of Indian Industry.

The report indicated that the total demand from India (domestic demand and exports) was expected to grow at 8-10 per cent in 2003-04 and 2004-05, as opposed to 5-6 per cent in 2002-03.

The fact that the industry would turn into deficit is largely backed by the growth in domestic demand and a strong demand from China, which was expected to continue.

The growth in the Chinese economy has so far, been led by the growth in the construction sector.

But, the next phase of growth was likely to be dominated by demand from consumption of items such as automobiles and white goods, which were made of flat products.

Moreover, the Chinese steel industry comprises capacities for long products due to thrust on infrastructure. Existing flat product capacities were insufficient to meet domestic requirements.

In addition, the capacities were small and fragmented and hence did not enjoy economies of scale. Industry sources said, out of total demand in China, flat products accounted for 30 per cent.

China's demand in 2002-02 was around 200 million tonne, which was estimated to grow to 220-250 million tonne in 2003-04.

The report also says that the gestation period for flat products manufacturing facility was 2-3 years. China has just started setting up capacities and these would start production only by the end of calendar year 2005.

Therefore, China was expected to remain a net importer of steel. However, the report puts a question mark on the sustainability of the performance of the Indian steel industry, owing to complete dependence on exports.

The increase in production by around 1.3 million tonne was largely on account of higher exports, which increased by around 0.9 million tonne.

As against this, domestic demand was estimated to have increased by only 5-6 per cent.

The report indicated that as the domestic demand to capacity ratio of the Indian steel industry was still very low at around 70 per cent, any decline in exports in future would again put pressure on domestic prices.

The report goes on to add that, in the event of a decline in international prices, or changes in the US policy on steel imports, Indian producers would lose their edge in the export market.