Tata Steel Ltd. (TATA), Steel Authority of India Ltd. and JSW Steel Ltd. (JSTL) may increase their share of the $34 billion Indian market as new rules to upgrade product quality force smaller rivals to shut factories.

The Bureau of Indian Standards will introduce norms in September to improve steel used in buildings, bridges and roads, G.K. Basak, executive secretary at the steel ministry’s joint plant committee, said in a May 14 interview. The government plans to improve the quality of infrastructure steel in the wake of last year’s earthquake and tsunami in Japan, he said.

The rules will impact about 11 million metric tons of low- grade steel capacity, according to a Bloomberg survey of six companies, government officials and analysts.

“With the focus on quality, Tata Steel, Steel Authority and JSW, which are raising capacity, will expand market share and profits,” said Niraj Shah, an analyst Fortune Equity Brokers India Ltd. in Mumbai. “Demand for construction steel is set to grow at a much faster pace than flat steel with higher spending on roads, ports and power infrastructure.”

China, the world’s biggest steel producer and user, began improving product quality after the Sichuan earthquake in 2008, with the industry ministry reiterating in January the need to use more high-strength bars in construction.

Low Cost
About 23 percent of India’s 88 million ton steel capacity comes from low-cost induction furnaces that use coal and are unable to remove phosphorus and other impurities that weaken the alloy. While using gas will lift the grade, the producers will need funds, time and technology to switch to the new fuel, said R.S. Borwankar, assistant vice-president at Welspun Maxsteel Ltd., which uses gas to fire its furnaces.

“Low-priced and poor-quality products will be out of the market,” Mumbai-based Borwankar said in a telephone interview. “That’ll help in building stronger structures that can withstand natural calamities.”

Mandatory standards for steel products are set in most major economies, including China and Japan, according to BSI, a global standards provider. Nations without their own rules adopt either the European or the U.S. guidelines.

Certification from the Bureau of Indian Standards for steel products, now optional, will become mandatory in September, Basak said. While the large steel mills that make certified products will benefit, steel produced in induction furnaces will need to invest in further refining, he said.

India’s steel demand is expected to grow 8 percent in the year ending March 31, faster than the previous year’s 5.5 percent, Basak said last month. While the new guidelines will also apply to imports, India’s overseas steel purchases are unlikely to be hampered as they mostly comprise flat products used in cars and appliances, Fortune Equity’s Shah said.

Rising Imports
India’s imports of steel products gained 0.4 percent to 6.8 million tons in the year ended March 31, according to steel ministry data. Products coming under the new quality norms will include bars, wires, ingots and structural steel.

“Imposing mandatory quality standards for steel is a bold step by India,” K.T. Chacko, director at New Delhi-based Indian Institute of Foreign Trade, said in a telephone interview. “It’ll be wrong to see this as a technical barrier to imports, as the onus is more on the domestic industry.”

Enforcing the new rules may not be straightforward. Small steelmakers apprehending closure may approach local courts to restrain the ministry from imposing the new quality standards, said S.C. Mathur, executive director at Cold-Rolled Steel Manufacturers Association of India.

“Considering the challenges, implementing the order is neither possible nor necessary,” Mathur said.

Taken Share
Large producers such as Tata Steel and JSW have in the past six months already taken market share from smaller mills, which became inviable because of high interest rates and raw material costs, Fortune Equity’s Shah said. The central bank increased key interest rates a record 13 times since March 2010, before lowering them last month.

Prices of construction steel have risen 8 percent since February, while flat steel remained little changed. A decline in supplies and higher demand may lead to an increase in long- product prices when the new rules come into effect, Shah said.

Tata Steel, Steel Authority and JSW would together have increased capacity by 45 percent to about 40 million tons in the two years ending March 31 on forecasts that consumption will surge on government spending. Prime Minister Manmohan Singh plans to attract $1 trillion in investments by 2017 to build power plants, ports and highways, to support economic growth.

“The new guidelines will give us an opportunity to enter new markets,” said Seshagiri Rao, joint managing director at JSW Steel, India’s third-largest producer. “Our products match the best in the industry and we’ll produce more this year following our capacity increase.”