Strength for Indian Steel

The aspiration to become the second largest producer of steel in the world has been burning for long and may soon be realized. Developments over the years have presented mixed signals – on one hand, many international players are keen to enter the Indian steel sector and the domestic market promises high demand for the output generated from the teeming steel factories over India; on the other hand, every resource that is required to reach this stage has its own set of problems, posing a new challenge for every project. Yet, the Ministry of Steel is very bullish that the milestone is close approaching.

The National Steel Policy 2005 envisioned that annual steel production will increase to 110 Million Tonnes (Mt) by 2020 with an annual growth rate of 7.3%. The industry exceeded the projections and today, India is the fourth largest producer of steel (as of 2011 figures).  At present, the installed capacity of Steel plants in India is 90 Mt and the production in year 2011 was 71.3 Mt. The year wise steel production in India is shown in Exhibit 1 and the year-wise list of top 5 manufacturers is shown in Exhibit 2.

Exhibit 1: India Crude Steel Production (2000-01 to 2011-12)

Steelproductionindia

Exhibit 2: Top 5 steel manufacturers (2010 and 2011)

2011

2010

1. China 683.9 Mt China 637.4 Mt
2. Japan 107.6 Mt Japan 109.6 Mt
3. United States 86.4 Mt United States 80.5 Mt
4. India 71.3 Mt India 68.3 Mt
5. Russia 68.9 Mt Russia 66.9 Mt

[Source: World Steel Association]

However, considering the performance in the last 5 years, this policy sounded too conservative and the Ministry of Steel released a new policy last year in June. The new policy predicts that the industry will grow to produce 275 Mt of crude steel by 2025-26 at a CAGR of 6%.

A number of reasons promise the expected sustained high growth of Indian Steel sector over the coming few years. India’s annual per capita steel consumption is 55 kg compared to the world average of 206kg and more than 500kg in the developed nations. This presents a huge opportunity and demand that can be fulfilled over the coming years. This argument is further reinforced by the fact that the 12th five year plan targets infrastructure investments to the tune of $1 trillion. This projects the domestic steel demand to grow at 14% annually.

At the same time, these expectations are moderated by various concerns, primarily, the intricate land allocation process, availability and access to raw materials and the actual growth of India which will define the future requirement of steel. Such a massive expansion of the Steel Industry can’t be achieved by only brown-field expansion. It requires significant investment in green field projects. Ironically, bureaucracy has thwarted this process as every project is stalled or significantly delayed because of issues related to land acquisition. This is the first major roadblock. Even, the Ministry of Steel itself recognizes this issue in the new steel policy draft report in terms of number of agencies involved, issue related to environmental and forest clearances and resistance against land acquisition. The most blistering examples are the POSCO Steel project in Orissa and Laxmi Mittal’s steel project in Jharkhand. Both these investments were announced way back in 2005 and till date neither of the projects has seen substantial construction. The delay in projects hurts the investors’ expectations and increases the cost of the project significantly in future.

Another set of problem is due to the raw materials. Iron Ore and Coking Coal are the two major raw material ingredients for steel production. Although the country has 28 billion tonnes of Iron ore reserves, the exploitation of these resources is a major issue because of environmental and land acquisition disputes. Simultaneously, the international demand of iron ore, triggered primarily by China, has led to the flourishing of illegal mining in India. As a preventive measure the Government of India imposed restrictions over mining in Karnataka. This led to supply side constraints for steel plants in the past 2 years. However, the effect of this ban was somehow mitigated by the increase in export duty on iron-ore. But, a sustainable iron ore supply is required for the Indian steel industry in the future to realize the expected crude steel production of 275 Mt by 2025-26. The second most important raw material is Coking Coal. Although India has plentiful thermal coal deposits, the coking coal resources are limited. Therefore, for the conventional blast furnace plants, the Indian steel makers are heavily dependent on imports. This dependence has hurt the manufacturers from time to time due to fluctuations in exchange rate and international prices of coal. Hence, availability of cheap and good quality raw materials is a major concern that needs to be addressed as it constitutes a major part of the cost stream of steel plants. This concern gains more importance as the crude steel production is expected to go three-fold in next 12 years. The cost of raw materials varies from plant to plant and is as high as around 55% for state owned RINL. The high cost of raw materials leads to high production costs and constrains the manufacturers from decreasing the prices during weak demand cycles.

The expectations are high and the demand side still appears promising but the supply side constraints especially raw materials and land is a major bottleneck which can derail the whole industry in coming future. As the scale of operations is going to increase, an effective and sustainable government policy is the need of the hour, which can take care of the availability of the all the resources as there is no dearth of investors who want a share of the pie of the Indian Steel Industry.

Mani Mahesh Garg is a PGP1 student at IIM Ahmedabad and a member of the Consult Club. He is a graduate from IIT (BHU), Varanasi with B.Tech in Ceramic Engineering. Prior to joining IIM A, Mani Mahesh worked at RINL, a public sector steel manufacturer.

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