Is the government killing the steel industry?

Last Updated: Wed, Nov 28, 2012 04:42 hrs

The industry ignored measures that would have improved iron ore quality, but then, the mining ban has done considerable harm too

Sushim Banerjee
Director General, INSDAG&

"Iron ore shortage will hit the industry hard, but the steel industry did not pay attention to beneficiation or pelletisation, which could enable it to use fines or convert low-grade ore to high-grade ones"

India is shortly going to add around 26 million tonnes of steel through brownfield expansion, and this includes projects by SAIL, Tata, RINL, Jindal, Essar, apart from smaller players. These are ongoing projects and are not facing any hurdles over raw material linkages. With this fresh capacity, it should be possible to cater to the emerging growth in demand for steel in the country.

We have to understand that India is a parliamentary democracy, so any implementation of policy requires political consensus - particularly because we have a coalition government. This is unlike China where capacities are created with full government support and some of them are now being closed for violation of environment norms or bank loan defaults. The government should play the role of a catalyst and facilitator in a liberalised economy.

It is a fact that some of the major greenfield steel projects have faced problems with land acquisition and raw material linkages. Many delays have taken place because Posco was insisting on iron ore swapping, a condition to which no country should agree. Nowadays wherever raw materials are sourced, whether it is Mozambique or Bolivia, Guinea or South Africa, the country insists on some kind of value addition there either in the form of a steel plant or pelletisation facilities.

I think the bigger issue facing the industry is iron ore shortage. This is going to hit the industry hard. But then, the Indian steel industry cannot shirk its responsibility; it did not pay adequate attention to beneficiation or pelletisation, processes that would have enabled it to use fines or convert low-grade ore to high-grade ones.

So far as illegal mining is concerned, the government has lost crores of revenues because of the laxity of the regulatory mechanism.

I also agree that there are issues with NMDC pricing. When international prices are coming down, it is very odd that domestic prices are going up. But in 2008 and 2009 when import prices had shot up, NMDC didn't increase prices to that extent. Generally, the government does not interfere in the commercial working of an organisation. The case of NMDC, however, may be different since it is the major supplier of iron ore to RINL, Essar and Jindal. The pricing in the ultimate analysis should be market-based, which will still make the public sector commercially successful.

Besides, it is important to look at the positive steps that the government has taken recently in favour of the steel industry. The import duty was raised from five to 7.5 per cent in the Budget to give relief to the steel industry, which has been losing market share to the arrival of cheap imports from China and CIS (Commonwealth of Independent States) countries. External commercial borrowing (ECB) rules have been simplified, which has helped companies like Jindal and Essar convert high-cost loans into cheaper ones.

From recent newspaper reports, we also understand that an empowered committee on big-ticket investments (National Board of Investment) is shortly being set up to provide a single-window clearance for mega projects, and the long-drawn fight between the ministries of coal, mines, steel and environment will be resolved. Hopefully, it should clear one or two major greenfield steel projects.

The BIS mandatory certification, which the ministry of steel has issued, is also a big step towards awareness of quality in the country. Creating awareness among buyers not to use inferior- quality steel will act as a deterrent against imports of seconds and defectives. Last year, around 450,000 tonnes of defectives were imported and distorted the market with low prices and quality degradation.

Steel companies are really looking at the government as a catalyst to create an enabling environment that would facilitate investment, both public and private, through the public-private partnership route. This will help make up the massive infrastructure deficit, reduce irrational subsidies so that adequate funds are available for productive investment, and boost the manufacturing sector by setting up industrial clusters. The industry and the government must join hands so that growth in steel demand is in keeping with production. Perhaps a reduction in interest rates, which the finance ministry has already urged the Reserve Bank to do, will bring the industry some much-needed relief.

&Institute for Steel Development & Growth

Harsh Jha
Managing Director, Tata Metaliks

"The ban by the govt on iron ore mining has impacted the availability of iron ore in the country and the price, which – unlike in the rest of the world – has been very high in India"

The steel industry is a capital- and raw material-intensive business. It requires huge capital outlays (Rs 5,000-6,000 crore per million tonne, depending on the configuration of the plant) and consumes 3-3.5 tonne of raw materials per tonne of steel produced. The industry, thus, needs access to capital on reasonable terms and adequate raw material at competitive prices. Raw material is a significant component of the cost structure of iron and steel, so its availability and price play a critical role in the financial performance of a company.

A large capital investment project requires three basic ingredients:

  • a stable and consistent policy framework;
  • reliable raw material linkages; and
  • supportive governance by the state and central governments.

Against this backdrop, let us examine the prevalent business environment for the industry.

Per capita consumption of steel in India is very low compared to the developed world. Thus, it can be safely assumed that there will be demand growth for steel in the medium to long term. Sensing the potential for growth, a large number of projects were launched and memorandums signed with much fanfare in Odisha, Jharkhand, Karnataka and some in West Bengal. Most, however, have remained on the drawing board.

The result: at least 20-25 million tonnes of new capacity will not be available until 2015-16. These projects were not derailed on account of capital or a constraint on demand, but on account of the extraordinarily tardy progress and:
a) criminal delays in environment (including forest department) approval for the project;
b) difficulty in land acquisition; and
c) non-allotment of iron ore or coal mines.

The last problem was compounded by the ban (hopefully temporary) on iron ore mining - first in Karnataka, then Goa and, now to some extent, in Odisha, on account of the blatant violation of environmental and mining norms by commercial mine operators. It is strange that though public wealth was being openly looted and converted into private wealth by unscrupulous miners in connivance with dishonest bureaucrats and corrupt politicians, no action has been taken against the culprits. Ideally, the private property of these involved should have been confiscated. On the contrary, mining has been banned. This ban has impacted the availability of iron ore in the country and the price, which, unlike in the rest of the world, has been very high (making it almost unaffordable). It has effectively cut the lifeline of the iron and steel industry. The government, instead of putting in place appropriate measures to prevent such gross misuse in the future or allocating or re-allocating mines to actual users and not to traders, has chosen to ignore the gravity of the situation.

We also need to understand one cardinal principle: economic development is not cost-neutral. The cost of economic development needs be paid in terms of a potentially adverse environment impact such as a reduction in forest cover (in the near term). What, however, is feasible and possible is to: (i) restore the forest cover in the medium term (three to five years); and (ii) effectively reverse the negative impact on the environment. In many places, Coal India, Tata Steel and others have demonstrated that the land can be restored to its original condition by responsible and responsive management.

Environmentalists' campaigns against creating new capacities or augmentation of additional capacities have put on hold all new investments. I, however, think it is a case of mis-information being touted as the enlightened voice of reason. Economic development and environmental rejuvenation need to coexist for a higher of quality of life for people, failing which we will remain poor and economically disadvantaged. Over-zealous activist should, in fact, demand effective implementation of ameliorative measures instead of opposing industrial development. They should demand regulatory measures to penalise those who violate the norms of environment protection. But a broad-brush treatment of obstructing investment is self-defeating.

The steel industry is faced with uncertainty about the availability of raw material and difficulty in fresh capacity creation for regulatory reasons. If these issues are not addressed swiftly, this basic infrastructure industry will be effectively killed.

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