Iron and Steel : Strengthening India

A strong Iron and Steel sector is the backbone of a strong economy. The higher consumption of iron and steel is seen as an indicator of higher development in infrastructure, which explains the growing demand for iron and steel throughout the expanding global economy. The abundant availability of raw materials like iron ore and cheap manpower in India provide tremendous potential for the iron and steel sector to grow. Since the sector exhibits large forward and backward linkages, it also implies higher growth opportunities for the entire nation. In the year FY03, India was the eighth largest producer of steel in the world (33.7 mn tonnes), the largest being China.

The production of pig iron (5.3 mn tonnes) and sponge iron (6.4 mn tonnes) also increased in FY03 showing high growth rates of 29.4% and 18.3% over the previous year. The production of iron and steel has been increasing rapidly, the exports are on a rise and the sector seems to be gradually moving up the value chain. Under the New Economic Policy (NEP), the iron and steel sector was deregulated as well as decontrolled. Since liberalisation, the sector experienced rapid strides and the growth has been originating more from the private rather than the public sector. Though the sector has received some incentives like 100% foreign equity investments and lowering of import duties on capital goods and raw materials, it has not been able to capture the global market. A surplus-led export strategy and the protectionist measures imposed by the USA, Europe (such as high tariffs, safeguard initiatives etc.) have led to this peculiar situation. On the other hand, dumping of unduly cheap imports from the Russian/CIS countries have been hurting the Indian domestic market. The benefits have also been moderated due to lower manpower efficiency and higher capital and energy costs.

Global Market
The iron and steel sector is highly diversified, with products ranging from basic raw materials to semi-finished and finished products. The present study integrates on two broad categories- iron and steel and iron and steel articles. Iron and steel includes a wide category of products such as alloys, bars and rods, flat-rolled products whereas iron and steel articles mostly comprises consumer goods like tables, tubes, pipes, track etc. Germany holds the top position for the aggregated iron and steel products (iron and steel and iron and steel articles) worldwide as a supplier.

The total size of the world market for iron and steel stood at US$ 117.5 bn for FY03. The market is relatively concentrated with the top ten exporters contributing for more than half (57%) of the entire exports. The major exporters have been Germany, Japan and France with a share of 10.1%, 9.4% and 7% respectively. The total size of the world market for iron and steel articles for FY03 was valued at US$ 88.6 bn. Germany has been the leading exporter (13.1%) followed by USA (11.6%) and China (9.2%). The market for iron and steel articles is more concentrated with the top exporters contributing around 66.6% of the total exports. The major developed countries have been dominating the world market for both the categories, indicating that higher capital availability is crucial for this sector’s development.

Exports from India
The iron and steel sector in India was set up to meet her domestic needs and support infrastructure development of the nation. Iron and steel exports from India started after 1964, the first time India’s supply dominated her domestic needs. Though the Indian exports are quite vulnerable to domestic demand conditions, the export market has been doing reasonably well in the past few years, with FY03 seeing an increase of more than 100% over the previous year. The increase in exports to Asia (approx. 227%) and America (105%) has contributed to this massive growth. In spite of the fact that India has done well, it still faces stiff competition, holding the twenty-fifth rank in the global export markets for iron and steel and the twentieth position for iron and steel articles in FY03. Also, the share of India is very low in most of its major markets (around 3%). The largest importer of iron and steel from India is China and that for iron and steel articles is USA. It is interesting to note that whereas China holds the top position in the Indian iron and steel export markets, it doesn’t even figure in the top fifteen destinations for iron and steel articles exports from India.

Iron and Steel
The iron and steel exports (non-articles) forms 63% of aggregated iron and steel exports. The iron and steel exports have grown tremendously in FY03 with China capturing the major share. The CAGR has grown at an impressive 14% in the period FY98-FY03. The major destinations for Indian exports are China, USA, Indonesia and Italy.

The exports to China have been quite volatile, with periods experiencing steady growth trends, followed by sudden spurts in FY94 and FY03, including major decline in FY98. These volatile changes in the Chinese import market for Indian iron and steel products have led to a CAGR of 194% in FY91-FY97 and of 101% in FY98-FY03. The vastness of Chinese market can be assessed by the fact that in spite of such a large quantum of exports to that market, India’s share is less than 5% of the entire Chinese market. The total size of the Chinese import market for iron and steel stood at US$ 13.2 bn in FY03. India ranks ninth in the Chinese market, facing tough competition mainly from Asian countries like Japan, Korea, Russia and also from Germany and USA. The total size of the US import market for iron and steel was valued at US$ 12.4 bn in FY03. Though the US market saw an overall decline at a CAGR of 3.3%, the Indian exports maintained a steady growth, registering a CAGR of around 20%, in value terms, between FY91-FY03. Imports of iron and steel from India in to the US were worth US$ 302.3 mn in FY03, registering a y-o-y growth of 135%. This high growth can be seen as a recovery from FY02 when the market declined to almost half of its previous size due to the imposition of anti-dumping and counterveiling duties on Indian exports. India holds the eleventh position in the US market, contributing 2.7% to its import market. India’s main competitors in this market are mostly the American and European countries. Another major destination for India’s exports of iron and steel is Italy. The Indian exports have been quite volatile in this destination too, growing at an impressive CAGR of 13.2% in FY91-FY97 but achieving a negligible CAGR (0.6%) in FY98-FY03. This can be partially linked with the recession in the Italian economy, which has been seeing a declining growth since 2001. The total Italian world market for iron and steel exports stood at US$ 7.8 bn. India’s share in the Italian import market for iron and steel was 0.9% in FY03 and it ranked twenty-fifth. Since Italy has been sharing good ties with India, India should try to target this market more efficiently and regain its lost position.

Iron and Steel Articles
The iron and steel articles share an equally important place in total exports, showing a steady increase since liberalisation. The share of this category in aggregated iron and steel exports was 52% in FY02, which reduced to 37% in FY03. The decline in its relative share in FY03 was due to the fact that growth of exports of iron and steel from India far outstripped the growth for exports of iron and steel articles. The major export destinations for this category are USA, UK and Germany. The US import market has retained the top position for Indian exports of iron and steel articles since the last decade. The total size of US import market for this product has been growing and it stood at US$ 15.3 bn for FY03. The Indian exports of iron and steel articles to the US expanded much faster in the period FY98-FY03 at 16%, than in the period FY91-FY97, when they grew by 10%. India’s share accounted for 2.3% of the total US import market for iron and steel articles and was ranked ninth in FY03. The main players in this market are Canada, China and Mexico. The UK import market for iron and steel articles has been stagnant over the period under review, and were valued at US$ 4.2 bn for FY03. Imports from India stood at US$ 85.3 mn registering a high CAGR of 13.1% in FY98-FY03. Imports from India account for 2.5% of total import market, the major share coming from Germany, Italy and China. India held the thirteenth rank amongst all the importers in to the UK market in FY03. India’s other major destination for iron and steel articles is Germany. The Indian exports to this market grew at an impressive CAGR of 35% in FY91-FY97, reducing to more than a half in FY98-FY03 (15.3%). Though we see that the Indian exports experienced a decline, they have grown at a much faster pace than the world exports, which experienced a negative CAGR of 0.4%. The major competitors for India are the European countries. India is ranked twenty-seventh having a share of 0.4% in total German import market (US$ 7.4 bn).

Promotional Incentives
The iron and steel sector has received various incentives to promote exports in the current EXIM Policy (2002-2007). First, the quantitative restrictions on exports have been removed, except in the case of a few sensitive items. Second, the setting up of overseas banking units in Special Economic Zones has been permitted. Third, the duty-neutralisation schemes such as Duty Entitlement Pass Book (DEPB) were introduced. Though the DEPB was suspended in Mar 04, it had proved to be quite beneficial in helping exporters increase their overseas market. The most important move has been the abolition of Duty Exemption Entitlement Scheme in order to reduce the transaction time. The other promotional measures relate to the tariff structure. The tariffs saw a sharp reduction (25% to 50%) in the liberalisation era, opening up the domestic sector to international competition. To safeguard the interests of the domestic producers, the Government tried to enhance domestic production by reducing the import of raw materials to as low as 5% (non-coking coal, metcoke, nickel) and even ‘nil’ (coking coal). Also, the Advance Licensing Scheme has been introduced, which allows duty free import of raw material for exports. A Steel Exporters Forum has also been set up to meet the need of producers and exporters and to resolve issues, problems and bottlenecks related to exports.

Future Prospects
The sector has been facing tariff and non-tariff barriers (in the form of anti-dumping investigations, safeguard measures etc.) from various countries. USA and EU are the two regions where the iron and steel trade has seen the most persistent non-tariff barriers. Mexico and Venezuela have raised tariffs as high as 25% and 35% respectively. In such times when the exports are being hit, the cheap imports of seconds and defectives have adversely affected our domestic sector. However, the medium to long term prospects for the Indian iron and steel export sector look promising. USA repealed the safeguard measures on steel imports as per a WTO ruling. Further, China has emerged as the most vibrant economy for both domestic production as well as consumption. With a high growth rate, China is expected to contribute around 58% in the anticipated global consumption in the year 2004. The increase in consumption in China can be attributed to the infrastructure developments, the spurt coming in part from the next Olympic games, to be held at Beijing. These are opportunities that India should look to capitalise on. India should also capitalise on its advantage as a supplier of galvanised products. The galvanised products are value added products that are mainly used for roofing, grain storage purposes and technical goods like AC, automobiles etc, and India has a dominant position in the world market for this product. With the prices firming up and the global economy on a gradual recovery, the Indian export market is expected to expand soon. Given the cheap availability of inputs (raw materials, manpower) and the various incentive schemes, the Indian exporters have immense opportunities not only to increase their share in the existing markets but also to diversify into other markets. Iran, Vietnam (for iron and steel) and Spain, Indonesia (for iron and steel articles) registered high growth rates during FY98-FY03, exceeding 80% and 40% respectively, indicating other possible potential market destinations that await India’s exploration.