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Prospects for Indian Steel Industry

Present status of the Indian Steel industry Steel is primarily a raw material based industry as for the production of one tonne of steel, an integrated plant consumes 4 tonnes of raw materials. India with its abundant availability of high grade Iron ore, the requisite technical base and cheap skilled labour is thus well placed for the development of steel industry and to provide a strong manufacturing base for the metallurgical industries. However, despite the recent euphoria the industry could not make much headway in the past decade. India presently accounts for less than 5% of the global output of Finished Steel and 1% of global trade. The per capita consumption of 27 kg. is also well below even the Asian average of 128 kg. China on the other hand shall consume 280 million tonnes of Steel in 2003, including 30 million tonnes through imports against the total consumption of 30 million tonnes by India. Chinese Steel Association has projected that consumption of Steel shall rise to 300 million tonnes in the next five years. Chinese Steel and metallurgical industries have provided a major thrust to the economic development, GDP growth and generation of massive employment opportunities. The revival in the global demand and the prices since March 2002 has improved the profitability of the integrated producers in India though the non-integrated or the secondary producers accounting for over 50% output of the Finished Steel but without any captive mines have not gained much due to the sharp rise in the prices of Melting scrap, Sponge Iron, Coke, Iron Ore and other inputs. Besides, the growth has been mainly export based, boosted by the high global prices and liberal export incentives. The export of Finished steel rose by 36% in 2002-03 and 32% in April-Sept. 2003 vis-à-vis the past year but the domestic consumption increased by only 6% and 3.4%, respectively. The shortages and frequent and sharp hikes in the domestic prices also hit the value chain and economic viability of a wide range of industries and the construction projects. The domestic consumption of several key downstream products like Galvanized sheets, Cold Rolled Sheets, Plates and Tinplates in fact consequently sharply declined during 2002-03 and April-Sept. 2003 as market for the industrial and consumer products was unable to absorb the price hikes. The brief SWOT analysis as above is considered necessary for a realistic assessment of the ground realities essential for the formulation of future strategies. The current status of the industry on the positive side amply reflects the vast potential for the future growth of steel and allied industries through integrated planning to exploit the potential and the Indian steel is indeed poised for a quantum jump in the next decade. Structure of Indian Steel Industry Indian Steel Industry comprises of several interdependent and interlinked segments for value addition, broadly classified as the integrated or the majors producers and non-integrated or the Secondary Producers. India has played a pioneering role in the recycling of scrap for the production of Steel through EAF/Induction Furnaces and the rolling of both the Long and the Flat Products in Mini/Midi Mills at highly competitive prices. The Secondary Sector accounted for over 50% of the total indigenous output of Finished Steel in 2002-03 and was dominant source for several categories, both for the domestic and the export markets. The Secondary Producers focus on the production of high grade steels and specialty products to meet the specific requirements of the industry and the development plans must include the strengthening of the Secondary sector along with the major producers. There is ample scope for the reduction of production costs by the Secondary Sector through the technological upgradation, particularly by the Electric Arc and the Induction Furnace Producers, through the conversion of Electric Arc Furnaces to Twin shell Furnaces. Pursuant to the technological developments in the past decade, the non integrated producers and the integrated compact Mills have emerged as low cost producers of Finished steel due to low capital investment and breakeven points intense customer orientation and flexibility in altering the productwise. The Sponge Iron/Mini/Midi Rolling Mill route appears to be the appropriate for a large country like India and the requisite support be provided to the Secondary Producers on merits, for the modernization and expansion projects. Key role of the domestic market The expansion of the domestic market in a huge country like India holds the key to the future growth of the steel industry and the basic input like Steel should obviously be utilized for the industrial and the economic development of the country. Besides, the export prices and markets are subject to wide ranging fluctuations triggered by economic and political developments in different parts of the world. China is presently the major destination for the Indian steel exporters but the Chinese steel industry itself is on a fast growth track and as per some analysts China may become a net exporter of Flat Steel products by 2005. The significant decline in the value of US Dollar and escalation in the Freight rates has also put India in a disadvantageous position vis-à-vis NAFTA, European Union, Japan and South Korea for exports to the U.S. market. There is also a growing trend in North America, Middle East and other countries towards self sufficiency and free global trade is giving way to bilateral and multilateral agreements. Finally, exports are best developed from a solid home market base. Indian industry therefore must strive and adopt effective measures to exploit the vast potential of the domestic rural markets, expansion of the Manufacturing Sector and infrastructure development, to generate the demand for steel products. The rise in the Indian per capita consumption even to the Asian average shall boost the demand for Steel products by at least 100 million tonnes. It is therefore vital that the steel producers should nurture the domestic market and the exports should not be at the cost of the domestic industry. The U.S. Govt. has recently imposed a duty of 10% on the exports of the Melting scrap, to improve domestic availability and stabilize prices and other countries have also adopted similar measures from time to time. India as Global and manufacturing and outsourcing base. Apart from the vast domestic market, India has also bright prospects to develop as a global manufacturing and outsourcing base for Iron and Steel based products. A recent study by the Kellogg School of Business on the manufacturing competitiveness in 15 countries, including Brazil, India, and Korea etc found that India is most competitive place for metal based manufactured products. There is vast scope to develop exports of Automobile components, equipment for construction industry, Oil and Gas Sector which shall boost the demand for steel products in a big way. The Indian Auto and the Engineering Goods Sector with its inherent strengths has bright prospects to become an integral part of the global production systems and multiply its current exports several folds in the coming years. There is need for collaborative research between the Steel and Engineering industry for market development and benchmarking with global standards of quality and prices to achieve the objective. Rational and development oriented pricing strategies Steel and downstream industries are part of a single value chain and any undue rise in steel prices has an adverse impact on the industry. Steel production and prices are therefore closely monitored by the OECD and the developing countries, to safeguard the domestic industry and the national interests. Besides, in countries with low per capita income like India, the demand for steel products is price elastic and cheaper substitutes like Asbestos Sheets, PVC Pipes, Tubes and Containers have cornered a significant share of steel products in the past two years due to sharp rise in Steel prices. In the Auto Sector also the net consumption of steel vis-à-vis the other materials has declined. The major consuming Sectors like the Building Industry, Auto Sector, Pipes and Tube Mfrs. Cold Rolling industry and others have been hit by price instability and represented to the Govt. for the reduction in the prices and heavy Customs duties on imports. It is ironical that FOB Plant prices for some products like the HR Coils are much higher than the prices for the export markets. The domestic Steel prices must be fixed on the principle of ‘what the market can bear’ and should be workable for the downstream industries. The development of the domestic market and industries should not be thwarted for short term gains on exports which may turn out to be detrimental in the long run. It may be clarified that price volatility is by and large confined to the export markets and in other countries price stability is maintained through long term contracts, reference prices and hedging. LME has also worked out a contract for HR Coils for North America, to curb high volatility in prices which in the long run is detrimental for both the producers and the consumers. Modalities for the future development It is apparent that India is well positioned for an accelerated development of the steel industry and a low cost global manufacturing base for the metallurgical and engineering goods. The reform process at this critical stage be pushed through and economy opened up by the removal of all bottlenecks and barriers. India shall register a growth of over 8% in 2003-04 and the projected investments on infrastructure development and housing, sharp growth of Auto and Consumer Durables sector, foreign exchange reserves are indicative of sustained growth in Steel demand. It is time for the steel industry to undertake modernization and expansion projects to cut the production costs and prices as high Custom duties and prices retard industrial growth. The Customs duties in any case have to be reduced to SAARC and Asian levels in view of the Free Trade Agreements under finalization with these countries. The demand for steel products is derived and the development plans of the steel industry have to be backed and synchronized by the overall industrial policy plan targets for GDP growth and the expansion of the manufacturing sector. The development of the raw material sources and the requisite infrastructure support by various Central and State Governments and other Agencies also necessitates meticulous planning for the success of the plans. The Govt. has thus to play a pivotal role in providing the overall policy framework and coordination for the smooth implementation of the development plans. The policies must now shift focus from protectionism to competition and development, to break the vicious circle of high prices and low demand. Indian steel industry has by and large operated in an insulated environment with high Custom Tariffs and Non-tariff barriers. It must be realized that the competition changes the entire work culture, objectives and the efficiency of an organization to achieve global competitiveness and several industries in India have already achieved this objective. India has inherent comparative cost advantages in the production of steel and TISCO was adjudged the cheapest HR Coil producer for the year 2002. There thus appears to be no need for the continuation of the protectionist polices which have proved to be counterproductive. The Parliamentary Committee on industry had recommended the formulation of an integrated policy for the development of the Indian steel industry in 2001. The Ministry of Steel has constituted a Task Force consisting of Producers, Major consumers and the Planning Commission to make its recommendations. The Task force has proposed a target for the production of 100 million tonnes of finished steel by 2015 to meet the demand from the domestic and the export markets. The objectives and thrust areas for the National Plan and the role of the Government as proposed by CORSMA interalia includes. (i) Formulation of an integrated policy framework and roadmap for the growth of the steel industry in the next two decades and an institutional framework for structural coordination between the steel and allied industries, for the effective implementation of the development plans. (ii) Diplomatic support for the conclusion of Regional and Bilateral trade agreements with other countries to develop Steel exports and safeguard the interests of the Indian Steel industry in WTO related negotiations. (iii) Creation of special development fund to promote research and development and technological upgradation of the Secondary Producers, on the lines of the development fund setup for the Textile Industry. (iv) Formulate and enforce a competition policy to improve efficiency and technological development of the Industry, to the global standards. (v) Modification of Labour laws, inline with the global regulations, productivity linked wages and Bonus rules, to promote harmonious industrial relations and enhance productivity. Steel is a strategic industry with strong downstream and upstream linkages and a national vision and policy framework is essential to provide requisite coordination and direction to safeguard the overall national interests and objectives. The National vision and the policy framework shall in fact provide valuable assistance to the Steel producers and Indian and foreign investors to formulate the company level development plans and also promote domestic and foreign investment in the steel industry. The major responsibility for the implementation of the development plans and strategies shall however rest on the industry through (i) Benchmarking with the leading global steel producers in term of the production costs, quality and service, to meet the global competition in the low tariff regime. (ii) Customer orientation and collaborative research and development with the metallurgical industries, to develop cost effective products for the domestic and export markets and to develop India as a low cost global manufacturing base for the metallurgical products. (iii) Development of rural markets and providing requisite infrastructure support for fabrication and after sale service in the rural areas. (iv) Promote construction of steel intensive commercial buildings and domestic housing in collaboration with Architects and town planners.

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