INDIAN STEEL : THE KEY ISSUES
Dr. A.S. Firoz *
The steel industry
world- wide is immune to periodic downturns in steel prices. Therefore,
the recent price drops resulting mainly from excess speculative
bookings from China need not cause reductions in profitability.
Getting out of
the short-term problems plaguing the steel industry, what matters
is the scenario that emerges for the steel industry in the medium
and the long term both in India and around the world. Even more
important than these forecasts is the question as to what should
be done to put the industry on a stable track to maintain its
steady growth. Globally, steel consumption trends have all along
been positive. It will be rather naïve to believe that the
industry is fighting for survival because the market has stopped
growing and that the sellers are chasing the buyers. On the contrary,
newer markets are emerging everywhere with fresh opportunities
for the industry even to invest. The excess capacity argument,
often put forward to blame the current woes of the industry, is
based on a static perception. The process of natural attrition
in the industry will routinely close down old plants and provide
conditions for setting up new ones.
If growth trends
are expected to continue on the global scales, the Indian steel
makers will also have reasons to be prepared to tap these opportunities.
From a net importer, the country has come a long way to become
a significant net exporter of steel today, accounting for a mammoth
four million plus tonnes of steel. This is based on the industry’s
competitive efficiency, its resilience and appropriate action
and strategy to tap the merging opportunities. There will be far
greater achievements to talk about in the days to come as the
industry matures. It is no exaggeration that India has all the
ingredients to become a global force in steel. The shadows of
the past gone by will certainly not haunt the industry in its
fresh strides in the future. The thirty million tonnes of current
steel output in the country is not indicative of a stagnant and
weak market but of the opportunities that lie ahead. The domestic
market will run its growth engine. Let us see some of the macro
economic indicators that shape the country’s future development
prospects.
Resilience
The Indian economy
maintained a 5.5-6 per cent growth rate even in the days when
the world economy was under stress and remained stagnant. It has
registered export growth rates in recent years to stand next only
to China. Despite opening up so much, there is no balance of payment
crisis. In fact, foreign exchange reserves are on the increase,
thanks to the judicious and cautious macro economic policy regime.
In steel, the country exported record tonnages last year and maintained
a significant growth even when major markets were closed by protectionist
measures by the developed countries. The Indian steel producers
grew by their product quality and creating market niches for themselves
all around.
The country’s
economic performance has just begun to show its inner strength.
There have been significant advances in road construction and
poverty alleviation through concerted rural development schemes.
The rural market for industrial goods is already large with a
huge growth potential despite some small hitches. It will not
take much time for all such roadblocks to go for a fuller development
of the Indian economy. The demand for steel grows in a thriving
economy.
The Indian steel
industry markets at home and abroad are equally important. At
home, it will face stiff international competition as the tariff
barriers are lowered. In the global market its hard competitive
strength will hold the key.
If the Indian
industry has to strengthen its global presence, it will obviously
have to overcome some of the major constraints and challenges.
Domestically, the industry will have to be technologically and
operationally fit. It will have to invest continuously to modernise
and replace its obsolete plants and machinery. The industry will
know how to do that and when. But the constraint that will come
on the way is how to mobilise the money for it. Steel plant modernisation
is not a matter of pocket money. Given the average profitability
it is also doubtful if the industry will have sufficient money
to carry out the necessary revamps. External funding will thus
be pivotal in it. For that the industry will have to work hard
to regain the confidence of the equity holders and the banks.
Sitting pretty for the prices to do the trick will not help the
industry. This will be a much more difficult job than producing
and selling steel.
Capital
Money will be
needed to develop new capacity. Given the current rate of growth
in steel consumption in the country, about 6 per cent annually,
the country will need an additional 1.8 million tonnes of finished
steel if the current net steel consumption is taken at 30 million
tonnes. The incremental quantity will be more or less equally
divided between flat and long products. This means in a few years
from now, the country will have to prepare itself to develop an
additional capacity in flat steel to meet its domestic demand
fully even with only a marginal presence in the global market.
In a globalised market there cannot be a pre-determined level
of exports or imports. If the current trends are any indication,
the Indian steel industry, through sheer competitive merit will
have a reasonable presence in the world market. Where is this
additional capacity to come from?
Some of it will
no doubt come from the possible expansion of the existing plants.
Perhaps capacity expansion this way will be significant in the
medium term. The fund-starved steel industry will have to count
every penny.
Scenario
The future is
built on the present. The steel industry had a dream last year
(2002-03) Although the market trends appear to adversely affect
its financials this year (2003-04), the industry will have to
make efforts to maintain its efficiency drive and cut cost to
remain strongly profitable. The steel makers should be happy to
see the soaring production of automobiles, cars as well as trucks,
catering both to the domestic and international markets. Much
of the steel used in automotive manufacturing continues to be
imported. There should be efforts not only to substitute imports
but also produce it for foreign automobile manufacturers. But
there are signs of concern as well. Every steel recovery brings
in efficient production facilities and creates an excess capacity
syndrome. These are consequently associated with price depression
and panic reactions. While the Indian industry may neither be
a part of such a syndrome nor the creator of one, the fallout
of a crisis usually engulfs everything. Weak prices lower corporate
profitability and the industry’s credibility in the capital market
which is more dangerous.
The other obvious
obstacle is that every steel crisis generates the vicious blame
game in international business. This is reflected in increased
protectionism. Although the Indian steel industry has survived
such onslaughts in the past, there is a cost to it as also temporary
loss of hard-earned foreign markets. A clear strategy is as important
an element as price is when it comes to exporting to a given market.
The steel industry
needs to be vigilant against excessive speculation that tends
to distort market demand and supply conditions, send false signals
to the industry and the consumers and create long-term instability
in the market. It is well known that speculation raises prices
beyond the equilibrium levels when the market is in the uptrend
and brings those down excessively at the slightest sign of a downtrend
and panic. There were elements of speculation at work in the recent
upswing as well. It is, therefore, necessary that the industry
guards itself against any such force, as panic-driven speculation
can be disastrous for it.
The Indian steel
industry will have to work hard on domestic market development.
Steel has to be brought back to applications that have substitutes
now. It has to be price-competitive vis-à-vis substitutes.
The industry has to strive to ensure that the delivery cost to
the final user is minimised. A lot more is required to be done
in this area as the current logistics are far from being efficient
by global standards. The entire trading and stocking network needs
a revamp.
*
Chief Economist, Joint Plants Committee, Ministry of Steel
