The Hindu Business Line : Case for regulatory body for steel

Normally, the prices of products in a decontrolled regime are best left to the interplay of market forces. But when there are few producers and competition is limited, there is need for a regulatory body to oversee the justification for revision.

AFTER a long time, steel producers in India are upbeat, with prices witnessing sharp spurts at frequent intervals. Steel consumption has increased from 14.84 million tonnes in 1991-92 to 27 million tonnes in 2001-02.After a slow-down, the market is picking up with the revival, albeit modestly, of the manufacturing and industrial sectors.

The demand is expected to go up further. Exports are on the rise, particularly to China. Plans are already on for big expansions by the steel majors on the assumption that the demand in the next five years will outstrip the present capacity and supply.

SAIL plans to augment production. It has an ambitious programme to add about 8 million tonnes to its production capacity in the next five-six years. Tata Steel, too, is not lagging behind with its proposed addition of about 3 million tonnes.

There are other big and smaller producers increasing capacities to push their own steel inputs, such as HR coils for cold rollers and billets for seamless pipes manufacturers The massive imports by China from India, in spite of the former's own big increase in production capacities in the context of the next Olympics might have triggered this decision to enhance the capacities all round.

While in the short run the hunger for steel from China would mean larger exports, the domestic demand for steel should concurrently grow to match the planned increased availability in the country after five years. At present, the growth is appreciable only in the services sector with manufacturing and infrastructure not growing to the desired levels.

For this to happen, there should be massive investments alongside these proposed expansion plans in the steel sector, in such vital areas as infrastructure and housing, accompanied by continued growth in the automobile sector to sustain demand. Otherwise, we would be back to the earlier scenario of surplus capacities, rising inventories, cutback in productions, falling prices and bruised bottomlines.

The projections of demand and supply for the next five years should be realistically made by the Inter-Ministerial Committee or Task Force constituted by the Steel Ministry, comprising representatives of producers, the Planning Commission, the Finance and Commerce Ministries, the Railways and the power sector, apart from major consumer segments such as the National Highways and waterways.

The Joint Parliamentary Committee may make an independent assessment. Such a study, generally tending to be on the high side, should be rigorous and take into account the likely developments in the global steel market.

The product mix and the quantum of the steel expansion should be judiciously planned with guidance from the Steel Ministry to ensure that it is market-oriented and that there is no overlapping and creation of excess capacities as a whole.

The justification for the expansions is possibly based on the assumption that the current over-capacities would run out by the middle of this decade and that consumption would grow steadily. It should be ensured that no unviable capacities are created without strong evidence of likely increase in domestic demand to prevent a return to the nightmarish days of the past.The public is not aware whether the large exports by steel producers, particularly those in the public sector against stiff competition from other countries, are at prices that yield a surplus after covering costs in full or cover only a portion of the costs.

The export of HR coils from India to China, it appears, is at prices lower than the domestic prices. In their anxiety to clear the stock that has no domestic demand or to create an artificial shortage for some products to raise prices, the steel producers may be resorting to export of their products even at unremunerative prices.

The losses in export sales in such an eventuality would necessarily have to be made up for by the higher prices on domestic sales. This would naturally impinge upon the pace of domestic development.

China will not be importing for much longer as it is also increasing its capacities. The US policy on steel imports could also change. There is also globally some increase in capacities. The competition from China after the 2008 Olympics in the export market would be very keen.

A fall in international prices cannot be ruled out, making exports unviable. A time will come when the external demand will trickle down, forcing producers to look for alternative destinations for the production from enhanced capacities.

The per capita consumption in India is still abysmally low and unless this grows significantly, the domestic demand will continue to be low.

The increased consumption of steel is not assured merely by generating higher production capacities but by the economic growth in the manufacturing and industrial sectors and development of infrastructure.

The forecasting of demand cannot be done in isolation to overall economic growth. An independent body is needed to assess the justification for large expansions.

The administered pricing scheme has been given up long ago and the handful of major steel producers are in a position to decide among themselves what and when to charge. The impunity with which the prices of hot rolled sheets have been increased four times within a span of two months from December 2003 indicates their imperviousness to the hardship of customers and their desire to make money when the going is good.

The reasons adduced for the recurring hikes are always the same — the cost of inputs having gone up and that they cannot absorb the same anymore. Their customers, who process the steel further into several products, are not able to pass on the increase in full immediately.

These increases eventually are borne by the actual consumers of the various products, be they houses, white goods, automobiles, cycles or any consumer item, and certainly lead to an inflationary economy. The argument that the steel component in engineering goods forms a small part of the total cost is tenuous, as prices of the end products go up at a much higher percentage when they ultimately reach the hands of the end-user. Price increases should not be a ploy for covering up manufacturers' inefficiencies and losses in exports or elsewhere.

Normally, the prices of products in a decontrolled regime are best left to the interplay of market forces. This logic would not, however, hold good when there are only very few producers, competition is limited and with a hitherto protective import duty structure in place to help steel producers. The pricing should not be left exclusively in their hands without a regulatory body to oversee the justification for revision.

It is neither practicable nor desirable for the government to intervene whenever the prices are revised for some or all products by one or more producers. There is, therefore, the need for establishment of a sound regulatory mechanism that would bring about an element of transparency in the eyes of end users.

This alone would dispel a commonly held belief that major producers are perhaps acting as a cartel to manipulate production with a view to getting domestic prices for some steel products increased.

The credibility of such a body would be in direct proportion to its independence from producers and the government alike as there are public sector companies in this segment. It should comprise independent experts drawn from sectors such as steel, commerce, power, railways, industry and transport.

Automobile-makers, cold-rollers and tube-makers, accounting for large offtake, have powerful lobbies to press their case for long-term contracts with major suppliers for committed supply with firm prices (except for statutory increases) for short periods of three or six months.

The smaller end-users across the country are left to the mercies of these big suppliers and their dealers with little clout in getting their supplies on time at stable prices for a long period.

To ensure that all customers, big and small, get a fair deal from the Indian steel alliance comprising major producers, the need for establishment of a regulatory body on the lines of insurance and telecom cannot be overemphasised.

(The author is a Chennai-based freelance writer.)