The Hindu Business Line : Steely times

WITH FISCAL 2004 turning out to be a seminal year for the steel industry, it is now party time in the sector. Rising product prices, fuelled by a healthy demand, have sent steel companies, both in the private and public sectors, into raptures over their performances. As the new fiscal rolls in, the companies flaunt their report cards for the previous year, some even confident that the best days are still to come.

Finished steel production growth is estimated at 7-8 per cent and consumption at 6-7 per cent thanks to the spurt in the demand from the automobile and the construction sectors. Not only have exports grown significantly, the basket too has changed for higher value and sophisticated products. The industry's presence is now felt in developed, and discerning, markets indicating global acceptance of product quality and service, not to mention the price. The scrap shortage has spurred DRI/sponge growth. There has been no fresh capacity addition but most plants have achieved higher utilisation levels. True, the trend has been similar worldwide but what is heartening is that India's steel industry's growth has outstripped the global average. The outlook for the current year too appears positive. The global steel production is expected to reach 1 billion tonnes in 2004, up from 962 million tonnes in 2003, and the consumption to 950 million tonnes from 885 million tonnes. China will continue to import flat products, and the consolidation of the steel industry worldwide will accelerate, improving industry sentiment further.

At home, the steel sector is poised for growth as GDP is projected to rise and, with it, infrastructure spending. This, coupled with low interest and inflation rates, increasing foreign investments and a projected rise in steel demand at 7-8 per cent, holds out the promise of a brighter future for the steel producers. Or, so it is felt. But, then, there are areas that continue to cause concern. The steel industry remains largely fragmented with a mix of old and new and big and small units, the metallic prices continue to be highly volatile, high costs of logistics have rendered transportation expensive, energy prices are soaring, the appreciating rupee is being watched with trepidation, and high infrastructure costs and uncertainty of demand growth in China are being viewed with apprehension. As import duties are lowered, the home market ceases to be the monopoly of domestic producers, and labour productivity in most older plants continues to be low by the world standards.

Barring a few, most steel mills continue to consume more raw materials and energy. This is a serious matter. Raw materials form the basis of the competitive strength of the steel industry and the linkages on this front are weak. There have been demands from certain quarters to involve the government to ensure the best possible utilisation of the country's natural resources. This, it is argued, will help determine the choice of technology and influence investment decisions. But will such an interventionist approach, reminiscent of the control regime, be judicious, more so in an economy professedly committed to the free interplay of market forces?