The Hindu Business Line : To make 200 million tonnes, India needs `steel vision' — Mr B. Muthuraman, Managing Director, Tata Steel

"We need a long-term vision for the steel industry," says Mr B. Muthuraman, Managing Director, The Tata Iron and Steel Company Ltd. This vision, according to him, has to look at what the country's steel production capacity is going to be in the next 10-15 years, and what needs to be done to achieve this in terms of mining, environmental and forestry laws and water management. The vision will also have to address social concerns.

In an interaction with a group of journalists from Chennai at Tata Steel's plant in Jamshedpur, Mr Muthuraman talked about the global steel industry, the outlook for India and the company's plans. A B.Tech in Metallurgical Engineering from the Indian Institute of Technology, Madras, Mr Muthuraman joined Tata Steel as a graduate trainee in 1966. He also completed an MBA from XLRI, Jamshedpur.

Excerpts from the interview:

On the global steel industry

The global steel industry has entered another era, quite unlike the last 25-30 years. The next 25-30 years of steel are going to be quite different. Between 1900 and 1960, there was only upward growth. The world average growth in consumption was 7-8 per cent a year between 1900 and 1960. From 1960 to about 1980, the rate of growth dropped to 4-4.5 per cent. And from 1980 to 2000-02, it fell further to 1.8-2 per cent.

Why did it happen like that? Between 1900 and 1960, the US, Europe and, a little later, Japan and South Korea, were becoming prosperous.

The sustainable level of per capita consumption of steel is about 300 kg per person. When a country is in infrastructure creation mode, the per capita consumption goes up to even 1,000 kg and then stabilises at 300 kg.

If the whole world is like the US or Europe, it will consume about 2,000 million tonnes, whereas it is consuming half that. The real potential for steel consumption is 2,000 million tonnes, which will happen when all countries reach a level of quality of life of the developed countries. Till now, the US, Europe, South Korea and Japan were the major consumers of steel.

China's consumption is now on an upsurge; this year it is going to be 290 million tonnes. Or, a per capita consumption of 220 kg. This is expected to reach 600-700 kg in the next 15-20 years and then come down to 300 kg.That means economic prosperity has shifted to more populous countries. Therefore, the rate of growth seen in the early part of the last century is going to repeat itself now. In the last three years, the annual average consumption growth of steel has been more than 5 per cent.

In April-October this year, it has been about 8 per cent year on year. This is the first time in 35 years that we have seen three successive years of consumption growing beyond 5 per cent.

For the next few years, the average consumption in the world is going to be in the region of 4-5 per cent, which, on a base of 1,000 million tonne, is high. In the last century, the growth at 7-8 per cent was on a much smaller base. We are into a state where a high growth rate of steel is expected over the next 25 years or more.

Also, unlike in the past, capacities are not getting created madly; I expect it to be more in line with demand creation.

The third phenomenon that we are going to see is going to result in a certain price structure for steel in the next few years, quite unseen in the last 15-20 years.

Broadly, there are two ways in which steel is made. One is the integrated route, which generates scrap. The other is the electric arc furnace route, which uses scrap. Each process accounts roughly for 50 per cent. Scrap gets generated by two sources. One, by integrated steel plants and the other is the capital generation of scrap. Except what goes into buildings, steel is available as scrap after roughly 15 years.

As a thumb rule, the steel available in 2004 is actually what was produced 15 years ago. In the last 15 years, steel consumption grew at only 1.8 per cent and it is going to grow at a much faster rate now. So the steel that was made and used in the last 15 years is insufficient to sustain the extent of steel-making that is going to be required through the electric arc furnace route in the next 15 years.

We are going to see a situation where there is going to be shortage of scrap for the electric arc furnace route. In such a situation, the scrap prices will be high.

Investments in mining iron ore and coal are made on the basis of the projected steel demand. Normally, iron ore and coal mines take four-five years to fructify. In the last 10-15 years, steel demand grew only at 1.8-2 per cent and not enough investments went into iron ore and coal mines; very few mines were opened up in the last 10-15 years.

Existing mines were expanded for the marginal increase of production by 1.5 or 2 per cent. But, now, steel consumption is growing at a faster pace, which requires higher quantities of iron ore and coal, for which the investment has not gone into in the last few years.

New investments are going into iron ore and coal, but they will take another four to five years to fructify. There is going to be a shortage of iron ore and coal for the next three-four years. And their prices are going to be high in thatperiod, which is going to impose an adverse trend on the price of steel. It is also costlier to open a new mine than to expand an existing one. Therefore, the new iron ore or coal that will be mined is going to be costlier.

All these factors — demand, raw material and scrap — are going to create a situation where steel prices for the next 10 years are going to be higher than in the last 10 years. If I were to say that the last 10 years prices of hot rolled coils were at $250, the next 10-year prices probably would be closer to $350. That is what the global scene is.

On the Indian steel industry

I expect Indian steel consumption to grow quite healthily. This year it is growing at 8 per cent. The economy is doing well and I can see in the next few years, the growth rates of at least 7-8 per cent, if not more. Where we are going to have a problem is in producing steel. It is going to be difficult to make the steel available to the Indian consumer.

Though India is a low-cost producer, it is going to have a problem because of the fact that when you want to graduate from 35-40 million tonnes to 150-250 million tonnes — that is what the growth rate is going to take us to another 10-15 years — you require lot of new innovations, lot of new thinking, you require a vision. And that vision is iron ore is in forest areas.

How are we going to manage the environmental and social aspects of mining greater quantities of iron ore? This is not the case in Brazil and Australia, where too ore is available but population is not an issue. We need to think of tackling those problems. If you want to produce 200 million tonnes in 2020, which is what I believe India should be making, we are not ready for it yet.

If you want to do something in 2020 of 200 million tonnes, you will have to mine some 320 million tonnes of iron ore compared to 60 million tonnes being mined now. There are environmental, ecological and social issues for which solutions have to be found 20 years in advance. We need to pay attention to the new mining laws and forestry laws that are needed.

The second major problem is scarcity of water. Steel consumes a lot of water. Every tonne of steel requires something like six-seven tonnes of water. Twenty times that water is in circulation. India is not managing that kind of water to be able to afford it to the steel industry. You require good water management.

What we have to do is have a steel vision for India to be able to say, okay, by 2020, I should be able to make 200 million tonnes. For which I should be able to look at mining and forestry laws, the ecological and social impact and also manage water.

On Tata Steel's plans

We are expanding because we know that steel is a strong thing for India. The demand in India, South-East Asia and China will grow. If we control our costs, capital structure and locations, we can be a really big company. What we are planning is to become a 15-million tonne company by 2010. We are well on our way to become that.

In Jamshedpur, we will be 7.5-8 million tonnes by August 2008. We acquired NatSteel, which is 2 million tonnes. We are going to start work on our six million tonnes Orissa project shortly. We are also negotiating with another State to locate another integrated three-million tonne steel plant for which the work will start in a couple of months.

We will fund these with internal accruals and borrowings, wherever necessary. Our debt-equity ratio now is around 0.3 and we would like to maintain that or bring it down even further.

As far as acquisitions are concerned, we do not want to go all over the place. We have to go to relevant markets. We are looking at many regions — South-East Asia definitely is one, which is why we went to NatSteel, and China, Iran, West Asia, Bangladesh, Pakistan. I can see Tata Steel going far beyond 15 million tonnes.

On steel prices

The current market is not sustainable and I am totally against steel prices the way they are today. If they remain this way, the big problem of substitution will take place over a period, which nobody will realise and it will be an irreversible process.

Indian steel prices are lower than the rest of the world. Over the last 25-30 years, the steel industry earned a return less than the cost of capital in the world. The suppliers to the steel industry and the consumers earned much more. You have got three parts of the value chain you can't have one part lower than the rest...

Last year, steel prices were high. The steel industry in the world should have made profits. In 2003, the industry earned even less relative profit than the consuming industry compared to 2002. The reason for that is increasing input materials costs — coal, iron ore, freight, scrap, pig iron, sponge iron. There is no company that can price itself in isolation. Even then, what did Tata Steel do? It dropped for all its direct and bona fide customers prices for flat and long products.

Tata Steel adopted a policy to sell its products to direct customers at prices lower than its competitors and having a maximum retail price for all its products, which is what is sold through the distributors channel without allowing the middlemen to make the money.

We have inefficiencies in infrastructure and we cannot be isolated from the world in terms of prices.

The steel prices are the result of something. If you can control that, then the price of steel must come down. There is no question about it. It does not come down by people reducing the prices.

Impact of China exporting steel once its domestic demand tapers

Even this year, China is exporting a lot of long products. The cost of steel-making in China is higher than in India. I am not so worried that China will export steel. What can happen is it can dump products.

China's downstream manufacturing efficiencies are higher than India's. Its steel is costlier than India but it makes refrigerators cheaper than India. On steel, I am not worried.