The Hindu Business Line : When lobbies clash…

As producers of steel, iron ore, forgings and auto components lobby against one another, should the Government tinker with duties to favour one or the other? Certainly not.

When the going gets tough, the lobbies get going! Powerful lobbies belonging to iron ore exporters, steel producers and such consumers as forging and auto component manufacturers have all recently turned hyperactive championing their respective causes and ensuring that the government, in its effort to quell inflation, does not take any action against their interests. Industry associations such as the Indian Steel Alliance, the Association of Indian Mini-Blast Furnaces and the Association of Indian Forging Industry have released prominent newspaper advertisements arguing their cases and seeking protective action from the government. Admittedly, to a neutral observer, the arguments of each of these lobbies appear convincing and persuasive. The fact is that there is a partial element of truth in all of their hyperbole-laden statements. Thus, when the auto component and forgings industries complain how high steel prices are affecting their margins, they appear credible. Not so, however, when they demand that steel producers equate their prices with that of their counterparts in China and the US. Similarly, the steel lobby looks convincing when it points to high iron ore and coking coal prices affecting steel-makers but not really so when it demands that the government should impose a stiff penalty on ore exports.

So, what should the government’s role be here? Should it give in to one or the other lobby’s demands and tinker with duties? Certainly not, because it is neither the duty structure nor the pricing policy of the producers, be they mining companies or steel mills, that is behind the rising prices now. If iron ore and steel prices are on an upward spiral, it is because both these commodities are riding the global price boom. Commodity markets and prices are globally interlinked and there is little use blaming domestic producers for aligning their price structure with prevailing global prices. In a globalised free market, it would be naïve for a forgings manufacturer to expect a steel producer to price his output artificially lower than the prevailing international price. By the same token, a steel producer ought not to expect any concessions from his raw material suppliers, be they iron ore companies or coking coal producers. Companies that produce commodities or use them as inputs should learn to ride out price cycles by increasing operating efficiencies rather than complain against each other and seek government intervention.

The government, for its part, should adopt an even-handed approach without playing into the hands of one or the other lobby. It should by all means resist the temptation to interfere in this dispute, which is all about the interplay of market forces. At the end of the day, the market is the best leveller and if today, consumers of commodities are at the receiving end it may not be too far into the future when the price cycle turns and commodity producers find themselves in the same position.