The Hindu Business Line : Whither the steel industry?

The proposed scale of steel-making that is being publicised will need immense funding from the FIs and the demand can fall well short of the 80 million tonnes projected for 2011-12 by the Plan panel, as has happened in the past.

Dipankar Bose

Players of all kinds, old and new, large or small, are now talking of making more steel. Some are proposing new plants while others want to expand the existing plants. According to press reports, more than 10 million tonnes (mt) of new steel capacity is to be added in the next four to five years.

Two questions arise. First, nearly three tonnes of raw materials, such as iron ore, coal, manganese, dolomite, etc., need to be moved to make one tonne of steel. One can imagine what huge freight movement the proposed scale of steel-making would entail. Intriguingly enough, the railways have maintained a discreet silence regarding this colossal task, till now.

The second question pertains to demand. Our steel consumption has been rising over the last six years. From 29.19 mt in 2001-02 it rose to 36.37 mt in 2004-05. Afterwards it rose faster and reached 41.43 mt in 2005-06 and 43.74 mt in 2006-07. In fact, between 2000-01 and 2006-07 the total quantum of steel sold in India was 213.5 mt, some 68.8 mt more than what was sold in the previous six years.

This huge induction of new steel goods in the economy has sharply raised the size of the total steel stock and also the proportion of new products to the total stock, thereby significantly increasing the productive capacity in the economy. To utilise this vast stock and the net yearly additions to it at a given level, the domestic steel demand has to rise sufficiently high every year.

Drag factors

But this cannot happen, given the slowdown in housing, our dependence on monsoon, a raging food inflation that is robbing the middle and lower middle class who provide the bulk of demand and the continuously rising steel prices, fuelled by the burgeoning raw material cost.

Therefore, a fairly a large part of the total capacity will remain unutilised reducing thereby the incremental home demand, till the surplus capacity gets exhausted through depreciation and the demand picks up for replacement.

The variation in the annual increase in steel consumption reflects this cyclical phenomenon.

For instance, in the last six years, trucks were sold in large numbers, thereby raising the total number of trucks in the country and the proportion of new trucks in the entire stocks. On both counts, the freight-carrying capacity of the roadways has increased substantially because the new trucks can take far more loads than the old ones.

To keep this enhanced fleet with the yearly net additions, at a given level of capacity utilisation, the freight demand has to rise higher in each successive year — a condition that clearly cannot hold. So, the incremental trucks sales will fall till the surplus capacity is exhausted through wear and tear.

Price Pressures

China, the main importer of our steel, has become a net exporter in the world steel market since November 2006 and its exports are exerting a downward pressure on world steel prices. This will intensify further with rising production as indicated by its soaring demand for iron ore.

The situation is somewhat similar to that of mid-1997 to 2002 when the vast South-East Asian economy with its huge imports, suddenly collapsed with the fall of the Thai baht on July 2, 1997. It was followed by all the other economies in the region, including South Korea, the strongest economy.

This led to a global demand slump with a fall in our exports which coincided with a decline in home demand. This is because we were already carrying a substantial stock of new steel goods sold during the preceding three years when the going had been good.

Afterwards, though consumption improved, surplus capacity in Europe and the US had pulled down world steel prices and domestic prices had to be cut sharply to ward off imports. All this had put the Indian steel industry through troubled times from 1997-98 to 2001-02.

From the early 1990s to 1997, when steel demand had been rising fast, every second company was commissioning a feasibility study for making steel, buoyed by the rosy projections of the Planning Commission that failed to materialise.

Many companies joined the fray and enormous loans were sanctioned against big plans. In all, about Rs 35,000 crore was borrowed from the Industrial Bank of India (IDBI) and the Industrial Finance Corporation of India (IFCI) and other financial institutions (FIs) at the high rate of interest prevailing then.

FIs take a hit

With the global slump, Indian steel-makers fell into bad days, followed by defaults and even closures. Only about Rs 5,000 crore was paid back to the FIs.

Both IDBI and IFCI collapsed and had to be revived with huge infusion of public funds, but only as commercial banks and not as term lending development banks, nursing industries, a role that had rightly made them famous in the then developing world. This was an irreparable loss for the nation, especially for the medium-scale industries, which keep the small sector going.

Of course, times have changed with much lower rate of interest now, than that in the late 1990s. Neither will Chinese imports collapse overnight. So, 1997 to 2001 is not likely to be repeated in world steel in the near future.

Still, there are reports of substantial excess capacity in Europe and the US which will rise because of the impending recession in the US. Further, the proposed scale of steel-making in India that is being publicised will need immense funding from the FIs and the demand can fall well short of the 80 mt projected for 2011-12 by the Planning Commission, as has happened in the past.

Again, the steel companies will clamour for public funds when things go wrong, pleading that they belong to the core sector. The government may placate them.

There is another possibility. A large part of the iron-ore mined might be exported, given the current record high price of the ore, which is predicted to rise by more than 50 per cent in the next year, thanks to China’s zooming demand.

(The author is a free-lance writer on industrial issues.)