Global analysts are bullish on the Indian steel market, despite sticky issues, such as land and mining rights, which led ArcelorMittal and Posco to withdraw from projects recently. Nicolas J. Sowar, Global Metal Sector Leader at Deloitte, feels skilled manpower, rich iron ore and a big population will continue to boost the Indian steel industry. Excerpts from an interview:
How do you see the Indian market at present?
China has over 200 million tonnes of over-capacity. We can talk about India's desire to have 300 million tonnes capacity, but unless you have a competitive advantage, a lower cost structure, better technology and more efficient energy, any extra capacity you build will be problematic. I think, in the long run, steel companies in India are going to do well. Still, there is excess capacity, some of which needs to go away. But, directionally speaking, India has got opportunities. You have rich iron ore. You have a skilled workforce. But, you have do not have coke and the required energy, and these could be concerns.
However, adoption of the DRI (direct reduced iron) process is a big deal. With that structure, you will have one of the lowest costs. So, I would rank India with Russia, and sometimes with Brazil… as a great place for business. And, quite candidly, the coastline which you have, you can be an exporter of not only iron ore, but steel, too.
However, there are some impediments. One of them is land rights. I think the issues related to Posco and ArcelorMittal are absolutely real.
State Governments say land banks are available. Companies need to pay and get the land. Will this solve the problem?
I am not sure about the specifics. Now, you have just distorted the whole model. The model is based on where they see their components, not on what somebody is asking them to pay.
Posco is one of the finest steel companies in the world. It clearly had serious intentions of being there. But with the kind of cost issues involved, we have to respect both companies… I do think that land rights, iron ore rights, lease rights or mining rights could be problematic. Then there are challenges with energy, natural gas, prices of electricity and coke.
Still, so many things are done well here… I see 5 per cent growth as good and sustainable. I am very bullish on the Indian steel market. I would suggest that companies make steel being used in consumer products, such as automobiles and appliances. Such an approach will have dual benefits.
First, the appliances industry needs a large labour force, unlike the steel industry, and second, it will get an impetus from the growing middle class.
You are bullish on the Indian market and talked about supply side. What is your perspective on demand?
I personally think that demand will take care of itself. Right now, there are issues. But, I believe in the potential of this country. One of the positives is 1.2 billion people. Infrastructure needs to be re-developed. That's what happened with China. It is infrastructure; it is long products that boosted demand. Ultimately, China will become a great producer of what we call consumer steel: flat steel. But, here, the best opportunity is for long products. This country has got an extremely skilled labour force, smart people and competitive prices. So, I am not sure why this should not continue to help.
With the economic slowdown and consequent impact on industries, how can Indian steel companies reduce costs?
I think you need to manage your balance sheet by reducing working capital. Try to be more efficient. You need to look at the supply chain from start to finish. Every employee has to understand the key matrix to achieving cost advantages. Keep things running. If a blast furnace stops working, the company will be out of business.