Posted in Marketing & Strategy Articles, Total Reads: 2345
, Published on 23 October 2013
The steel industry in India is more than a century old with TATA Iron & Steel Company (TATA steel) being the first plant to be established in the year 1907. After Independence, steel was a regulated sector in India till 1991 with only the government owned Steel Authority of India (SAIL) and the pioneer TATA steel as the major players. After the Government decided to open up the economy considering the 1991 crisis, the sector was deregulated. Slowly but surely, private players started to build their steel plants.
Currently, India is the fourth largest producer of steel in the world and is expected to be the second largest producer by 2020. In spite of this, per capita consumption of steel in India is 55kg much lesser than the per capita consumption of the world which is at 206kgs. Over the last two decades, as the GDP of India consistently grew, the demand for steel also saw a positive growth, which further encouraged the private players to invest in technology to produce steel efficiently. As a result of The New Industrial Policy Regime and abolishment of price regulation, few private players went on to become major steel producers in the country even though the market leader position is still held by SAIL. Capacity wise the major steel makers in India are:
1. Steel Authority Of India (SAIL) 2. JSW steel 3. TATA steel 4. Essar Steel
The Global Financial meltdown
The dream run of the steel companies continued for well over a decade since liberalization. But with global financial crisis of 2008, the global steel demand and hence the rates of steel came crashing down. One might tend to think that the GDP of India is still expanding and hence the demand would continue to grow. It is, in fact true that the steel demand in India was increasing even after the Global financial meltdown though for the past few months demand has been sluggish. The steel production has increased by 33% from 2008. Also, the per capita consumption of steel in India indicates immense growth possibilities. In spite of these factors, Indian steel industry is facing problems. Let us look into the major problems being faced.
1. Raw materials
India has large reserves of iron ore mainly on its western and eastern belt. It is estimated that India has around 30 billion tonnes of iron ore reserves. But mining accessibility and availability of these ores to the private steel sector is not streamlined. Private steel companies do not have the raw material security to successfully expand their capacities to meet the rising demand. Along with the infrastructure problem, presence of the ores in environmentally sensitive areas has complicated the problem. There is ban on mining on few of the areas in western belt with high iron ore content. On Eastern belt, the problem of Naxals has been restricting the access to these reserves.
2. Government policies
The Government of India, to improve the trade relationships with few of the developed countries has entered into trade partnerships. The comprehensive economic partnership agreement (CEPA) with Japan and South Korea implies that import duties on steel have been drastically reduced. These countries have high production levels but their domestic steel demand is declining. The excess steel is now being flooded in the Indian markets, thus driving down the price.
3. High capital requirement
Steel is one of those industries which requires very high initial capital requirement. The capital costs increase with the kind of technology that needs to be procured. It is a well-known fact that by implementing higher level of technology and automation, a firm can extract more efficiency from its facility. But the availability of funds and high interest rates are deterrence for both brown field and green field expansion plans.
4. High interest rates
The rate of borrowing for capacity expansion in Indian is very high compared to other countries. Indian industries are charged 14% interest whereas in the interest rates in Japan in 2.4%. The Indian companies need to recover these costs when deciding on the final price. Other countries’ manufacturers will have a lower interest cost, hence their final costs will be lower than domestic producers.
The above mentioned factors have put the Indian steel industry in a state of disadvantage. To overcome this, the Government must come up with a policy framework addressing these issues to strengthen the domestic industries. A fine balance between sustaining the industries and protecting the domestic consumers from price rise needs to be maintained. On the other hand, the steel industries need to innovate and make their process more efficient, thus reducing their production costs, to survive in this scenario.
The article has been authored by Deepak P Bhat, TAPMI, Manipal