Subir Roy: India gets competitive in steel

VALUE FOR MONEY

India's competitiveness in services is now spreading to parts of manufacturing. One of such newly emerging sectors is steel.

This is apparent from two developments--one, the increasing confidence of leading Indian players, and two, signs that the country may be emerging as an attractive location for steel making in the eyes of global players.

The most dramatic development in this regard is the decision by the Korean giant Posco to set up a 10-million-tonne steel-making complex in Orissa. The decision came after active speculation that Brazil may pip India to the post.

There is clear logic in the shortlisting of the two countries. South America is the only geography which beats India in costs of steel making.

Posco has declared that the decision to invest in India is independent of any investment plans for Brazil. But what may have tilted the decision in favour of India is its proximity to the region, east and southeast Asia, which is likely to be the main driver of demand for steel in the foreseeable future.

The other dramatic development over a period of time is the slow unfolding of the vision of Tata Steel beyond Indian shores. Tata Steel had emerged as the global least-cost producer several years ago, according to studies conducted by the steel consultancy World Steel Dynamics.

But the same study also noted that Tata Steel was low on global perception of its quality (result of poor brand recognition) and its ability to realise high downstream value.

It is these that are likely to change soon. It has decided to seek US listing, a key step in global brand building that has been undertaken by software leaders like Wipro and Infosys.

The listing decision comes at the head of completing the acquisition of Singapore-based NatSteel, with manufacturing facilities in seven countries in the region, which will straightaway add 2 million tonnes to the 4-million-tonne capacity of Tata Steel.

By 2008, Tata Steel will have raised its Jamshedpur capacity to nearly 8 million tonnes, plus it will have embarked on a greenfield project to create a 6-million-tonne capacity in Orissa.

It is interesting that the same company had a few years ago gone quite far to set up a greenfield project in the same state, but changed its mind and gone in for expansion in Jamshedpur itself.

The official reason given for this change of heart is that the earlier project plan involved someone else building the port (uncertainty) whereas the present project has the Tatas also building the port needed.

While that can be the technical reason, the fundamental one may be a new willingness to think big, which was earlier not there.

Group Chairman Ratan Tata has articulated this new thinking by saying that the company was already one of the most "profitable" steel makers in the world; the new vision was to become one of the most "admired".

What has brought about this change? One is the ambient psychology. If India keeps shining and the rest of the world buys the shining story, then sooner or later a new confidence will emerge.

Two, it is the reality underlying the psychology. Import duties on steel came down from 25 per cent to 5 per cent over just eight months last year.

This has undoubtedly been made possible by galloping steel prices globally and in India since 2002-03, enabling one steel company after another to wipe out past losses.

But despite the price rise, today domestic steel prices are lower than import parity prices. If you consider domestic imposts and regulatory costs, which cannot be neutralised, the effective rate of protection is now zero or negative.

What makes Indian steel, or India as a location for steel making, globally competitive? Ingres, a division of ICRA, has listed the following advantages and disadvantages of the Indian industry.

India's per capita steel consumption is very low. In view of the likely growth of incomes, and consumer and infrastructure spending, domestic demand is likely to be buoyant in the foreseeable future.

The low Indian cost of capital and skills and also the easy availability of iron ore are great pluses.

As opposed to this, India suffers from the disadvantage of a shortage of other major inputs like coking coal, coke, and scrap. Its energy costs are high and infrastructure facilities poor.

Also, labour productivity is low. The important point is that while the advantages are likely to remain, some of the disadvantages may go away. The infrastructure by all accounts will improve, energy costs are likely to go down at least marginally through a wider use of natural gas, and expansion and efficiency gains in mining and electricity generation.

And improvements in labour productivity in all likelihood will keep ahead of the rise in wages.

A commoditised process like steel making, which is also somewhat polluting, should have moved extensively to a country like India long ago.

It is the misguided policies (steel prices were deregulated in 1992) and the inward-looking attitudes that they created among Indian businessmen which prevented India from reaping the advantages that should have automatically come its way as a result of the emerging global division of labour.

Even now a lot remains to be done. B Muthuraman, managing director of Tata Steel, says that we are not ready to produce 200 million tonnes of steel by 2020 as that requires major policy decisions, involving both the infrastructure and the environment, that have yet to be taken.

Why 200 millions, when production last year was a mere 37 million tonnes? Well, if per capita consumption in India was 20 kg and in China 200 kg, then you know the distance that needs to be covered.

According to one projection, by 2020 Indian demand will be 130 million. If you have the ambition to become a major steel exporter to the world, you have to add that much more to capacity.

The opportunity is that Indian costs are currently competitive. The challenge is to realise that opportunity.

sub@business-standard.com