A new vision of steel for development

by Rajesh V. Shah

The Government of India recently announced a highly ambitious vision for India’s steel industry and future demand and circulated a New Draft Steel Policy 2017 for public discussion.

This document is an outline for attaining a most challenging target capacity of 300 million tonnes of crude steel capacity by 2030, which is anticipated to be the demand for steel then. To put this figure in context, India is producing only around 100 million tonnes today while China alone produces around 750/800 million tonnes per year, which is an astounding 50 per cent of global output. Besides it will require India to add capacity every year at a rate not even remotely achieved in the past.

Very correctly, in its first paragraph this Draft Policy points out that installation of adequate steel making capability is of strategic importance and especially vital for a large country. Hence every enabler which supports competitive Indian steel making capacity has not only economic value but adds to our national security.

India’s per capita consumption of steel, as most of its other comparative necessities such as energy or plastics, is much lower than global averages. The Government has expressed confidence in achieving the high targets set for building roads, ports, new cities, housing and expanding the railway network. This rapid growth in infrastructure is expected to be accompanied by an equal, if not faster, need for all forms of vehicles and consumer durables. All of which have and will continue to have steel as one of their principal constituents.

It is thus unmistakably clear that if enough steel making capacities don’t exist within, India’s short term and long term economic security is at peril, especially when the only country which could then supply steel in large quantities is China, with which India already has a huge negative trade balance.

The ‘Steel Vision 2017’ compiles quite thoroughly all the predicaments facing Indian steel companies, such as non-availability of key raw materials like coking coal and key alloys. It further elaborates that acquiring land, establishing key linkages such as water, power and transportation, obtaining iron ore mining rights and crucial environmental clearances, delay construction of new projects significantly. High prevailing interest rates, long gestation periods to build steel plants and the huge debts, much of them still under corporate debt restructuring, faced by many of the Indian steel companies, further compound the difficulties to expand or construct greenfield units. Indian banks have become extremely vary after living through several steel demand and price downturns, to lend easily to the Indian steel sector. Further, the current initiatives of the Government aimed at assisting the Indian steel industry to recover, will have to be rolled back in the near term.

Given all that is stacked up against Indian steel companies, including those in the public sector, it is completely unlikely that anywhere near 300 million tonnes in capacity can be achieved within a decade. India would remain undesirably dependent on imports, mostly from only one country, China, or accept impaired development.

However, the future doesn’t have to be so gloomy if the Indian Government can accept the reality which comes through transparently in the Government’s own Draft Steel Policy. They must be compelled into sacrificing the holy cow – the deeply ingrained concept of Government-owned steel plants.

The Government of India owns a majority stake in six steel plants, producing only about 18 million tonnes annually. These well established units are most valuable as they have tens of thousands of acres each of land in their possession and are blessed with extraordinarily good linkages as well as operating mining rights for iron ore and coal. Each location can easily construct plants upwards of 25 million tonnes capacity annually, together creating the steel capability critical for India’s prosperity. It is totally possible, if truly land efficient layouts are employed to achieve upwards of 25 million tonnes of capacity in each of these six locations. This would mean that 10 times the existing capacity is possible in this Government owned plants. Yet there is no way this will happen if they remain in the public sector as they have been most ineffective in project management due to various inbuilt constraints. Projects are delayed at least five years beyond set deadlines and their manpower productivity is abysmally low.

The only path ahead is for the Government to disinvest each of these six plants to large, qualified and competent bidders, mostly international, and perhaps to one or two Indian firms, with firm guarantees from them to invest and expand to mandated levels of capacity. Investment of nearly $150 billion of low cost funds over a decade will be essential and which can come almost entirely from international sources.

It is for the Government to create sufficient public support as the Vajpayee led BJP Government did in the past, when several industries were disinvested, and those today are models of corporate efficiency, continued investment and enhanced employment. The Government exchequer could also realise over $15 billion through disinvestment of their stake in these public sector steel units.

Japan, South Korea, China and France, the only remaining major steel producing nations, should be wooed by India so that they encourage and support their countries’ premier steel corporations to bid for and take over the Indian public sector steel plants to expand them rapidly to competitively meet all of India’s future needs. All Government assistance and assurances for safeguarding such unprecedented foreign investment in a single sector must be promised and given. Existing employees would in any case have nothing to fear as they are protected by law and their tenure can be ensured as part of the contract with the new owners. Such massive expansion of India’s steel capabilities would necessarily generate millions of skilled jobs, directly and indirectly.

If the infrastructure, transportation and housing aspirations of the billion plus Indians are actually to be realised and, in the process, essential long term economic security is not to be put at stake, then this rational route needs be adopted without delay.

Make in India absolutely commences with making steel in India.

Rajesh V. Shah,Co-Chairman and Managing Director & Former President of the Confederation of Indian Industry (CII). SteelRajesh V. Shah is Co-Chairman and Managing Director, Mukand Ltd, and a Former President of the Confederation of Indian Industry (CII).

About the Author: Rajesh V. Shah