Why is Steel losing its Sheen?

After having waited for about six years to get his $ 30 billion projects off the ground (one in Odisha and the other in Jharkhand, each capable of producing up to 12 million tonnes of steel per annum), steel tycoon Lakshmi Niwas Mittal said at a recent seminar in New York that the Indian government was condemning millions to stay poor by not expediting industrialisation. It was a damning indictment of the Indian government. Naturally, the observation didn’t go down well with New Delhi. But, Mittal only said what most steel barons in the country have been grumbling about for a while, first privately and now publicly: The zing is out of steel, negativity pervades the sector.

Rough estimates suggest that at least 35-40 million tonnes of capacity has been cancelled or postponed over the past few years, putting a question mark over the steel ministry’s dream of taking the installed capacity to 200 million tonnes from 90 million tonnes now. The investment envisaged in the new capacity was a whopping Rs 630,000 crore, bulk of it from private steel producers. A large chunk of that is unlikely to happen in the foreseeable future. All told, 222 memoranda of understanding were signed by steel companies, which included the likes of ArcelorMittal, Posco, Tata Steel, JSW Steel, Bhushan Steel and many others, with the mineral-rich states of Jharkhand, Odisha and Chhattisgarh, starting from 2005. But, seven years later, wrangles over land acquisition, slow-paced environmental go-aheads, controversies over allocation of raw material (iron ore and coal) and a huge shortage of iron ore have held up a majority of these projects.

Consider the case of Posco. The South Korean giant had signed an agreement with the Odisha government for a $ 12 billion plant in 2005, but, it’s been an unending battle since, mainly over land acquisition. On June 21, the memorandum of understanding finally expired; hectic parleys are now underway for renegotiation in the terms and conditions. The story repeats itself for almost all projects. That’s the reason for Mittal’s remark.

Who’s responsible?

In most of the cases, the buck stops at the government’s door: Either at the Centre or in the state. In Jharkhand, the rehabilitation and resettlement policy is yet to be notified, making acquisition of large tracts of land difficult. For companies that dared to purchase land directly from villagers and tribes, getting clear land titles is almost impossible. Jharkhand accounts for 40% of the new capacities announced. Bhushan Steel director, Nittin Johri says everything that is stuck “is at the government’s level and only the government can undo it”. Essar Steel India managing director and CEO Dilip Oomen adds: “In order to encourage the creation of capacity, there should be single window clearance for all approvals. Steel is a capital intensive industry: No investor can afford project delays, as this will add to the project cost.

If India does not create capacities to meet the growing demand, it may end up becoming a large importer of steel.” Not everybody agrees the sector is in the dumps. A World Steel Association (WSA) study, which covered 62 countries, showed in October 2012, growth in crude steel production in India over the previous year was 5.7%, close behind China at 6%. And, over a 10-month period, India overtook China (2.1%) with 3.8% growth. But, there could be a slowdown ahead. WSA had said in its October study that due to unfavourable domestic and economic conditions, India’s steel demand growth was projected to slow down to 5.5 % in 2012 and five per cent in 2013; WSA’s projection for 2012 was 7.9 % in October 2011. Rashtriya Ispat Nigam CMD, A P Choudhary says the ministry of steel has achieved its target of total production capacity of 90 million tonnes by 2012. The catch here is that most of this capacity addition has come through brownfield expansion, and not new projects.

The signals are clear

Average capacity utilisation in India is at about 80 %, around the same level as that a year ago. The difference from last year, however, is that prices have dropped in the domestic market by about $ 120 a tonne on account of imports. “ As on March 31, 2012, the installed capacity in the country was 90 million tonnes, but production was 70 million tonnes,” JSW Steel Joint Managing Director &Group CFO Seshagiri Rao says. JSW Steel’s factory at Vijaynagar in Karnataka was working at 80 % of capacity in October – it is now down to 70 %. There are other instances as well. Hospet Steel, a joint venture between Mukand and Kalyani Steels which can produce up to 700,000 tonnes of steel in a year, is operating just one of its three furnaces.

To contextualise the figures, data compiled by the Joint Plant Committee of the steel ministry shows during April- October this year, production grew 3 %, whereas real consumption grew by 4.7 %.

Tussle for ore

Did the domestic players then fail to cash-in on the consumption growth to full extent? The industry would probably reply in unison with an emphatic ‘yes’. The reason: An acute shortage of iron ore and unrealistic prices. The current export price of iron ore by state-owned National Mineral Development Corporation, or NMDC, is $ 120 a tonne, which translates into an ex-mine price of Rs 1,360 a tonne. For domestic producers, NMDC’s sale price is Rs 2,610 a tonne. This miffs the local steel producers.

NMDC, on its part, has maintained the pricing mechanism has been laid down by the Supreme Court. What has also happened is that there is no difference between the prices of iron ore in e-auctions and long-term contracts any more. In other words, there are no discounts on long-term contracts as was prevalent a year ago; this reflects the shortage of iron ore in the market – sellers expect prices to rise further in the country and are unwilling to bind themselves to long-term contracts. “The prices of iron ore are benchmarked on imports, whereas they should be based on export parity,” a mining veteran points out. “In spite of higher power tariff and imported coking coal, Indian steel producers had an advantage over their Chinese peers. But, with the current iron ore prices, the industry will soon lose its advantage.” India has approximately 23.59 billion tonnes of iron ore scattered across Jharkhand, Odisha, Chhattisgarh, Karnataka and Goa. Of this, the proven reserves are only 6.3 billion tonnes – the balance is probable and possible reserves. In the aftermath of the ban on iron ore mining in Karnataka, the Supreme Court had permitted NMDC to mine one million tonnes a month, in a bid to provide some relief to the industry. Steel producers, however, claim it is doing just about 700,000 tonnes. The requirement of Karnataka steel producers is about 2.5 million tonnes a month. Karnataka may be the epicentre of the mining mess, but it’s actually widespread. Investigations by the Shah Commission into illegal mining in Goa and Odisha have cleaned up some mess, but, on the flip side, added to the shortage.

But, if the domestic producers couldn’t take advantage of the consumption growth, who did? “Most of the imports are coming from Japan and South Korea. In the past two or three years, imports of hot- rolled coil (the benchmark for flat products used in automobiles and white goods) have increased by six times, primarily on account of the free- trade agreements,” JSW Steel’s head of corporate strategy, Prashant Jain, says. In view of the pressure from imports, the government had increased the duty on most steel products from 5 % to 7 % in this year’s Budget. However, it doesn’t quite affect the imports from Korea and Japan since, under the provisions of the Comprehensive Economic Partnership Agreement, the rate is subsidised at 3.1% for Korea and 3.3 % for Japan for 2012-13. The rate will reduce to zero by the beginning of 2017. Imports of hot- rolled coil from Korea surged 125% and 72% from Japan in 2011- 12. “It’s a misnomer that imports are cheap, but it translates into higher realisation for them by almost $30-$ 35 a tonne,” Jain says.

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