RITA SINGH, CMD, Mideast Integrated Steel Limited, Mesco Group
Odisha has played a pivotal role in the emergence and growth of the steel industry in the country. Blessed with abundant iron ore, the state made rapid strides in steel. Besides iron ore (32.9% of country’s reserves), Odisha has abundant reserves of bauxite (59.95%), chromite (98.4%), coal (24.8%) and manganese (67.6%), which provide immense opportunities of trade and manufacturing.
However, with changing times and circumstances, there may be merit in making a fresh approach towards policies to revitalize these sectors. We all know mining and steel sector hold the key to economic development of Odisha in terms of generating revenue for the government and creating industrial jobs for the people. Economist Galbraith had said in the context of dealing with uncertainties, “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.” I think policy-making is as challenging as forecasting, and one gets it right only by chance.
There is no denying that there is global overcapacity in steel, which is led by China. In India the low capacity utilization is not due to global overcapacity but due to high cost of production of Indian steel leading to higher imports of steel together with manufactured goods using steel finding their way in the market. Over the next decade India will be the only country showing consistent increase in demand for steel, however, the issue before us is whether the demand will be met with Indian steel or imported.
At a time when global steel capacity, especially in China, is winding down, we in India have plans to increase the capacity three-fold to 300 million tonnes (mnt) in the next decade. In the next four years, China has announced it would reduce capacity by 200 mnt from the existing capacity of 1,100 mnt. Over the long term, demand for finished steel in China is expected to remain at 550-600 mnt only while the demand for steel in India will increase.
In the globalized industry, the cost of steel making must be competitive. Having surplus capacity, China would naturally push exports, which has already crossed 110 mnt in 2015. Indian steel must compete with Chinese, but this needs level playing field. According to independent estimates, making steel in India is about USD 100 per tonne more expensive than in China, due to higher costs related to finance, labor productivity and logistics. Only advantage that Indian steel industry has is abundant and good quality iron ore and ample coal although, not coking. However, our regulatory system does not allow mining for coal, iron ore and other minerals to flourish. We need to reboot the mining sector.
The stress in steel sector has constrained the banks to undertake fresh lending for steel capacity expansion; therefore, it is incumbent upon the states and centre to come up with out-of-the-box solutions for dealing with the debt problem of the sector. High capital cost is a structural problem of the Indian economy and it would remain so in the near future, hence, one possible solution for this challenge could be to create a special window of lending for the steel industry so that cost of capital can be reduced. I would suggest that steel industry is critical for Make in India campaign and therefore should be accorded status of ‘Strategic Industry’ for which innovative norms for raising capital at a competitive rate must be crafted. If we don’t get our act together, steel sector will not be able to participate in the Indian growth story. I expect Odisha to take lead in promoting steel industry as it has several natural advantages.
The third element of cost structure of steel manufacturing is ‘Logistics’. While building transport infrastructure (ports, railways and highways) will take time and should be prioritized as has been done in the union budget.
Some immediate steps can be taken like applying normal railway freight rates as against premium freight rates on steel industry.
At the state level, the government should ensure that all bottlenecks in the transport of minerals are addressed. There are several administrative steps that can be taken. For example, supply of raw materials to steel mills is affected due to restriction on movement of rucks during daytime – some way should be found for increasing the time for movement of trucks from mines. Another issue is state level permissions, which should be expedited. Cases relating to expansion of mine capacities, right of way for slurry pipelines, improving roads, incentivizing mines for increasing production, having regulators for fixing road transportation rates are some of the steps that the Government of Odisha should take.
The issue of allocation and pricing of all natural resources has been a big challenge through the history. There is no one right way to allocate and price natural resources. Not only minerals but land and water too are mired in controversy when it comes to allocation and pricing of these natural resources.
So long as profit derived is limited, the policy choices in allocation and pricing of natural resources remain below the gaze of controversy. Iron ore prices are down today, and one does not hear much noise. We are currently experimenting with auction route for minerals and only time will tell how successful this method is.
Late Biju Patnaik had the vision of making Odisha the steel hub of India. It was his idea that saw emergence of Kalinga Nagar. In the context of Odisha, the cost of production of iron ore should be comparable with the best in the world. Consider the cost of the iron ore delivered at China port for companies like FMG, an Australian mining company, which is at USD 29 per tonne. These types of costs are unthinkable in Odisha; despite having the resources, we are unable to achieve economies of scale due to regulatory constraints and other factors.
High rate of royalties, new cess like DMF and NMET, high transportation costs and delays in movement together with export duties make Indian iron ore not only globally uncompetitive, but it also deprives Indian steel industry of its raw material advantages. The argument of inter- generation equity for conserving minerals is based on the assumption that minerals like iron ore and others should be conserved for future generations. In my view, technology will make iron ore redundant in the next 30 years or even earlier. This opportunity of development will be lost forever. We must remember Australia exports close to 750 mnt of iron ore and Brazil close to 400 mnt. India can also do the same. There is a case for removing export duties on all types of iron ore and encouraging increase in production. This would spur investments in iron ore mining and steel sector.
I want to conclude with a quote from Bill Gates, “If you go back to 1800, everybody was poor. I mean everybody. The Industrial Revolution kicked in, and a lot of countries benefited, but by no means everyone.”
Most recently China has benefited from the manufacturing revolution, but we in India are somehow reluctant to get rich. We can still do it, for we have 1.25 billion plus people.
Source: Steel 360 Magazine May’16 Issue