Can the sector Emerge as winner?

The year 2011 has been bad for Indian industries but the steel industry, plagued as it is with lack of clarity on land acquisition, lack of raw material and myriads of other trouble, has been hit particularly hard. In fact, with the growth in demand for steel pegged at 8 per cent by the Ministry of Steel for the 2013 fiscal, it is unlikely that the industry will be able to meet the demand. If the present scenario continues, by 2020 the production shortfall will force the country to import 50 million tonnes of steel every year.

The biggest issue facing the industry is the inconsistent supply of raw materials. We import as much as 30 million tonnes of coking coal, expected to rise to 43 million tonnes by 2015. Though India produces the largest amount of coal after the US and China, the resources in the country are of low quality. Indian coking coal is high in ash content and requires imported high quality hard coking coal for blending which makes the cost of importing lower than using the domestic coal. Moreover, there are multiple policy issues which are stagnating the development of coal resources in the country.

Out of 216 coal blocks allocated by the government to the private players, which had a total potential of about 200 million tonne per annum, only 28 such blocks are producing coal till date with a total capacity of approximately 30 million tonne per annum. Coal imports in India touched the highest ever figure of USD 17.5 billion in last fiscal, recording an astonishing growth of 80 per cent and being the third largest import item for the country after crude oil and gold.

The lack of coal has resulted in the fact that most of our Iron ore is not utilised. We are exporting 60 million tonnes of iron ore for the lack of production units capacity in the country. In an attempt to put a check on the amount of ore exported, the government has raised the excise duty from 20 per cent to 30 per cent in December 2011, making Indian iron ore overpriced in the world markets. To worsen the issues, ban on mining in Karnataka forced many private players like JSW steel to run their plants under capacity or find alternative sources for iron ore. A revised national mineral policy to encourage modern and systematic exploration practices in both brownfield and greenfield tracts to build up additional reserves and resources is the need of the hour.

The other major issue is land acquisition. Projects from Posco, Mittal and SAIL(Brahmani Industries project) are stuck due to their failure to secure land. There has been no clarity on laws
governing the acquisition of land for such projects.

Senior Director, Deloitte Touche Tohmatsu India, Kalpana Jain says, “Current land acquisition provisions are extremely cumbersome and time consuming. Delay in environment and forest clearances, which takes anywhere between 18 to 24 months is also an issue.” The way in which mega steel projects have been stalled due to environmental issues and last year’s open confession by the then environment minister, Mr. Jairam Ramesh that he has had to twist several regulations while issuing environmental clearances to various big projects due to pressure from various quarters from within the government, indicate that there is a lot of ambiguity regarding environmental clearances.

In the last six years, a total of 222 memorandum of understanding have been signed between various state governments and steel producers of which less than 10% of these projects have gone on the floor. This translates to about a total of Rs 2000 billion investment disallowed – a fact that discourages future investments from international players.

 Even if it can handle these start-up problems, the industry still remains severely hamstrung with issues logistics, back dated technologies and internal and external transportation. A quick ramp up of the Indian ports is essential which suffer from a smaller draft size of around 20 mts as compared to international standard size of 30 mts and over utilisation of larger ports due to insufficient expansion. Internally, transportation issues like slow roadways, covering 300 kms a day as opposed to 1000 kms abroad and a lack of dedicated railway system like the ones in China, Russia and even Ukraine pose problems.

However, if we are to take the word of officials the future does not look as gloomy. Says A.S. Firoz, chief economist, joint plant committee, ministry of steel , “Despite all the problems with the sector, it has got no market risk with a huge domestic demand and there is a keen effort on the part of all the stakeholders to resolve the issues. So we can hope for the country to become the third largest steel producer in the coming days.” Whether or not this all bravura will be decided by the new steel and manufacturing policy and its effective implementation.