The trouble with transporting steel
For India to benefit from capacity targets set in the National Steel Policy 2017, modes of transportation other than road and rail need to be developed first
India’s two leading industry professionals T V Narendran, CEO and managing director of Tata Steel, and Seshagiri Rao, joint managing director of JSW Steel, have wisely taken upon themselves the task of dispelling certain myths about the Indian steel industry, in particular that the mills here do not come up to world standards in terms of product quality and costs.
Narendran is emphatic in his assertion that some steel mills here would easily pass off as “globally competitive and efficient within their premises. But much of that advantage gets compromised when they step outside their factory gates” for procurement of raw materials and egression of finished steel products.
This is because the environment outside mill premises where logistics come into play is largely within the realm of government, both at the Centre and in states. It goes without saying that the infrastructure here whether it is rail, road or water transport calls for considerable strengthening for our industries to enjoy logistical efficiency available to their counterparts in developed countries and also in some emerging economies.
In order to reduce their dependence on the heavily pressured infrastructure, some steel groups, specially Essar and JSW, are putting reliance on environment friendly and cost-effective movement of iron ore through pipeline from mines to mills. Tata Steel, where the logistics cost is around 15 per cent, is to own wagon rakes, build slurry pipelines and set up ports to ease movements of raw materials and finished steel products. Similarly, the majority governmentowned miner NMDC, which is to commission a 3-million tonne (mt) steel mill in the downstream at Nagarnar in Chhattisgarh sometime next year, is building a slurry pipeline for iron ore transportation.
The trend of Indian steelmakers with financial muscle creating facilities to ease logistical pressure they are subject to is growing in recent years. But the nature of the steel industry is such that it requires moving three units of dry bulk items, including iron ore, metallurgical and thermal coal, ferroalloys, limestone and dolomite to make one unit of the metal, which will also requires evacuation to the market here and abroad. The 2017 national steel policy has set capacity target of 300 mt for production of 255 mt of steel in 2030-31. An infrastructure robust enough to handle steel related cargoes of 1.02 billion tonnes (bt) a year by then could only be created by the government with some contribution by the user industry.
Prime Minister Narendra Modi in an address to businessmen recently in the US said India was to invest $1.3 trillion in infrastructure in the next few years. This was in an attempt to present the country in a favourable light among potential foreign investors. Modi’s announcement has delighted the steel industry here for two reasons: First, the promise of a sturdy infrastructure that Indian steel exposed to global competition acutely needs. Second, the promised $1.3-trillion investment in building roads and bridges and sea and river ports and airports will generate considerable additional demand for the ferrous metal. This, however, should not distract attention from the goal to bring down our now exceptionally high logistics cost to as near the world class level of 7 to 8 per cent in the quickest possible time.
Encouragingly for the industry, Dharmendra Pradhan who now has additional charge of steel besides petroleum and natural gas in the Union cabinet says that a key to improving global competitiveness of Indian steel will be to give it a multimodal transport system that will facilitate smooth movement of raw materials and finished products. Logistics cost has two elements. Direct costs are those incurred in the course of moving goods such as warehousing, transportation and any value added services. Mckinsey & Co in a report says that the disturbing feature of the logistics scene in India is the 40 per cent share of indirect or hidden elements in total logistics cost against “less than 10 per cent of the total in developed countries. Indirect costs include inventory carrying cost, theft, damages and loss in transit.”
Narendran says “inconsistencies in logistics result in higher inventories and that translate into inflated inventory carrying cost and working capital. What happens with steel industry logistics outside mill gates has an implication for other cost elements.” This, therefore, underlines the urgency to fill the gaps in infrastructure denying the industry to realise its full potential. In recent weeks from Steel Secretary Binoy Kumar to Odisha Chief Secretary Asit Tripathy did some loud thinking on the best ways to come to grips with logistical challenges faced by the steel industry, which is required to create new capacity of 160 mt in the next 11 years.
Tripathy describes the logistics scene in Odisha, which alone has 30 mt steel capacity of the country’s around 140 mt as “a nightmare” with “evacuation of finished products as well as moving imported raw materials from ports” posing major challenges. The least that Odisha, which is to have one-thirds of the projected national steel capacity of 300 mt in 2030-31 will be required to do, with backing of the Centre, is to have a break from traditional approach to logistics and promote multimodal transportation. Tripathy says: “Odisha has two major rivers, Brahmani and Baitarani, which should be developed into major inland waterways” for transportation of steel related raw materials and finished products. Such goods movement finding much favour in the US and in EU countries is relatively inexpensive and, at the same time, environment friendly.
Interestingly Kumar and Tripathy’s proposal to create steel hubs so that the units in them could have the benefit of common infrastructure also features prominently in the 2017 policy. Hopefully, recent pronouncements by Pradhan and concerned bureaucrats that inland waterways and coastal shipping will be developed to ease pressure on rail and road transport will be followed up by rapid action.
Supporting Narendran’s claim of high levels of efficiency of Indian mills when high logistics cost outside mill gates is not considered, JSW’S Rao says, “Five Indian groups feature in the World Steel Dynamics list of 30 world class steelmakers.”