GOV­ER­NANCE FLAWED NEW STEEL POL­ICY

It is time to work to­wards a tech­no­log­i­cally ad­vanced and com­pet­i­tive steel in­dus­try. This can be brought about by in­duc­ing in­no­va­tion and dis­in­vest­ment in the steel sec­tor.

Gfiles - - FRONT PAGE - by K SUBRAMANIAM

DO­MES­TIC steel in­dus­try is still re­cov­er­ing from the last years’ global slump in the sec­tor fol­lowed by largescale dump­ing in In­dia, par­tic­u­larly from China. Short-term mea­sures, such as im­po­si­tion of anti-dump­ing duty on cheap im­ports, did pro­vide some respite to the In­dian in­dus­try. Still steel com­pa­nies ac­count for lit­tle less than 20 per cent of the to­tal non-per­form­ing as­sets (NPAs). Thank­fully, coun­try’s eco­nomic engine is run­ning fast as In­dia is one of the fastest grow­ing economies. The Modi gov­ern­ment is mak­ing ef­forts to ac­cel­er­ate it fur­ther by fo­cus­ing on in­fra­struc­ture cre­ation, which has a di­rect bear­ing on the do­mes­tic steel sec­tor. In­dian steel sec­tor has grown rapidly to be­come the third largest pro­ducer af­ter China and Ja­pan. It also holds the same global rank in terms of con­sump­tion. Coun­try’s sus­tained eco­nomic growth makes it a lu­cra­tive mar­ket for global steel giants, hence there is an ur­gent need to strengthen do­mes­tic steel com­pa­nies and make them com­pet­i­tive. The in­dus­try is of strate­gic im­por- tance to In­dia as it is the back­bone of key in­dus­trial sec­tors—con­struc­tion, in­fra­struc­ture, power, en­gi­neer­ing, au­to­mo­bile and con­sumer prod­ucts. The sec­tor con­trib­utes about 2 per cent of the coun­try’s GDP and em­ploys over 5 lakh peo­ple di­rectly and about 20 lakh peo­ple in­di­rectly. Re­al­is­ing its strate­gic im­por­tance for the In­dian econ­omy, the gov­ern­ment re­cently an­nounced the New Steel Pol­icy (NSP) 2017. Al­though it seeks to give im­pe­tus to the steel sec­tor by ad­dress­ing both de­mand and sup­ply is­sues, it re­peats some key is­sues enu­mer­ated in NPS 2005 that ham­pered com­pet­i­tive­ness of In­dian steel com­pa­nies vis-à-vis their global ri­vals. A sim­i­lar pol­icy doc­u­ment was pre­pared 12 years ago (NSP 2005). It had pointed at six key im­ped­i­ments that re­quired ur­gent pol­icy in­ter-

ven­tion—min­ing is­sues, cok­ing coal im­port de­pen­dence, low R&D in­vest­ments, high cost of debt, in­ad­e­quate in­fra­struc­ture and low pro­duc­tiv­ity. Even af­ter 12 years of pol­icy in­ter­ven­tion the do­mes­tic steel sec­tor is still fac­ing these chal­lenges. The gov­ern­ment needs to re­cal­i­brate strate­gies in NPS 2017 to “ad­e­quately” ad­dress these is­sues. It is ap­pre­cia­ble that NSP 2017 is a flex­i­ble doc­u­ment that can be amended depend­ing upon the ex­pe­ri­ence gained dur­ing im­ple­men­ta­tion and mar­ket dy­nam­ics.

The Am­bi­tion

IN 2015, when steel con­sump­tion in China, Ja­pan and USA reg­is­tered neg­a­tive growth, In­dia con­sumed 5.3 per cent more steel than the pre­vi­ous year. In 2016, In­dia re­tained its po­si­tion as the fastest grow­ing ma­jor steel econ­omy in the world. Now it plans to al­most dou­ble the ca­pac­ity to 300 mil­lion tonnes (mt). NPS 2017 projects crude steel ca­pac­ity of 300 mt, pro­duc­tion of 255 mt and a ro­bust fin­ished steel per capita con­sump­tion of 158 kg by 2030-31. The key fea­tures aim for devel­op­ment of glob­ally com­pet­i­tive steel man­u­fac­tur­ing ca­pa­bil­i­ties—cost-ef­fi­cient pro­duc­tion as well as do­mes­tic avail­abil­ity of iron ore, cok­ing coal and nat­u­ral gas. Un­der this pol­icy, the Steel Min­istry has com­mit­ted to en­sure avail­abil­ity of raw ma­te­ri­als like iron ore, cok­ing coal and non-cok­ing coal, nat­u­ral gas, etc., at com­pet­i­tive rates through pol­icy mea­sures. How­ever, the pol­icy needs to go much fur­ther if it re­ally aims to achieve its stated ob­jec­tives within the time frame.

The Over­sight

The am­bi­tious ca­pac­ity ad­di­tion pro­gramme would not take off in a vac­uum. It must be syn­chro­nised with sim- ilarly ro­bust de­mand. Who will dare to in­vest in cre­at­ing ca­pac­ity if ex­ist­ing fa­cil­i­ties are un­der-utilised? One of the big­gest pol­icy trig­gers should have been on im­prov­ing de­mand for steel. The NSP 2017 is also lever­ag­ing upon the gov­ern­ment’s am­bi­tious plans like ‘Hous­ing for All’ and ‘Make in In­dia’ cam­paigns. There is spec­u­la­tion that the gov­ern­ment may make it manda­tory for lo­cal projects to buy lo­cal steel. While these are wel­come ini­tia­tives, it can­not be a long-term so­lu­tion be­cause of be­ing pro­tec­tion­ist in na­ture. As de­mand is al­ways as­so­ci­ated with price, steel de­mand in In­dia can have a boost only if the coun­try can have good qual­ity steel at af­ford­able prices.

Com­pe­tency

It is a point to pon­der that coun­tries like Ja­pan and Ko­rea, and to great ex­tent China, who are de­pen­dent on im­ported iron ore and cok­ing coal, can sell cheap but qual­ity steel prod­ucts to In­dia. This is mainly be­cause of abysmally low level of in­vest­ment in R&D by our steel pro­duc­ers, which is less than 0.5 per cent of sales as com­pared to 1-1.5 per cent by the Ja­panese and Korean steel mak­ers. Al­though Steel Devel­op­ment Fund (SDF) was set up long back in 1997-98, the progress is not very en­cour­ag­ing. Out of 91 projects, only 55 projects have been com­pleted, 24 projects are in progress and 12 have stopped as of March 31, 2016. While the In­dian steel com­pa­nies are get­ting so many safe­guards from the Gov­ern­ment of In­dia in terms of trade pro­tec­tion and other schemes, it is im­per­a­tive that the do­mes­tic steel mak­ers take nec­es­sary steps to in­crease ex­pen­di­ture in R&D to im­prove their com­pet­i­tive­ness, re­duce cost and im­prove prod­uct mix through in­no­va­tion.

If the Cen­tral gov­ern­ment re­ally wants raw ma­te­rial to be avail­able at com­pet­i­tive price, it should ra­tio­nalise the tax and duty struc­ture on iron ore and cok­ing coal which can sub­stan­tially re­duce the cost of raw ma­te­rial for the do­mes­tic steel pro­duc­ers

It is a pity that more than 150 mt of un­sold iron ore has been ly­ing as stock­pile in dif­fer­ent parts of In­dia. Most of this is less than 62 per cent Fe grade. This is be­cause the do­mes­tic steel mills prefers only high grade iron ore and re­ject low-priced lower grade ma­te­rial. On the other hand, Chi­nese steel mills can con­sume iron ore with Fe con­tent as low as 56 per cent. Why can’t our steel mills use such low grade ore in their steel mak­ing process? The gov­ern­ment should en­sure in­vest­ment in in­no­va­tion for us­ing low grade ore, which is abun­dantly avail­able in In­dia, to max­imise Value in Use for the BF Mix in the steel plants and si­mul­ta­ne­ously de­velop high end steel prod­ucts to re­duce de­pen­dency on costly im­ports.

Raw Ma­te­rial Cost

TO make steel af­ford­able and to re­vive the steel in­dus­try it is nec­es­sary to sup­ply raw ma­te­ri­als like iron ore and cok­ing coal at cheaper price. Raw ma­te­rial will be­come cheaper only when its sup­ply will be aug­mented. How­ever, iron ore min­ers are fre­quently un­der crit­i­cism for the rea­son of high cost of pro­duc­tion to the In­dian steel mak­ers. But the fact is that iron ore only ac­counts for 18-20 per cent of the to­tal cost while it is the cok­ing coal which is re­spon­si­ble for 30-40 per cent of the to­tal cost. In­dia has over 18 Bt of proved re­serves and 34 Bt of to­tal re­sources of cok­ing coal. How­ever, in­ad­e­quate wash­ing ca­pac­ity and lack of ex­plo­ration have in­creased In­dia’s de­pen­dency on im­ports. In­dia can­not af­ford mil­lion tonnes of high qual­ity cok­ing coal to keep burn­ing un­der Jharia decade af­ter decade and in­stead im­port, drain­ing na­tional ex­che­quer. The gov­ern­ment must take se­ri­ous note on Jharia Ac­tion Plan and foster ex­plo­ration of cok­ing coal in a mas­sive way with si­mul­ta­ne­ously en­cour­ag­ing set­ting up coal wash­eries. Sim­i­larly, aug­ment­ing the iron ore sup­ply, par­tic­u­larly in States like Kar­nataka where iron ore pro­duc­tion has been capped, can fur­ther re­duce the cost of iron ore. Un­due gov­ern­ment con­trol over pric­ing and avail­abil­ity of raw ma­te­ri­als has been one of the rea­sons be­hind In­dian steel in­dus­try los­ing com­pet­i­tive­ness, both in terms of qual­ity and pric­ing. Af­ford­abil­ity can­not be achieved by a mere price con­trol mech­a­nism/for­mula of raw ma­te­rial, rather than by eas­ing the hin­drances of sup­ply. We can take a cue from the coal sec­tor re­forms. Let us look at what was done to ease the prices of coal and power to make it af­ford­able as an ex­am­ple. As per a gov­ern­ment re­port, In­dia will dou­ble its coal pro­duc­tion to 1.5 bil­lion tonnes by 2020. This mas­sive sup­ply of coal will, in turn, re­duce the prices of coal sourced by the power and other sec­tors as it seems to have al­ready done in the global mar­ket of coal. The In­dian power sec­tor is no longer at the mercy of im­ports for coal and, in fact, the In­dian coal in­dus­try is also look­ing for ex­port av­enues. A sim­i­lar model can be repli­cated in the In­dian iron ore in­dus­try if only reg­u­la­tory re­stric­tions on the ca­pac­i­ties of the iron ore mines are re­moved. Kar­nataka, a min­eral rich State, can be a cru­cible of do­mes­tic sup­ply for the steel mills in the re­gion with­out hav­ing to source ore from other far reach­ing states like Odisha and coun­tries like South Africa and Brazil, in­cur­ring heavy ex­pen­di­ture on trans­porta­tion and shelling out a high price for ore.

Iron ore min­ers are fre­quently un­der crit­i­cism for the rea­son of high cost of pro­duc­tion to the In­dian steel mak­ers. But the fact is that iron ore only ac­counts for 18-20 per cent of the to­tal cost while it is the cok­ing coal which is re­spon­si­ble for 30-40 per cent of the to­tal cost

Tax Bur­dens on Raw Ma­te­rial In a mar­ket where end prod­uct is freely de­ter­mined, it is im­per­a­tive that the raw ma­te­rial prices should also be de­ter­mined freely based on de­mand and sup­ply fac­tors, with­out any gov­ern­ment in­ter­ven­tion. How­ever, in In­dia the key raw ma­te­rial of steel-mak­ing—iron ore and cok­ing coal—are highly taxed, which in turn in­creases the cost of steel pro­duc­tion. Iron ore min­ing in­dus­try in In­dia is al­ready pay­ing a roy­alty of 15 per cent of sale price, which is one of the high­est in the world. This is fur­ther in­flated af­ter ac­count­ing for DMF and NMET charges, which are di­rectly linked with roy­alty at the rate of 30 per cent and 2 per cent of roy­alty, re­spec­tively. Then there are State level taxes, like SPV fund in Kar­nataka and Goa Per­ma­nent Fund in Goa, at 10 per cent of sale price, which are mostly sim­i­lar to DMF.

IN a sub­dued iron ore mar­ket, this leaves hardly any­thing in the hands of do­mes­tic min­ers to spend on pro­duc­tiv­ity and ef­fi­ciency to re­duce cost of min­ing. Any at­tempt to con­trol price of do­mes­ti­cally pro­duced iron ore is also a ret­ro­grade step for the iron ore min­ing in­dus­try, which is al­ready crip­pled with var­i­ous chal­lenges. Cok­ing coal, which is pro­duced in small quan­tity and largely im­ported to meet do­mes­tic de­mand, is taxed at 2.5 per cent Im­port duty for an un­known logic. This, cou­pled with the ` 400 per tonne of Clean En­ergy Cess, im­poses a sub­stan­tial bur­den on the coal cost for steel com­pa­nies. The cu­mu­la­tive cost of these taxes on raw ma­te­rial is ap­prox­i­mately ` 2,000 per tonne (based on the fluc­tu­at­ing prices), al­most equal to the con­ver­sion cost of RM to Hot metal in a blast fur­nace. These taxes are not per­mit­ted to be set-off even un­der GST, thereby dou­bling the ef­fec­tive cost of mak­ing steel from the raw ma­te­rial. Re­moval of these costs alone will turn around a num­ber of steel com­pa­nies in the red cur­rently. If the Cen­tral gov­ern­ment re­ally wants raw ma­te­rial to be avail­able at com­pet­i­tive price, it should ra­tio­nalise the tax and duty struc­ture on iron ore and cok­ing coal which can sub­stan­tially re­duce the cost of raw ma­te­rial for the do­mes­tic steel pro­duc­ers. Re­duc­tion of roy­alty on iron ore to 5-7 per cent (in line with Aus­tralia and South Africa), abo­li­tion of im­port duty and Clean En­ergy Cess on cok­ing coal and the Cen­tral gov­ern­ment closely work­ing with State gov­ern­ments to re­move du­plic­ity in tax­a­tion can re­vive steel mills’ prof­itabil­ity. Re­vis­it­ing Pol­icy Frame­work In­dia has com­pet­i­tive ad­van­tages in steel and the new pol­icy rec­om­men­da­tion to source raw ma­te­rial from sec­ondary mar­kets, such as scrap, will frit­ter the in­dus­try. By do­ing this, In­dia will be throw­ing away the scope of cre­at­ing em­ploy­ment op­por­tu­ni­ties, while im­pact­ing the en­vi­ron­ment and pro­vid­ing a route to any un­reg­u­lated / haz­ardous scrap to find its way to our soil. With In­dia be­ing a min­eral rich coun­try hav­ing large re­serves of iron ore, should we then be re­sort­ing to scrap as feed for the steel in­dus­try? Be­fore In­dia en­vis­ages for 300 mt steel ca­pac­ity, what will hap­pen to the ex­ist­ing 122 mt ca­pac­ity, large part of which are lan­guish­ing for low util­i­sa­tion and in se­ri­ous debt trap? Be­fore new ca­pac­ity ad­di­tion, the gov­ern­ment should help the ex­ist­ing units to con­sol­i­date. These units should be turned around by merg­ing ‘healthy’ play­ers with re­quired in­cen­tives so that it would be a ‘win-win’ sit­u­a­tion for both. Fi­nan­cial in­sti­tu­tions should be con­vinced and taken on board to en­cour­age such con­sol­i­da­tions. The gov­ern­ment’s im­me­di­ate fo­cus has to be on im­prov­ing ca­pac­ity util­i­sa­tion to the ro­bust lev­els of 90 per cent.

Al­though Steel Devel­op­ment Fund (SDF) was set up long back in 1997-98, the progress is not very en­cour­ag­ing. Out of 91 projects, only 55 projects have been com­pleted, 24 projects are in progress and 12 have stopped as of March 31, 2016

Re­vi­tal­i­sa­tion The gov­ern­ment has tried help­ing dis­tressed com­pa­nies by rais­ing the im­port duty on steel and slap­ping ad­di­tional pro­tec­tive mea­sures like MIP, safe­guard duty, etc., but the fact re­mains that the bad loans of steel in­dus­try ac­count for as much as ` 1.15 lakh crore as of Novem­ber 2016, which is al­most 2 per cent of In­dia’s GDP. In terms of out­stand­ing loans owed to banks, the in­dus­try saw the high­est slip­pages at 7.8 per cent, fol­lowed by tex­tiles at 6.4 per cent. Even State-run gi­ant SAIL, known to be a highly prof­itable com­pany, re­ported a net loss of ` 794.84 crore for the quar­ter ended De­cem­ber 31, 2016. It is time there­fore not to take a my­opic view but have a tech­no­log­i­cally ad­vanced and com­pet­i­tive steel in­dus­try. This can be brought about by in­duc­ing in­no­va­tion and dis­in­vest­ment in the steel sec­tor, thereby sav­ing it from meet­ing a fate like the pub­lic sec­tor avi­a­tion ser­vice Air In­dia.

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