The proposals to set up new steel plants in the last four months alone add up to over two-thirds of the total current capacity.
There has been a sudden flurry of interest from multinational giants to invest in large greenfield steel capacities in India. Over the last three weeks, 12 new large steel projects have been announced by entrepreneurs. These entrepreneurs promise to invest an estimated Rs 150,000 crore to build capacities to produce 22.4 million tonnes of steel per annum in India. Steel has been attracting a lot of investments lately, but the gush seen in the first three weeks of January 2010 is extraordinary. For example, in the quarter ended December 2009, when the Mittals announced a new 6 million tonne plant in Karnataka with a lot of fanfare, the total of new investment proposals in the steel sector was worth Rs 87,000 crore for 21.5 million tonnes. This was the highest quarterly new investment in steel in the past three years. And, now, the first three weeks of January surpass even this record.
The total additional steel capacity expected to come on stream in 2010-11, according to CMIE’s CapEx database, is about 10 million tonnes. India’s current capacity to produce steel is a little over 65 million tonnes. The proposals to set up new steel plants in the last four months alone add up to over two-thirds of the total current capacity. The new proposals being made in comparison to the existing capacities are, therefore, quite extraordinary.
The 40-odd million tonnes of new capacities proposed in the past four months are a small part of the total investments in steel. The total new capacities proposed are estimated to add up to a massive 350+ million tonnes. Thus, entrepreneurs propose to add over five times more capacities than India has today. This does not include projects that have been shelved or abandoned. Obviously, all of the surviving projects will not get implemented, although it is not possible to identify those that will not make it to the finish line.
| HEAVY METAL (TOTAL INVESTMENT PROPOSED IN NEW STEEL MILLS) | ||||
| Quarter ending | New projects | Total investments | ||
| Number | Rs crore | Number | Rs crore | |
| December 2006 | 27 | 58656 | 317 | 5,37,451 |
| March 2007 | 23 | 34096 | 290 | 5,70,279 |
| June 2007 | 25 | 42526 | 304 | 6,15,657 |
| September 2007 | 30 | 12372 | 320 | 5,76,441 |
| December 2007 | 28 | 17430 | 328 | 5,83,917 |
| March 2008 | 31 | 67436 | 347 | 6,83,333 |
| June 2008 | 10 | 26729 | 351 | 7,64,543 |
| September 2008 | 20 | 73769 | 367 | 8,46,455 |
| December 2008 | 6 | 523 | 358 | 8,48,678 |
| March 2009 | 4 | 18265 | 345 | 8,38,243 |
| June 2009 | 1 | 100 | 340 | 8,26,086 |
| September 2009 | 4 | 22300 | 339 | 8,38,631 |
| December 2009 | 7 | 86665 | 341 | 9,48,751 |
| January 2010* | 12 | 1,49,704 | 350 | 10,23,000 |
| Source: CMIE, CapEx database Note: The data for January 2010 is only for the first three weeks of the month, while the rest are for three months. The January 2010 data are provisional. | ||||
What is obvious, though, from these large investments on hand and the continued frenzy to propose new capacities is that the competition to set up new projects is intense. Each entrepreneur knows that he is a part of the herd and that everyone will not survive. But, everyone also thinks that his project has a better chance of succeeding than the others. This competition should yield the best. It is clear that India alone will not consume all the new steel output. Investments will obviously have to be globally competitive. Steel manufacturing is a capital-intensive and long-term investment. This globally competitive interest of multinationals and Indian enterprises in investing in India in the steel sector is the most eloquent story of the promising prospects of India’s long-term growth.
The employment potential is huge and the impact of these investments will be felt in areas that have hitherto remained relatively backward. Orissa and Jharkhand have been the principal recipients of investments in steel.
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Competition in investing in steel is not limited to entrepreneurs alone. States compete to attract investments, too. In this context, there is an apparently important shift in the destination of investments in steel. The proposals of the past four months show a distinct shift in favour of Karnataka. Eight of the 12 projects proposed in the first three weeks of January this year are located in Karnataka. These account for 17.3 of the 22.4 million tonnes of new capacities proposed. Some of these new projects do appear to be dressed to sign a Memorandum of Understanding with the Karnataka government, reportedly in June when it holds its Global Investors’ Meet. In recent times, only Gujarat has been holding such grand meetings, and our experience has been that a large number of projects announced during such meetings do not get implemented.
Karnataka is a new entrant into the competition among states to attract fresh investments. Hitherto, the competition was essentially between Jharkhand and Orissa. Karnataka now looks like a serious contender. The shift in favour of steel investments in Karnataka has some merit as large multinationals have evinced interest in the state. One of these — the largest investment proposal — is from the Korean steel giant, POSCO.
POSCO proposes to set up a 6 million tonne steel plant in north Karnataka at a cost of Rs 32,300 crore. The government of Karnataka approved the project in January. The project makes a claim for 5,000 acres of land, and promises to employ 20,000 people. This is in addition to POSCO’s efforts to set up a 12 million tonnes steel mill in Orissa. Its investment in the Orissa project is of the order of Rs 49,950 crore, and the land it is seeking for this project is 4,000 acres. It was reported to have been able to procure only 600 acres as of August 2009, and has faced several hurdles in implementing this project since it first proposed this at least six years ago. But, this has not deterred the company from proposing more investments into steel in India.
The Karnataka government has also approved Surya Vijayanagar Steel and Power’s proposal to set up a 5 million steel plant in Bagalkot at a cost of Rs 20,000 crore and for which the company makes a claim for 4,000 acres of land.
The largest investment proposed into steel in the past four months was by the public sector giant, Sail. The company has proposed a 12 million tonne greenfield project at Chiria in the Paschimi Singhbhum district in Jharkhand. The project was announced in November just before the state elections, and the company has already stated that it would take up this project only after 2012, although reportedly, the company has been allocated half the reserves of the Chiria iron ore mines.
Interestingly, Orissa does not figure prominently in the new investment proposals of the last four months. The capex game is getting bigger and it will be interesting to see how the story unfolds itself and to see if there is a tipping point beyond which entrepreneurs give up, or state governments give in. Or, we find the elusive solution to inclusive and explosive growth.
The author is managing director and CEO, Centre for Monitoring Indian Economy; mahesh@cmie.com