Why govt could fall short of its steel ambition

Despite a rise in steel prices since mid-2016, the pvt sector has found it hard to add new capacity

India’s ambitious crude steel capacity target of 300 million tonnes (mt) by 2025-26, which would allow production of 275 mt to meet the country’s anticipated requirement of the metal at that point, is a bequeathal to the present regime from the United Progressive Alliance government. The targets, around which the 2012 National Steel Policy was framed, never looked easy to independent observers. 

This despite all the iron ore rich states at that time held the bait of allocation of mineral deposits to lure investments into new steel capacity. But the 2015 amendment to the Mines and Minerals (Development and Regulation) Act, 1957, put paid to any discretionary power that the states enjoyed in the allocation of mineral deposits. This coincided with the meltdown in the market. Producer margins were severely squeezed by the fall in the world demand for steel, overhang of the global surplus capacity of at least 600 mt of which half is in China and also that country’s compulsion to export over 100 mt of the metal.

Except for a few, such as Voestalpine of Austria, Nippon Steel & Sumitomo Metal of Japan and Nucor of the US, which make very-high-value-added steel, through closely-held technologies, most others today find their balance sheets splattered in red ink. The upshot is, industry leaders from ArcelorMittal to ThyssenKrupp are going through a process of intense cost-cutting and shedding uneconomic operations, often courting opposition from the host government. 

What is relevant for India is that steel makers’ capacity across the globe to invest in new ventures is sufficiently crimped. The good news is that steel prices are behaving better since mid-2016. Even then, it will be some time before steel companies will risk investment in new mills. 

India presents the spectacle of some struggling to complete projects because they are unable to get additional funds from banks that are increasingly turning wary of steel. The banks are not to be blamed: nearly 30 per cent of their Rs 300,000 crore exposure to the industry has become non-performing. 

Trouble before take off

As Tata Steel’s Kalinganagar experience will bear out, the wait before the start of construction of a new project could be unconscionably long. This is due to the challenges to procure large tracts of contiguous land, post-land-acquisition protests by action groups, time needed to secure all the clearances to start work on the ground and the virtual absence of infrastructure where all the new plants are to be built. Now when the industry is busy putting its house in order after going through long periods of bad working, the 300 mt target looks even more distant. 

The question then is why is the Modi government, which has shown uncommon alacrity in scrapping Planning Commission and doing away with quite a few policies of the previous government, sticking to a steel capacity target which is palpably unrealisable in less than 10 years? 

The government think tank Niti Aayog has in a working paper cast doubt about the ability of steel industry to achieve the 2025-26 capacity set out in the 2012 policy. The paper rightly says that cheap imports of steel flooding the market in the last few years had inflicted much pain on the local industry, which is starkly manifested in the failure of mills to service bank loans. 

Interestingly, Niti Aayog is not abandoning the 300 mt capacity target. Instead, it favours the introduction of a new dynamic steel policy and not just tinkering with the 2012 guidelines. The paper says the proposed new policy formulation should ideally be based on a review of the present state of entire steel value chain — from raw materials to finished products. It favours the creation of an ecosystem that will allow profitable working of all upstream segments linked to steel. 

But what must not be lost sight of is the ground reality changing for the worse since 2012. Policy formulators then believed that the industry would receive considerable foreign direct investment (FDI) from the likes of South Korean Posco and ArcelorMittal. 

Flashback to 2005 when Posco announced plans to build a 12 mt steel project in Odisha with an investment of $12 billion, billed as India’s largest FDI. But frustrated over the slow land acquisition, unceasing protests by the locals and the Odisha  government’s failure to secure requisite clearances from Delhi for the allotment of the promised Khandadhar iron ore deposits to it, Posco declared in July 2015 that the project was “tentatively postponed.” 

Earlier, Posco had pulled out of a 6 mt project in Karnataka over land acquisition problems and uncertainty about mines allocation. ArcelorMittal too has abandoned plans to build mega steel projects in Odisha, Karnataka and Jharkhand. But that has got more to do with the global steel crisis. 

Funding problems

So there is hardly any hope of India getting any significant FDI in steel, except in niche areas such as Steel Authority of India Ltd (SAIL) and ArcelorMittal planning to make high-end automotive steel together. But that doesn’t create new steel capacity since flat hot rolled coils for the unit are to be sourced from SAIL’s Rourkela plant. Tata Steel and JSW Steel have collaborations of this kind with Nippon Steel and JFE Steel, respectively. 

This being the fate of FDI, the country will have to depend almost exclusively on local groups for capacity expansion. But are they in a position, financially or otherwise, to create additional steelmaking capacity of 180 mt to achieve the 2025-26 target?  

Tata Steel Managing Director TV Narendran has strong reservations about the local industry’s capacity to deliver what the government expects of it. 

Only a few in the private sector are in a position to build new mills or expand the ones in operation. JSW Steel’s plan to become a 40 mt steelmaker from around 15 mt now is highly credible. So also Narendran sounds convincing when he says “give us 15 years we shall own 30 mt capacity – 18mt at Kalinganagar and 12 mt at Jamshedpur.” 

SAIL Chairman PK Singh says: “With three important enablers – considerable surplus land, captive iron ore reserves and good human resources – we should be able to become a 50 mt group by 2030 from 21.4 mt in 2017-18 when the current phase of modernisation will be complete.” But there remains a question mark over SAIL capacity to fund the expansion, specially because of the knock it took in the last several quarters.