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Photo: Bloomberg
Photo: Bloomberg

Opinion | How friendly government policies can boost Indian steel industry

  • Indian steel manufacturers bear multiple local taxes - electricity and cross subsidy duties, clean energy cess and royalties on ore and there are more
  • In rival markets, these levies either do not exist or are comparatively lower, making Indian steel non-competitive even before it leaves our plants

One immediate relief would be the introduction of a Border Adjustment Tax, known as BAT. Many countries use BAT to protect local steel manufacturers. After the economic pain unleashed by the pandemic and the enduring threat posed by Chinese state-subsidised steel imports, can India afford not to BAT.

Indian steel manufacturers bear multiple local taxes - electricity and cross subsidy duties, clean energy cess and royalties on ore and there are more. These taxes make up 12% of the price of steel. In rival markets, these levies either do not exist or are comparatively lower. So Indian steel is non-competitive even before it leaves our plants. BAT would create a level playing field. It would also be a sweeping drive for 'atma nirbhar' India.

The steel ministry shares these concerns, which gain urgency with Prime Minister Modi’s advocacy of self-reliance and ‘being vocal for local’.

In April and May, covid-19 crushed domestic industrial and consumer activity. The hit on India’s biggest steel mills, which make up 65% of the country’s annual output of about 110 MT, was calamitous.

The industry has been left standing still. The cost of standing still has been very high.

During the pandemic, the mills’ massive blast furnaces continued to burn but made less than a third of pre-covid-19 levels of production. Why keep the blast furnaces burning for so little output? Because closure and reopening can take up to 12 weeks; the process is complex; and maintenance costs are high. This remains the nuclear option for steel makers.

In short, India’s mills have continued to bear high fixed costs: firing furnaces but without making much steel. Big integrated mills posses the manufacturing and marketing agility, and capital base, to survive, with bruises. Smaller mills, which account for about a third of national output, lack the strengths to survive a trough, and many have capitulated.

Steel is front and centre in India’s recovery, a point that I, as president of the Indian Steel Association, which represents the big integrated manufacturers, have placed before the steel ministry and government. The industry rests on mutual support – we invest, the government offers supportive policies, for example on BAT and other tax. This will strengthen the industry, currently the second largest by output after China, and lend weight to India’s competitive and comparative advantages, especially in manufacturing, in a post covid-19 economic order.

Indian steel’s guiding light is a steel ministry vision of 300MT of capacity by 2030, currently at about 138 MT. The pandemic will put pressure on this target. Recent stimulus packages as well as monetary policy adjustments to improve liquidity and credit for MSMEs, reflect the enormity of the challenge.

A revived economy means a revived steel industry. ISA’s base position is to seek support that improves steel demand. India may be one of the world’s largest economies as defined by, say, GDP; but our per capita steel consumption is miserly. We simply do not use steel in the multiplicity of ways that is common in a developed economy. That must change if we are to grow in commercial and value terms.

The challenge is a big one: just consider these short terms hurdles:

>Government capital expenditure, currently diverted to public health, needs to revive even more if steel is to be benefit from one of its strongest sources of structural demand.

>Real estate builders, another big source of strong demand, have lost their appetite for large scale construction.

>Car manufacturers, hammered by collapsing demand in April and May, but slowly reviving do not see a vigorous upturn until the second half of the year.

>The pandemic has also hurt demand for capital utilisation, weighing heavily on capex.

This is a grim outlook; infrastructure and construction alone generate about two thirds of steel demand. How can demand be improved? Here are some thoughts.

>First, steel needs more state funded infrastructure projects such as roads and bridges but a parallel fillip would be for the government to pay on time, even upfront to expedite work; the backlog of unpaid bills contributes to the freezing of unfinished projects.

>An initiative to consign old cars to the scrap heap would significantly lift demand for steel to build replacement cars. There is disagreement over the pricing of old car scrape, but this consumer sentiment-boosting initiative is long overdue.

>Improving the logistics chain would help transport finished goods and materials more quickly and less expensively. An example is enforcing ‘right of way’ for slurry pipelines, laying them alongside highways, so reducing time to delivery to ports or plants.

>Make steel the material of choice in construction of flyovers, roads bridges and crash barriers, improving their safety, durability and, as a result, their life-cycle cost. We will see the potential impact of this initiative in the monsoons.

>Steel mills need labour and truck drivers. But we lack both because of pandemic induced migration. Without drivers we cannot move finished steel. The ministry of roads says India requires 2.2m drivers but there are not enough training centres for heavy-goods vehicle drivers. This is surely an easy win for skills training?

>Finally, Indian mills possess world-class infrastructure and capacities and have integrated backwards by acquiring mining rights, partly to mitigate costs. As mentioned, one is high taxes on input materials such as energy. BAT would help Indian steel gain global competitiveness.

Despite these home-grown disadvantages, the bigger mills still managed to move with ingenuity to seize opportunity in these onerous trading conditions. AM/NS, like some others, pivoted quickly to export pellets to China, after a year of this inactivity and in the process won a record order. Pellets to China illustrates a wider truth about our industry: in these most extraordinary market conditions, an opportunity was identified and seized. We believe the same can happen with wider and deeper support from the government.

The author is President of Indian Steel Association. Views expressed are his own.

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