`A bright future'

Interview with R.S. Pandey, Union Steel Secretary.

R.S. PANDEY sees a bright future for the steel industry in India provided, of course, the iron ore mining policy to be announced by the government soon acts as a catalyst for growth. He discusses the industry's problems and prospects in an interview. Excerpts:

With proposals for setting up steel plants coming in and MoUs (memoranda of understanding) being signed, where do you see the steel sector five to seven years from now?

Unlike five years ago, the Indian steel industry today is very resurgent. Five years ago, it was a moribund sector; some newspapers called it a graveyard industry. In four years, the situation totally changed, and today it is witnessing a very high rate of growth. Globally, the industry is growing by about 6 per cent annually. If in China it is growing by about 15 per cent a year, in India it has grown by about 10 per cent in the last two years.

The overall growth in the steel sector during the Tenth Plan was around 9.5 per cent. In the Eleventh Plan, it is estimated that if the annual GDP growth is around 9 per cent as projected by the Planning Commission, the steel sector will grow by about 10 per cent. Essentially, it all depends on the share of manufacturing and infrastructure, including construction, in the GDP.

In line with the increasing consumption of steel, production capacity is also growing. In 2005-06, we produced about 42 million tonnes of crude steel, besides some pig iron. Estimates are that we will reach a production level of around 80 million tonnes in the next five years. In the National Steel Policy (NSP), we had stipulated that steel production would grow by 7.3 per cent while consumption would increase by 6.9 per cent per annum. These targets have already been exceeded by a huge margin. We have witnessed a growth of over 10 per cent in the last two years. Such being the growth potential, scores of domestic and global players have signed nearly 120 MoUs with States having rich iron ore deposits. Many of them are at various stages of implementation and are keenly waiting for a conducive iron ore policy to emerge.

If all these proposals and MoUs materialise, India will be one of the largest steel producers globally, with a production capacity of over 150 million tonnes. How many of the parties do you think are serious players?

All of them will be serious players if they get land and lease for iron ore mining. Many of them are waiting for the government's final call on the mining policy. The Hoda Committee has done some work on this and it is yet to be considered at the highest level. Once the policy is announced, we will know the seriousness, or otherwise, of the players. As far as production of 80 million tonnes of steel is concerned, there is not much doubt, because these capacities are more or less established. But beyond that, how we grow will depend much on the iron ore mining policy.

Why has India suddenly become attractive as a steel-producing centre?

There are two main factors. One, the consumption of steel has started growing very fast all over the world, led by growth in China. India is also on the same track and the expectation is that steel consumption in the country is set to grow very sizably and decisively. In India, the steel consumption level is only 35 kg per capita per annum, one of the lowest globally, as compared to the developed world benchmark of 400 kg. The expectation is that the demand for steel would also grow in keeping with the high GDP growth, led by the growth in manufacturing, construction industry and infrastructure building.

Second, India has rich iron ore reserves, with one of the most extensive deposits in the world, which many other countries, including China, do not have. If this advantage is leveraged, if the producers for the next 30-50 years do not have to import iron ore from other centres, which would involve extra transportation costs, then they are confident that it will offset disadvantages such as inadequate coking coal and the high cost of energy, infrastructure and finance.

The major difference in consumption levels, when compared with the rest of the world, is because of styles of construction. While we use less steel and more brick and mortar, elsewhere the use of steel is much higher. How then do you plan to match up to global standards?

Yes, it is true that our steel-cement ratio is one of the lowest in the world. In fact, we are at the level of 25-30 per cent of the U.K. [United Kingdom] as far as steel-cement mix is concerned. But with the ongoing process of development and growth, when the availability of timber is shrinking, there will be less of wood and more of steel consumed. People will also realise that the lifetime cost of steel is low, the commodity being very lasting. If this is properly explained to people and if other supportive measures are taken by making steel available near the places of consumption, the demand is bound to grow.

In this direction, we have taken some steps. There is going to be a nationwide campaign for higher steel consumption. I had a meeting with major public and private sector players and they all appreciated that steel consumption has to grow in urban as well as rural areas. For this, awareness has to be created, service centres must be developed and steel of the type required by the construction industry should be made available.

The apprehension among domestic steel producers is that foreign players will export the ore when the mines are leased to them.

At present, there is no restriction as such on exports. The high-grade ore is only canalised. There are two sets of views. The mining players do not want any restriction. On the contrary, steel makers say there is a need for conserving ore deposits because they will support the steel industry for a long time.

If major private players come in and set up capacities, what would be the role of public sector units like Steel Authority of India Ltd.?

The public sector steel companies in India are doing extremely well. And, therefore, they will have a decisive role to play. In fact, SAIL and RINL [Rashtriya Ispat Nigam Ltd.], which has the Vizag steel plant, have undertaken massive expansion plans. Between 1992-93 and now, the share of the public sector in steel production had gone down. Today, its share is 41 per cent while that of the private sector is 59 per cent. In 1992-93, the private sector had a share of only 37 per cent. In terms of finished steel, the private sector, even in 1992-93, had a 67 per cent share and this has now grown to 71 per cent. But the public sector units are growing, even if the private sector is growing faster.

During 2006, SAIL and RINL decided on major capacity expansion plans. SAIL is going to increase its capacity from the current 13 million tonnes of hot metal to 22.5 million tonnes in just four years. RINL is set to expand its capacity from three million tonnes to 6.3 million tonnes in the next three years. So that is a major expansion of capacity for the PSUs.

When more private and foreign players come in, the public sector's share in steel production will decline further. In this scenario, is it not better for the government to exit the sector?

Why should the government exit, particularly when the PSUs are doing well? Instead, they should be encouraged all the more. Let there be a healthy competition between public and private sector producers. The question of exit comes when they do not perform. Look at the stock prices of SAIL. A few years ago, the scrip was at below Rs.10 per share. Today, it is more than Rs.80, and the expectations are that it will go up even higher.

But don't you agree that public sector units have a handicap by way of excess manpower, which affects the production cost?

Yes, labour productivity is low, in SAIL in particular. But it is improving. The steel major is going to adjust much of its existing manpower in the expansion phase when its capacity is going to almost double. The management had also undertaken a massive VRS [voluntary retirement scheme]. In RINL, labour productivity is not all that bad.

Besides, SAIL has done very well in various other techno-economic parameters in the last two and a half years. In 2003-04, SAIL's manpower productivity was 127 tonnes per man per year. In 2005-06, it went up to 150 tonnes per man per year, an improvement of 20 per cent. In blast furnace productivity also, there has been an improvement, as also in the production of high-end special steels and capacity utilisation.

With the improved turnover, which comes from higher capacity use and higher manpower productivity, SAIL's profits have surged. Its gross profit more than doubled between 2003-04 and 2005-06. The general presumption was that the spurt in profits was largely due to the high prices of steel. An analysis has shown that as far as SAIL is concerned, the higher profit is 29 per cent owing to the price factor in steel and other input costs, and 71 per cent owing to improvement in capacity use and other factors I just mentioned.