india

What is next for India's growing steel industry?
By Anuj Chopra, The Christian Science Monitor



There was much jubilation in India when the Tata Group, an Indian conglomerate, won a bid late last month for the Corus Group, an Anglo-Dutch steel firm. The deal catapulted the new global entity to become the world's fifth-largest steel firm.

At more than $12 billion, Tata's purchase is the largest acquisition ever by an Indian firm. The success of the takeover had Indian financial analysts celebrating more than just another superlative. The purchase signals a milestone for India's economy as it matures from an attractive investment destination to a global investor.




But perhaps more important, the Corus deal brings India's steel industry, currently the world's seventh-largest, to the forefront of the global steel market. Fuelled by an accelerating manufacturing sector and a dramatic infrastructure improvement effort, India's steel sector is clocking a 10 per cent growth rate.

"Now it is a two-way street," said Kamal Nath, India's commerce and industries minister at a press conference on February 1.

"India is not only seeking foreign investment, it is a foreign investor itself. And this trend is likely to grow."

Indian analysts say that growth rate is likely to continue.

While China currently produces nearly 418 million tonnes of crude steel‚ nearly 10 times that of India‚ Indian steel is likely to be more cost-effective in the future. Unlike China, India's 14 billion tonnes of untapped iron ore reserves can sustain domestic production of 120-130 million tonnes for at least 25 to 30 years if strategically exploited, analysts say.

Iron ore

With a dearth of iron ore supplies in its own country, China is the world's largest importer of iron ore, bringing in nearly 300 million tonnes of ore from 40 countries each year. Chinese steel companies are struggling with rising global prices of iron ore.

"However, even at [India's] growth rate, it will take a long time for India to catch up with Asia's other behemoth, China, because of the wide difference in production figures," says AS Firoz, a leading Indian economist and steel expert.

In the coming years, India is expected to surpass the production capacities of South Korea, Russia, the United States, and Japan.

Powered by domestic demand from their large populations, China and India already account for 35 per cent of total world steel production, more than double that of Europe, according to the International Iron and Steel Institute (IISI).

A major part of that growth is India's homegrown manufacturing sector, analysts say, which is expected to grow at 11.3 per cent this year, up from nine per cent last year. The other major boon to the steel industry: The Indian government has pledged to spend $15 billion on infrastructure projects over the next decade.

The outlook for Indian steel hasn't always been this rosy. The 1980s and early 1990s were a lull period for the steel industry.

India's sluggish economy and low demand for steel at the time meant that investing in the steel business was considered extremely risky.

When India first began its continuing process of liberalisation in 1991, the government instituted economic policy measures that are still bearing dividends today. First, it scrapped a tedious licensing process for building steel mills. The government also slashed import and export duties, energising the steel trade.

Since then, India has almost doubled its crude steel production to nearly 44 million tonnes each year; of that, 41 million tonnes come from domestic consumption.

Looking ahead

According to the IISI, India will consume the most steel in the world over the next decade, with annual demand increasing at a rate of 7.7 per cent. Meanwhile, China's demand will hum at 6.2 per cent.

Despite significant victories and continuing market reforms, India's steel industry still faces several roadblocks. While coal is abundant, India lacks quality reserves of the coking coal used for making steel. "Coal is the biggest cause for concern for bulk steel production in India," says Seshagiri Rao, chief financial officer of JSW Steel, an Indian firm. Coal production has grown at two per cent annually, but demand from steel companies has outpaced it at eight per cent. With 11 per cent of the world's coal reserves, China has the advantage.

The government has urged steel companies to invest in foreign mining assets. India's major steel firms are looking at the reserves of countries like Australia, Canada, Indonesia, and Mozambique. JSW recently signed a contract to acquire a licence to operate a coking coal mine in Mozambique.

Meanwhile, India's natural ore wealth has attracted investment from foreign firms as well. Last year, Mittal-Arcelor and South Korea's Posco signed contracts to build two 12-million-tonne steel plants in eastern India.