Wanted: Steely Resolve

India’s steel industry has little hope of snapping back from its slump without a big Central push
Slump
BEG, BORROW OR STEEL The framework of India’s economic story, post-reforms, was supposed to be different

The nerves of steel displayed by the world’s top steelmaker ArcelorMittal, first, by bucking the French government’s threat to nationalise its steel facility in France, and then by writing down the value of its European business by $4.3 billion, are a reflection not just of LN Mittal’s grit and realism but also of the tough times the global steel industry is beset with. Analysts say 2013 may be worse. Global steel supply could vastly exceed demand, the latter hurt by European austerity, China’s rebalancing act and slowdowns in emerging markets.

Analysts expect India’s steel industry to suffer too. The country’s economic expansion, with which steel usage has a direct correlation, may be disappointing. Notwithstanding the Government’s recent reawakening to the need of fast-growth policies, rating agency Crisil believes that the ‘substantially impaired investment pipeline’—a legacy of policy logjams—‘would take time to recover.’ A favourable investment climate is a prerequisite for India’s 12th Five-Year Plan to see $1 trillion spent on infrastructure, a sector that together with construction usually accounts for 60 per cent of all steel used across the country in a year.

Optimism is scarce. India’s domestic industry turns out 76 million tonnes of steel annually, only about a tenth of China’s output. In 2013, the World Steel Association expects Indian consumption to grow at a sclerotic 5 per cent, roughly half its pre-crisis rate. “India,” says Dharmakirti Joshi of Crisil, “would see a big fillip in demand only if the Prime Minister’s assurance of fast-tracking large infrastructure projects is implemented with iron will.”

If India’s infrastructure sector has been a poor performer, other sectors have been hit by an anti-inflationary monetary policy. “[Higher lending rates] have not only kept the cost of working capital high for the steel industry,” says Ashish Upadhyay of India Ratings, “but also reduced end-user demand from sectors such as automobiles, consumer and capital goods.” These account for the rest of India’s steel usage but have been in a slump, with only faint signs of recovery.

The woes of steelmakers are compounded by a scramble for two key inputs: namely, iron-ore and coking coal. While the latter is largely imported, the availability of iron ore remains hostage to what Upadhyay calls the “prevailing mining mess” that has kept India’s abundant reserves in the ground. This is a mess the Judiciary could sort out. Until then, iron ore too would need to be shipped in, and for that to serve Indian steelmakers well, the rupee would need to stay stable.