Challenges before the Indian steel industry

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The growth trajectory of the steel industry has its own set of challenges. We outline the five major challenges to the growth prospects discussed in the previous section. The Indian steel industry is often regarded as uncompetitive globally. In 2016, World Steel Dynamics ranked India second in terms of cost of conversion of iron ore to steel, after Ukraine. Indian mills were found to be more cost efficient in converting iron ore to steel than their counterparts in China, Japan or Korea. Most Indian integrated steel producers ranked within the top 35 steel mills globally. The answer to the dichotomy can be found in a report by the National Institution for Transforming India (NITI Aayog).19 The report explains a USD 80–100 cost difference in the table below:

Finance: Steel is a capital-intensive sector. Nearly INR 7,000 crore is required to set up 1 tonne of steel-making capacity through the greenfield route. Naturally, the cost of financing any expansion or new steel capacity is usually through borrowed capital. And in India the cost of finance is extremely high compared to the cost of finance in developed countries such as China, Japan and Korea. This adds about USD 30–35 USD to the final cost of steel. Moreover, steel demand is cyclical. So, during a downturn, the return on investments gets eroded. From 2004–2011, steel demand increased at a fast pace. This prompted most steel makers to expand existing capacities. However, the Indian steel industry faced a severe downturn between 2014 and 2016. This eventually resulted in many steel makers facing bankruptcy proceedings in 2018. The industry, in fact, is yet to resolve all the bankruptcy cases. Today, financial institutions have become wary of lending to the sector. In conclusion, therefore, a large share of the challenges that the steel industry has faced since 2014 can be traced to the extremely high finance costs or cost of borrowed capital. Although India’s Reserve Bank has lowered the policy repo rate five times and by 135 basis points in 2019 alone, the cost of capital in India still remains significantly high and Indian steel makers continue to face a relative disadvantage vis-à-vis their competitors from the developed world.

Raw materials: Although India has abundant reserves of iron ore and coal, it has negligible reserves of coking coal. The National Steel Policy envisages that India will reach 300 million tonnes of steel-making capacity, and 68% of that will be through the blast furnace route, which requires coking coal. This translates to about 200 million tonnes of steel being produced using coking coal, which means an annual consumption of about 180 million tonnes of coking coal.21 India largely fulfils its coking coal requirements through imports from Australia. But due to vagaries of weather, there has been huge fluctuations in coking coal supply as well as coking coal prices.

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