As far as statements of intent go, there is no faulting the ambition. Global steel industry is in a fragile state right now and a severe glut in China, world's largest steel producing country, has made a mockery of pricing mechanisms. In many ways, steel is no longer a global commodity anymore as prices vary significantly from Europe and US to India, China, Middle East Asia Latin America and Africa.
In the last few years, India has provided the only silver lining. While other markets have either stagnated or declined, consumption of steel in India has grown continuously at a steady pace. It has resulted in expansion of the capacity by domestic companies even as new players have found it next to impossible to start operations. In 2015, India overtook US to become the third largest steel producing country and lags only China and Japan. By the turn of this decade there are chances it may overtake Japan too.
This is not the first time a road map for the sector has been drawn up. The government came up with its first steel policy that projected capacity to rise to 110 MT by 2019-20. Seven years later, post the heady days of 2006-08 when the sector was at an upswing and global majors like Posco and ArcelorMiital were lining up with big ticket tens of billions dollar investments in India, the government came up with another policy in 2012. It then set a target capacity of 300 MT by 2025-26. This new policy in 2017, merely extends the deadline by 5 years keeping in mind the troubled market scenario.
"The erstwhile planning commission and ministry of steel had drawn up plans to ramp up capacity to 300 mt by 2025-26 on the assumption that at that time total steel production was 100 MT and per capita consumption was 62-63 kg per person," says Ravi Uppal, Managing Director and group CEO, JSPL. "The world average is 250 kg plus. They basically thought we must increase the consumption propensity. But it is too soon, too early and too large. We are talking about doubling capacity here. To be honest we do not have the wherewithal right now. The way steel prices have nosedived, net sales realization is poor, while raw material prices have gone up while interest rates remains so high."
The policy, like its earlier versions, however, does not address or suggests ways to deal with the core issues facing the industry. Setting up a steel plant is capital intensive and takes a minimum 3-4 years, provided the land acquisition process itself is smooth. Within that time span, the dynamics of the market often change. So when the capacity actually comes on-stream, there may not be enough demand to absorb it. The lack of certainty coupled with high interest burden leads to the problem of non-performing assets that the industry is currently grappling with.
It may not be as bad elsewhere, but the domestic steel industry is not exactly flying. Today, the sector's exposure to banks is Rs 3.13 lakh crore and more than a third of it is already classified as non-performing asset. Given a chance, many would like to exit the sector and the policy provides little incentive to stay put or join in.
"Where is the investment in steel really happening? Tata Steel's Kalinganagar plant investment is over. JSW's 4 million tonne expansion is completed. No Greenfield or Brownfield investments are underway today which will be commissioned in the next few years," says Seshagiri Rao, Joint Managing Director and Group CFO, JSW Steel.
"Private sector investment will take time. Any of the top 30-40 private companies in India engaged in 4-5 capital intensive sectors in the country, they are not in a position to invest because their existing plants are not fully operational, and their balance sheets require correction. So that will take time. We cannot expect in the next 12 months, investments will happen from private sector."
With the industry in a trough, this is perhaps the best time to set up a steel plant. By the time the capacity is ready in 2021-22, the fortunes would have changed. Yet, nobody has the cash or the tenacity to invest today. The lenders prefer to stay away and the Poscos and ArcelorMittals have long gone and are busy fighting their own bigger battles.