Whenever there is a steep rise in any commodity price, the consumers start crying “Wolf !” and float wild conspiracy theories. The government, helpless to tackle the situation in any fundamental way due to global circumstances about which it can do nothing, goes for the easy option available. It threatens to impose controls and shows the stick.

Whipping up

That is exactly what is happening in case of the steel industry. In a bid to bring down the headline rate of inflation, which has reached 7.5 per cent and has created tremendous embarrassment to the ruling Congress party, the UPA government is now threatening to bring the steel industry under the Essential Commodities Act.

The government wants the steel manufacturers to voluntarily reduce prices by at least Rs 5,000 to Rs 6,000 per tonne. If they do not fall in line, the industry would face ban on steel exports, imposition of hefty excise duty and even subsidised imports. The steel ministry officials are particularly sore on the private players because the government-owned Steel Authority of India Ltd (SAIL) has already promised to hold the price line.    

Ten years ago, when steel demand was in the doldrums, commercial consumers in  the engineering and construction sectors had no regret in beating down prices offered  by the steel producers and the steel industry had hit rock bottom. At that time bureaucrats as well as politicians did not have a word of sympathy for the plight of the steel industry. There was not even a whisper about cartelisation.

More sinned than sinning

Today, just because the decade of runaway economic growth in China and consequent surge in its steel consumption, has reversed the global steel price cycle, everyone is vilifying Indian steel companies for being a bunch of profiteers with no sense of national responsibility. The media, particularly the electronic version, with little time to analyse and probe the background to the current development, takes the easy way out and latches on to a theme, which makes for catchy sound bytes. In this case the catchword word is cartelisation, which has been mooted by the government to take the heat away from its own ineffectiveness in cooling down domestic steel prices. International prices are reigning higher, which leaves no room for the import option to cool down domestic prices. It may make for opportunistic politics, especially in a pre-election year, to root for consumers and blame the producers but the truth is a victim in the process.

Global demand surge

The truth about the rise in price of steel is that it is not an overnight phenomenon, nor is it confined to India.

World steel demand, which had remained flat around 720 to 750 million tonnes per year throughout the nineties, started surging from the beginning of the present decade when China commenced investing heavily in its infrastructure and housing projects as well as construction for the Olympics. China’s steel consumption shot up from 120 million tones in 2000 to over 400 million tonnes in 2007. During the same period, the other BRIC countries (Brazil, India, Russia and China), also embarked on a high rate of growth, which started pushing up their demand for steel. Consequently, total global steel consumption surged from 750 million tonnes in 2001 to 1200 million tones in 2007.

The cost push

In consonance with this rise in demand, it is natural that the price of steel will rise too. For example, producer prices for hot rolled coils have gone up from $250 per tonne in 2000 to $1000 per tonne today. Much of this price rise for the alloy has been due to a colossal increase in the price of inputs that go into making it — iron ore, coking coal, scrap, electric power, natural gas etc. This increase has been anywhere in the region of 100 per cent to 300 per cent in the last seven years.

For example, the spot prices for prime coking coal, which has to be fully imported by the Indian steel industry, have risen from $80 per tonne in 2005 to $200 per tonne now. While replying to questions from reporters at Jamshedpur last week, B Muthuraman, MD, Tata Steel, estimated that the effect on the price of steel due to the price rise of inputs in the last one year alone is to the tune of Rs 10,000 per tonne. Incidentally, input prices are predicted to harden further this year. With the International Iron and Steel Institute predicting that global steel consumption will grow by 6.8 per cent this year, the big producers of steel have already announced further hikes in the prices of their products. High international steel prices are, therefore, here to stay, at least for one more year.

Wild charge

Coming to domestic steel prices, the bogey of cartelisation is only a smoke screen. For a cartel to function effectively, the members should have a number of similarities in terms of inputs, technology, capacities, managerial structure, ownership pattern etc, so that there can be valid cost comparisons. The cartel should also account for a dominant share of the industry.

The Indian steel industry, on the other hand, is highly fragmented and diverse in all respects. There are government-owned companies and private companies, privately held companies and publicly quoted companies, giant integrated steel manufacturers making a few million tonnes per year and small secondary steel makers making a few lakh tonnes per year. Then there are producers using huge blast furnaces and those following the small electric arc furnace method, which require totally different inputs.

No meeting point

There are producers having their own iron ore and coal mines and those buying ore and coal from the market. There is a wide variation in product mix too — some companies primarily make flat products and others primarily making longs and so on. Even if it is conceded that 60 per cent of the output of steel in the country is distributed among half-a-dozen companies, a cartel among these has to include the largest steel producer government-owned SAIL, which would never be a party to such underhand tactics. Forget about cartelisation, the industry cannot even seem to cooperate as an association. The Indian Steel Alliance (ISA), which was formed during the dark days of the industry to promote steel consumption in the country, saw one of its main members walk out about a year ago.  The Prime Minister may have managed to convince the steel producers to hold their prices for a couple of months with his recent appeal in Jamshedpur to their patriotic obligations.

But that is as far as he will get. The only way government action can enable Indian steel producers to bring down their prices substantially is to compel iron ore mining companies in the country to meet the ore requirements of domestic steel companies at cost to the company basis, which is one-fifth of current international ore prices. Only then should the mining companies be allowed to export the surplus ore. The government can then legitimately put pressure on the steel producers to pass on the benefit of lower ore prices to the steel consumers.

The writer is a former journalist and can be reached at nnsachi@yahoo.com