Steel Industry in India - a National Advantage?

By: Atul Prakash, Final Year MBM (IIT Kharagpur), B.Tech (Metallurgy)(NITW)

It has been often mentioned that a nation's development can be gauged from the condition of the Steel Industry in that
country. This is so because it makes significant contribution towards the development in terms of infrastructure,
employment etc. The Government of India has a Steel Ministry to look into the matters related to this industry. The sector is
so important that it needs to be nurtured and grown in order to generate a National Advantage.

We need to analyze the industry with the perspective that it can bloom into a source of advantage for the nation as a whole.
So for this purpose we first have to identify the ingredients which would lead to a national comparative advantage. These
ingredients have been listed down with the perspective of steel industry:
1. The availability of resources and skills: India has got abundant resources of Iron ore in the eastern part of the country. But
it is lacking in the quantity of metallurgical grade coking coal. It has been reported that India will have to import all its
coking coal requirements by the year 2025, which is of utmost importance in most of the large steel plants which have a
blast furnace. Hence, there will be a heavy toll on the foreign exchange and also on the cost of production of all the
integrated steel plants. As a result, a strong need for an alternative route is required to sustain the development of the nation.
We always hear about the use of renewable sources of energy in our day to day activities, but the real savings will be
achieved only if the industrial usage of the non-renewable resources is decreased. This is not very easily possible in the steel
plants due to the engineering and metallurgical considerations. In this respect, Essar Steel's use of Natural Gas to make
Sponge Iron is a remarkable thing for the future as it will not be dependent on the foreign supply of coking coal. India had
envisioned a long-term plan on the eve of independence to develop its capabilities in the field of engineering and technology
by setting up world class institutions like IIT and NIT. These institutions have produced some of the best technologists in
world. Also the Industrial Training Institutes (ITI) have produced skilled technical labor for the industries. With gas-based
sponge iron making still in the nascent stage, competency in the technical knowledge of this is not very advanced. So there
is an urgent need of Research and Development in the industry as well as research activities in the academic area. Sponge
iron industries should sponsor research to make radical changes in the process of sponge iron making.
2. Information that firms use to decide which opportunities to pursue with those resources and skills: The resources cannot
develop into a product without any entrepreneur using them along with other information and setting up an industry.
Currently it is common for businessman to use the information regarding technology from USA or Russia due to their
developed economy. But it will be more relevant to look into the developments in countries with similar constraints in the
field as India. After studying this the person can make any other radial or incremental changes to it depending on the
accepted risk and judgement.
3. Goals of individuals in companies: After the company has been formed its development path will be charted out by the
individuals working for it and not by a unique individual. So their goals and aspirations are the factors for developing the
national advantage.
4. Pressure on companies to innovate and invest: The critical factors of sustenance in an economy profitably push the
company to make investments so that it will result in more returns. Also, the stagnation and recession in a company's profit
seek for innovations to return to a boom situation. Also the recession in the economy or an industry as a whole results in
people making innovations and investments to upgrade their standard of living.
Porter's Diamond of National Advantage
A. Factor conditions - A country creates its own important factors such as skilled resources and technological base. In this
regard the creation of skilled human resource is on the right tracks in terms of the numbers with increasing number of
engineering colleges all across the country. But along with the increase in the numbers there has been a fall in the quality
due to lack of quality teachers. The government has upgraded the RECs to the status of NITs to increase the teaching
standard in these institutes and bring them to world class standings. But the need of the hour is the advancement in the field
of technology. Developments in technology cannot be limited to the government initiatives alone, there has to be a major
thrust in R&D by the companies as well. It is only with some breakthrough technologies that India can realize the status of a
developed nation. If we can develop the process of sponge iron to the extent that the production can be taken to the levels of
those by the Blast Furnace (BF) then we shall have our future secured from the scarcity of coking coal in the very near
future. Also the cost of such production needs to be taken down heavily if wish to build up a core competency in sponge
iron production. We had previously lost out to China when both the nations started with similar capacity but China at
present produces about 150 MTPA whereas India produces about 30 MTPA only. So if India can lead in the production of
sponge iron then we shall have another success story like the software industry.
Local disadvantages like the high cost of power, unavailability of coking coal, soft iron ore have led to innovations in the
field of metallurgy and commercially viable options have come up in the Iron & Steel industry. Many industries have
employed charging of pellets into the furnaces instead of the soft ore. With decreasing resources of coking coal some
companies have setup plants to produce steel via the sponge iron route. Also most of the reserves of coal are limited to the
states of Jharkhand, West Bengal, Orissa, Chattisgarh, so in western Gujarat Essar Steel setup the plant using MIDREX
technology based on use of Natural Gas. Essar produces steel from sponge iron by Electric Arc Furnace and they made an
innovation to reduce their power cost by innovating the technology of charging Hot Direct Reduced Iron (HDRI) by a
specially designed ladle for carrying the HDRI.
At present the production rate is not as high as the rate that can be achieved by the Blast Furnace route, but setting up a BF
is a costly proposition and then again it will mean using imported coking coal. This will affect the company's cash flow
adversely and also the cost of production would shoot up. Hence, the best route would be to invest in R&D heavily and
develop methods to make sponge iron with greater production and better productivity and quality. If the company succeed
in this endeavor then it will have an absolute advantage over other sponge iron producer's all over the world. This would
lead to a corresponding National Advantage.
B. Demand conditions - The local markets have not been very mature and the demand for steel has not been very high in
India. Steel industry thrives on the infrastructure development, which has been pretty low in India and it is high time that
government pays attention to this need which would result in overall growth of India's GDP. Every investment made results
in employment, increase in demand for consumables and non-consumables, enhancement in quality of products. So, the
recent Golden Quadrilateral project, largest infrastructure development project since independence, has set the mood for the
steel industry. It will result in heavy consumption of steel and as a result the struggling industry with huge asset base can
come out of the slump. Many more such projects are the need of the hour. Also, the demand for high quality alloyed special
steel needs to be created so that the steel industries would make amends in the processes and steel for many more purposes
such as space application, aircraft, automobile parts etc. can be developed. A demand side push is required to make the steel
industry globally competitive.
C. Related and Supporting Industries - The governmental control in most of the supporting industries have made them aloof
and segregated. This has resulted in laggard operation by these companies. If deregulation of these industries were affected
then they will become more cost effective, which would trickle down to the steel producers. Specifically for the gas-based
sponge iron producers, availability of natural gas has been a problem forever. State controlled companies like GAIL, ONGC
have to route their produces to other priority sector and in fact it was difficult to get supply of natural gas itself initially. So
the non-availability of natural gas, compels the industry to use costlier fuel such as Naphtha. Also the natural gas resource
in India is not high enough, but the recent findings of natural gas by Reliance in Godavari basin and other oil & gas
explorations have set the spirits high for cheaper and easily available natural gas. In order to nurture the sponge iron
industry, these supporting industries also need to be developed alongside.
D. Firm's Strategy, Structure and Rivalry - Any firm in the nation takes up the structure that is suitable to the demographic
and societal culture of the nation. Emulating a domestic successful company is better than treading the path of some foreign
firm. Most successful privately held companies in India started as a Family Owned Business (FOB) and then later got public
listed at stock exchanges. It is due to the joint-family culture in the country that has resulted in such a prevalent trend.
It is always deemed better to have low rivalry in the industry to make it more attractive. But this is true only in the initial
stages, when the company is setting up its market base. But more rivalry later leads the company to make innovations and
investments that would result in the benefit of the overall industry.
Local rivalry forces firms to move beyond basic advantages that the home country may enjoy, such as better iron ore
reserves in eastern India. We can consider the case of Essar Steel as an example. All the steel plants are setup along the
eastern coast of India, but only Essar set up a plant at Hazira on the western coast. Although it was situated far away from
its pelletization plant, it was closer in reach to its majority market of Middle East, Europe etc. The company made an
attempt to become market oriented. It set up its own shipping fleet, which gave it cost benefits in both in-bound and out-
bound logistics. As the company is using natural gas for sponge iron making the availability of the same is easier at Hazira.
Also, with talks of pipelines between Iran and India via Pakistan making waves, it is good news for Essar, as it will make
more gas available to it at lower cost.

Government Role
Government needs to make the environment more competitive and conducive for the steel manufacturers especially those
using sponge iron route of production. This needs to be done by the following outline:
Encourage companies to raise their performance by enforcing stricter quality norms.
Stimulate early demand for advanced products, by investing on research in state owned sector of aerospace etc.
Focus on specialized factor creation, like allocation of natural gas for the sponge iron industry.
Stimulate local rivalry by limiting direct cooperation and enforcing anti-trust regulations.