The role of the government in the Indian steel sector

ROLE OF GOVERNMENT

In the pre reform epoch, when public sector was ruling, the ministry of steel was the cardinal regulator and determination shaper in pricing, allotment and distribution. With dismantlement of the rigorous regulative government, In the post-de-regulation period, the function of the Ministry of Steel is now considered as a facilitator.

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The function of Government in advancing competitory forces in this oligopolistic featured industry is really of import. Government intercession via policy or through some regulatory/judicial may be called for, particularly to protect larger consumer involvements. For case authorities ‘s diktat to the steel manufacturers to keep monetary values down in the face of lifting domestic and planetary demand for steel is an illustration of administrative ministry ‘s invasion in the market.

ROLE OF MINISTRY:

Supplying linkage for natural stuffs, rail motion clearance etc. for new workss and enlargement of bing 1s.

Facilitating motion of natural stuffs other than coal through finalisation of waggon demands and guarantee an un-interrupted supply of natural stuffs to the manufacturers.

Interaction with All India Financial Institutions to hasten clearance of undertakings.

Regular interactions with enterprisers suggesting to put up new ventures, to reexamine the advancement of execution and buttocks jobs faced.

Designation of infrastructural and related installations required by steel industry.

Promoting, developing and propagating the proper and effectual usage of steel and increasing strength of steel use peculiarly in the building sector in rural and semi urban countries, through the puting up of “ Institute for Steel Development and Growth ( INSDAG ) ” in Kolkata.

Encouraging research & A ; development activities in the steel sector. There is an institutional mechanism through which fiscal aid is provided from Steel Development Fund for this intent. Attempts are being made to further augment R & A ; D activities in the state.

Interacting with State Governments to supply power at reduced/ concessional duties particularly to mini steel workss all over the state. Similarly, the cargo rates adopted by the Railwaies have been rationalized after inter action with the Railway Board and freight cost on natural stuff transit for steel manufacturers is reduced.

Apologizing the categorization of coking coal in audience with the Coal Ministry so as to cut down the impact of royalty collectible on this basic natural stuff. Import responsibilities on several natural stuffs, such as, bit, ships for breakage, coke, non-coking coal etc. used by the steel industry has been reduced steadily over the past 4-5 old ages.

Policy REGIME FOR THE STEEL SECTOR IN INDIA:

Under the new industrial policy, Fe and steel has been made one of the high precedence industries. Price and distributionA controls have been removed every bit good as foreign direct investing up to 100 % ( under automatic path ) has been permitted.

The Trade Policy has besides been liberalized on import and export of Fe and steel. The authorities is committed to convey duties on assorted points of Fe and steel down to the international degrees ( Appendix 1 ) .

National Steel policy’2005 marks autochthonal production of 110 million metric tons ( meitnerium ) by 2019-20 from the 2004-05 degree of 38 meitnerium at a compounded one-year growing of 7.3 per centum per annum. Similarly targeted ingestion is 90 meitnerium by 2019-20 from the 2004-05 degree of 36 meitneriums, connoting a CAGR of 6.90 per centum.

The policy devises a multi-pronged scheme to accomplish these marks with following focal point countries – remotion of supply restraints particularly handiness of critical inputs like Fe ore ; better cost fight by spread outing and beef uping the substructure in roads, railroads, ports and power ; increase exports ; run into the extra capital demands by mobilising fiscal resources ; advance investings by taking procedural holds. In add-on the policy besides addresses challenges originating out of environmental concerns, human resource demands, R & A ; D, volatile steel monetary values and the secondary sector.

The Eleventh program working group for steel recommends the following for effectual development of the steel industry:

Full use of the bing policy model of Public-Private Partnerships ( PPPs ) in development of substructure like Railways.

Set up an R & A ; D Mission in order to supply accelerated push on R & A ; D and thereby better the fight of the industry.

Spread consciousness about fudging mechanisms available in exchanges like MCX and NCDX and develop appropriate regulative mechanism to avoid any manipulative patterns.

Develop an appropriate Institutional Framework for aggregation of informations and airing of Information.

See puting up of a multi-disciplinary organisation along the lines of the International Iron & A ; Steel Institute ( IISI ) .

Proposal to hold a dedicated program fund of Rs. 25 crores for the 11th Five Year Plan in the Ministry of Steel towards grant for development of human resources for Fe and steel and for ad runs for publicity of steel use.

A Technology Up step Fund Scheme ( TUFS ) for the Small and Medium Enterprises ( SME ) sector in steel industry to upgrade the technological profile of the workss in the SME sector.

GOVERNMENT INTERVENTIONS AND EFFECTS:

After 1992 liberalisation, the steel monetary values are market determined. Although, authorities ‘s intent behind Intervention is to rectify market imperfectness but recent intercession on affairs of pricing steel long merchandises has pointed that the major steel manufacturers have significant pricing power in the market and that they can be expected to move in unvarying with significant net impact on the market to travel the tendencies in the coveted way. In fact, it has given rise to competition issues in the market. And more significantly, it affects adversely the big participants ‘ inducement to put.

The differential competitory placement of the steel houses on this count has been derived historically as a consequence of the market falsifying regulative authorities policies in the yesteryear. The former licensing policy of the authorities in the first topographic point prohibited private entry into the integrated path and so bit by bit allowed private investing merely in little EAF based mini steel workss before deregulating the sector wholly in 1991-92. Further, monetary value and distribution control for steel produced in the incorporate sector did non let for sufficient growing for the participants already in the industry.

slow authorities reactivity

Government ‘s slow procedure of alteration has resulted in continuance of such distinguishing competitory conditions. Although the pick of engineering has become progressively market determined and is based progressively on pure commercial considerations, the policies related to ownership and leasing of mines and specific authorities intercessions do significantly act upon the engineering pick.

Subsidizing the little units

Government ‘s strategy of supplying subsidies to the State Small Industries Corporations ( SSICs ) makes SAIL, Tata Steel and RINL to sell steel at a subsidised monetary value to these SSICs. But authorities commission study itself says that the SSICs act as an agent/trader merely and the benefits do non make the intended donees. The point is, in this manner, the authorities creates favourable pricing conditions in the market.

Import POLICY INDUCED DISTORTIONS IN THE COMPETITION IN THE MARKET

The authorities ‘s financial policy has been slightly supportive to the domestic steel industry and against the involvement of the consumer industries ; these could be considered to be anticompetitive.

Take for case the the import responsibility on steel, that remained at really high degrees for a long clip, at 25 per centum boulder clay January 2004. It is merely now that anti-inflationary action has led to import responsibility being waived.

Besides, the industry benefited from the floor monetary values imposed on premier steel merchandises, non merely when the planetary monetary values dropped to abysmal degrees, but besides when they started lifting to sensible places. Though these have eventually been abolished, the drawn-out protection unduly supported the steel shapers at the cost of the consumers.

The industry besides gained from certain process related non-tariff barriers like compulsory enfranchisement demand for quality of imported merchandises by the Bureau of Indian Standards ( BIS ) . This involved lengthy and cumbersome processs affecting high minutess costs for the importers.

The authorities besides designated specific ports for imports of certain classs of steel with a clear ( though non officially stated ) purpose to control their imports.

The infliction of an anti-dumping responsibility on non-alloy steel a few old ages ago on an perfectly flimsy land was besides questioned widely by the consumer industry.

Further, a prohibitory import responsibility on seconds and defectives besides went against echt consumer coercing them to purchase premier stuffs against their wants and demand. Given the fact that there is a big figure of diverse industries dependent on low priced faulty stuffs and there are no specific grounds why such consumers should be forced to purchase high cost natural stuffs for their low value merchandises, the authorities ‘s relentless base against imports of seconds and defectives violate the spirit of competition with openly doled out favors to the major steel shapers. The steel industry frequently raised wellness issues in certain instances which are nil but administrative and jurisprudence enforcement affairs holding no relation either to the policy or the market.

These steps were against the involvements of a certain sections of the steel industry itself ( for illustration, the merchandiser CRC and GP/GC manufacturers ) , and served the major steel manufacturers when it came to competition with the user industry.

Control Over Natural Resources and Captive Mines

While cartelization can non be established with facts and in the context of the bing competition Torahs in the state, there are larger concerns in the steel industry about competition issues when it comes to differential form of entree o natural stuffs such as Fe ore, coal, manganese ore and Cr ore, etc.. All these have created differential advantage to the steel shapers.

Captive excavation historically arose from steel endeavors get downing Fe ore or coal based production when there were no independent excavation endeavors in the relevant countries. Besides, such action was more valid in the context of administered pricing governments of the yesteryear. In such a state of affairs when the end product monetary value is regulated on the footing of costs, it did non affair, whether natural stuffs such as Fe ore or coal are mined by the steel manufacturers or were bought from an external bureau mining independently at a market determined or administered monetary value. However, the relevancy of continuance of such a system needs to be reviewed when there are no limitations on the end product ( steel ) monetary values and free market conditions prevail in that market. One needs besides to analyze the host of deformations that arise in the market of Fe ore which, in bend, acquire reflected in the economic sciences of steel production and accordingly raise intra industry competition issues in the steel market.

Historically, Tata Steel and SAIL got into steel production based on Fe ore mines leased out to them on a confined footing. Other than them, the state had steel production merely from bit based units who had nil to make with Fe ore.

Coal ( coking or non-coking ) has limited private engagement in the supply side and it is sold to the steel companies at administered monetary values by authorities owned Coal India Ltd. For other natural stuffs, such as Mns, some of the steel shapers have confined entree to them, but the majority of that is bought from the unfastened market. In the overall economic sciences of steel production, Mn is non so of import sing its comparatively low portion in the costs of production. Captive Cr ores are of import in the instance of chromium steel steel production merely.

Iron ore, hence, is the most of import mineral in the context of confined excavation and the related policies lie at the Centre of competition issues in the Fe ore and steel market.

Structure of the Iron Ore Market

From the supply side, today, the Fe ore market is divided into the undermentioned sections:

Merchant excavation companies in the public sector such as NMDC, OMC OMDC etc. who sell Fe ore either at market based or authorities determined monetary values.

Merchant excavation companies in the private sector who sell iron ore at market based monetary values

Steel manufacturers ‘ confined mines.

From the demand side of the market, the market is segmented in the undermentioned manner:

Iron and steel companies doing usage of their ain confined resources mined straight or indirectly at the existent cost of excavation ( plus cargo )

Iron and steel companies obtaining assured allotments from NMDC or any other authorities company at monetary values fixed by the concerned Fe ore company with or without the authorities clearance/approval.

Iron and steel companies purchasing partially or to the full their demand from the merchandiser excavation companies/traders at market monetary values.

The construction of the market seen both from the supply and the demand sides provides highly interesting scenarios. In footings of supply confidence, the steel manufacturers with confined mines are best placed followed by those with assured allotments from the merchandiser excavation companies in the populace sector. The Fe and steel companies who have to depend on the market are the worst placed. Among them, those with long term agreement with so Fe ore mineworkers are placed better.

While the market monetary value of Fe ore is driven by specific demand and supply conditions in the market and is besides linked to the monetary values of steel bit, steel, sponge Fe etc.. , the populace sector giants such as NMDC provides Fe ore at non-market monetary values, largely far lower than the prevalent domestic or planetary market monetary values on allotment footing. Since the footing of allotment is non good defined, this market remains far from being competitory, with built in subsidies, and clearly provides a competitory border over all those who are to purchase their Fe ore from the market.

There is no job per Se if a natural stuff resource such as Fe ore or coal is available to a user industry at cost when they have confined entree. The trouble arises under the undermentioned fortunes,

When the user industry, say, a steel manufacturer is provided with a Fe ore or coal excavation rental grant, at a price/cost that has no relevancy to the value of the plus, particularly when other manufacturers who are dependent on the same natural stuff are outside of this favour. It is like supplying land or a mill to one free of cost and to another at market monetary values to make the same concern. The constituted officeholders, particularly the public sector entities and TISCO gain extraordinarily from such actions of the yesteryear.

When an overriding precedence is assigned to an applier for excavation rentals when linked to send on integrating that is when confined excavation rentals are provided precedence over the remainder without any extra duty to carry through. Besides, when a precedence is assigned to province owned excavation companies disregarding the fact that they operate in the same market under precisely the same conditions.

When a prospective investing is incentivized with the promise of a confined excavation rental by the province authorities.

Not merely that all the above instances are in dispute to the free market conditions, the prisoner excavation is being seen by the authorities itself as a subsidy to the industry.

As can be seen from the charts annexed, on an mean the Fe ore cost to the steel companies with entire confined excavation falls in the scope of Rs.322 per metric ton for Tata Steel to Rs.558 per metric ton for SAIL for the twelvemonth 2005-06. For a company dependant on partially confined resources ( up to about 30 % ) such as JSW Steel, located in a excavation country, the costs were Rs. 886 per metric ton. For RINL, wholly dependent on assured supply from NMDC at authorities determined monetary values, the costs were in surplus of Rs. 1500 per metric ton in 2005-06 and Rs.1100 per metric ton in the old twelvemonth. As against this, a typical sponge Fe unit dependent wholly on the unfastened market paid Rs. 2800 for CLO and others Rs. 1600 per metric ton for mulcts, ex-mine, excepting conveyance costs.

Therefore, conditions of fight can be an result of deformed competition in the market. One beginning of this deformed competition is the unequal entree to the natural stuffs, which may give some houses an unreal competitory advantage. This advantage is in no manner related to specific techno economic efficiency in operation of the houses in inquiry

Much of the authorities policy prefering confined excavation is based on the declared aim of supplying supply security and thereby reduces the supply side hazards in the normally bulky investings in steel. However, in the conditions of big graduated table long term and one-year contracts which drive the Fe ore concern today, confined excavation can non be seen as the lone manner to supply supply security. Clearly, as seen from the MoUs signed by assorted enterprisers with different province authoritiess, confined mines are an built-in portion of the steel undertakings proposed. Arguably, supply security may non be the premier issue, instead it is assured returns.

The other major competition issue associated with confined excavation is that boulder clay now is related to the size of the rental retention and the bid over the resources extended. For illustration, SAIL and Tata Steel have big Fe ore resources under their control, far more than what they would be likely to necessitate in the foreseeable hereafter. They are being allowed to keep on to these resources on instead unsure enlargement undertakings. In a state of affairs when there is seemingly a deficit with restrictions being seen in enlargement of production, important resources are acquiring locked up under the rental retention of a few companies which in bend in making a deficit of capacity and subsequent rise in the monetary values of Fe ore in the unfastened market. This has gone against the involvement of the steel or Fe manufacturers dependent on the market.

Table ( a ) : Iron Ore Mining Leases with Tata Steel

Mining Area/Block

District

State

Mining Area in Hectares

Noamundi

West Singbhum

Jharkhand

1273.76

Noamundi

West Singbhum

Jahrkahnd

85.56

Joda East

Keonjhar

Orissa

671.09

Bamebari

Keonjhar

Orissa

464.00

Katamati

Keonjhar

Orissa

403.32

Joda West

Keonjhar

Orissa

1437.72

Khondbandh

Keonjhar

Orissa

978.00

Entire

A

A

5313.456

Beginning: Indian Bureau of Mines, Industry Intelligence, Respective State Governments.

Table ( B ) : Mining Leases Granted to Sail

Mining Area/Block

District

State

Mining Area in Hectares unless otherwise mentioned

Gua

Singbhum West

Jharkhand

1443.00

Gua

Singbhum West

Jharkhand

12.14

Manoharpur

( Chiria )

Singbhum West

Jharkhand

2269.00

Kiriburu

Singbhum West

Jharkhand

82.00

Kiriburu

Singbhum West

Jharkhand

1936.1

Meghahataburu

Singbhum West

Jharkhand

879.43

Budhaburu

( Chiria )

Singbhum West

Jharkhand

3.18 sq stat mi

Budhaburu ( Chiria )

Singbhum West

Jharkhand

1.25 sq stat mi

Budhaburu ( Chiria )

Singbhum West

Jharkhand

1.98 sq stat mi

Jilingburu1

Singbhum West

Jharkhand

210.53

Jilingburu2

Singbhum West

Jharkhand

30.44

Ankua

Singbhum West

Jharkhand

67.18

Ankua

Singbhum West

Jharkhand

622

Bolani

Keonjhar

Orissa

1586.36

Bolani

Keonjhar

Orissa

1321.45

Barsuan Kalta Taldih

Sundergarh

Orissa

2486.382

Toda Reserve Forest

Sundergarh

Orissa

77.94

Toda Reserve Forest

Sundergarh

Orissa

25.98

RAJHARA MECH.MINES

DURG

Chhattisgarh

220.00

JHARANDALLI

DURG

Chhattisgarh

813.19

KOKAN

DURG

Chhattisgarh

241.76

Kulwar – Nagpur

DURG

Chhattisgarh

938.06

Dalu ( or Dalli? ) Mechasnised Mine

Durg

Chhattisgarh

719.60

Mahamaya and Dulki

Durg

Chhattisgarh

1522.67

Kemmangundi

Chikmagalur

Karnataka

42.70

Rowghat

A

Chhattisgarh

500.00

Beginning: Indian Bureau of Mines, Industry Intelligence, Respective State Governments.

The province authoritiess such as Orissa, Chhattisgarh, Jharkhand and Karnataka, have late signed Memorandum of Understanding ( MoUs ) with prospective steel endeavors assuring them, among others, Fe ore excavation rentals on confined footing, against the promise to put up steel workss. Although the existent leasing out is linked to come on made on the investings, there were no pre-announced competitory standards which the province authoritiess should use to choose one among many ( if the instance be ) even make a ‘promise ‘ against a promise. In the instance of the MoU with POSCO, the Orissa authorities, with the inexplicit support of the cardinal authorities has considered confined excavation rentals for them leting them at the same clip to export most of that, which itself is an extraordinary grant.

The province authoritiess while harmonizing precedence allotment of mines to new investors in the province has non spelt out a policy towards bing participants on how to take attention of their concerns and how to convey them in at par with the new participants. In many ways, one finds that policy induced prejudice in the policy of prisoner excavation has worked to convey in deformations in the market of Fe ore and steel.

Export Tax

The authorities has late introduced a series of steps to control rising prices. One of them is debut of an export revenue enhancement on certain types of Fe and steel merchandises. The steps are to raise immediate supply to the domestic market. Prior to that, the authorities had introduced an export revenue enhancement on Fe ore at the rate of Rs. 300/50 per ton ( depending on the class ) last twelvemonth which has since been revised to an ad valorem rate of 15 per centum flat.

The Export Tax on Fe ore is more challenging. The authorities has considered the revenue enhancement at the current high degree to conserve the mineral for future domestic usage when the current production and production capacity already built up are far in surplus of current demand in the state. There are surveies that find baseless the fright that Fe ore in the state will fall short of demand in the foreseeable hereafter. While the current Fe ore production is in the scope of 200-210 meitnerium, and the industry has an estimated excavation capacity of about 250 meitneriums, local ingestion stands at about 85-90 meitnerium. That is, even after the domestic demand is to the full met, there will be over 100 meitneriums of Fe ore which can merely be exported. There are studies of stocks roll uping in mines and the ports. Bringing in limitations in such conditions may coerce the excavation industry to follow 2nd best options, possibly such as puting up value adding installations, where they do non hold competitory advantage or sell at unnaturally down domestic monetary value.

The other issue is that if preservation is a national precedence, there is an economic cost to preservation and who pays for that and in which manner. Today, the load of an export revenue enhancement or steps to deter exports has fallen wholly on the Fe ore excavation industry with merely the user industry to profit from it. The authorities, in the instance of its apprehension that Fe ore needs to be conserved, should hold a policy in such a manner that the load of a restrictive policy is good distributed or the affected industry is adequately compensated so that their investings and resources are good protected in value.

The last but non the least of import of them all is a proposal under consideration of the authorities of India ( as reported widely across national newspapers ) to relieve NMDC from paying export responsibility on Fe ore. More interesting is the fact that the authorities is even sing to return the export revenue enhancement collected so far by the company as a wages for keeping monetary value line down in the domestic market. These are important competition issues and necessitate no farther account why so.

Competition issues in the Context of Investment and Growth

steel production is a important substructure dependent industry and capacity creative activity involves significant direct capital costs for developing substructure for natural stuffs, conveyance logistics, storage etc. while some of these substructure development activities are taken up routinely by the authorities as a portion of larger development attempts, there are really specific investings which are directed at merely specific donees such as a big steel works. these include, for illustration, edifice of roads, Bridgess, urban substructure which are straight related to the economic sciences of the works. there is no clear policy in pricing such services. since such development attempts are non made uniformly, there can be valid instances of policy based favoritism. This is peculiarly true when the authorities undertakes country based development to suit specific endeavors.

Different strategies of revenue enhancement grants, particularly those seen in the signifier of release of province gross revenues revenue enhancement, octroi, etc. granted to prospective investings to pull them to particular province sum to subsidies. Competition issues are besides seeable when big endeavors are provided with cheaper and more assured supply of scarce resources such as energy and minerals. for illustration the displacement of turn overing Millss from mandi gobindgarh in Punjab to baddi in himachal pradesh on history of lower electricity rates and other revenue enhancement inducements. in jharkhand, Orissa and chattisgarh sponge Fe workss have been set up exactly due to assured coal linkages.

APPENDIX-I

State

Capacity

( million metric ton per annum )

Orissa

75.66

Jharkhand

104.23

Chattisgarh

56.61

West Bengal

21.00

Other States

18.2

Entire

275.70

Table ( a ) : predicted capacity

Table ( B ) : production, ingestion and growing of entire finished steel ( ‘000 metric ton ) in steel sector

Year

Production FOR SALE

Export

Import

Consumption

2004-05

43513

2293

4705

36377

2005-06

46566

4305

4801

41433

2006-07

52529

4927

5242

46783

2007-08

56075

7029

5077

52125

2008-09

57164

5841

4437

52351

Apr-Dec 2010

( provisional )

43849

5210

2099

40997

Table ( C ) : Crude steel production capacity, use

Year

CRUDE STEEL

capacity ( ‘000 metric ton )

production ( ‘000tonne )

capacity use ( % )

2004-05

47995

43437

91

2005-06

51171

46460

91

2006-07

56843

50817

89

2007-08

59845

53857

91

2008-09

66343

58437

88

Apr-Dec 2010

( provisional )

72763

45775

84

x

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