Steel Industry in India Must Focus on Reducing Cost and Improving Operational Efficiency

Piyush Dewangan and Rajabahadur V. Arcot

The metals industry in India is growing and has garnered significant global attention.  India is the world’s fourth largest producer of iron ore.  The country’s steel capacity has grown from 47.9 MTPA in 2004-05 to little over 75 MTPA in 2010-11 and emerged as the fifth largest producer of steel last year.  However, the per capita consumption of steel in India, which is around 52 kg, is far below China’s at 427 kg and that of world average of 203 kg. This indicates the high growth potential that exists for metals industry in India. The growth of the steel industry will be abetted by the growth of various industrial segments essential for the development of the country, such as highways, railways, airports and others.  ARC believes that there may be short term fluctuations in demand in the country but the long term outlook for metals industry is robust. 

India, in order to enhance its economic growth, is focusing on improving its infrastructure and has planned $1 trillion investment in the 12th five-year plan (2012-2017) to boost existing infrastructure.  The country is attracting domestic and foreign investments in several key infrastructure projects.  The growth in infrastructure creates excellent opportunities for growth in the metals industry.

In addition to the infrastructure projects, the growth of industries such as automotive, electric power and others are also propelling the growth of India’s metal industry.  The country’s automotive industry is experiencing robust growth and becoming the destination of choice for many global players.  The industry is witnessing growth in all segments (passenger cars, luxury vehicles, two wheelers and others) due to favorable demographic profile, increasing disposable incomes, changing lifestyles, and such others.  As the automotive companies extensively use aluminum and steel to make automotive parts, it contributes to the growth of the metals industry in India.  In addition, the electric power industry is witnessing large investments involving several greenfield and brownfield expansions.  The State had planned to invest $11.5 billion in the 11th five-year plan (2007-2012) to add 60,000 MW of generating capacity; but the investment is being doubled in the 12th five-year plan for further addition of 100,000 MW.  These trends in industrial activities are contributing to the growth of the metals industry in India. 

The growth potential of India’s metals industry is well understood by domestic and global players, hence the industry is attracting significant investments.  Several global players have either announced their expansion plans in India or are planning to enter this market.  Recently, China Steel Corporation along with its co-investors announced its plan to invest $178 million in India to produce electrical steel in Gujarat.  Tata Steel has also announced its plans of investing $1.8 billion for setting up a 6 million ton steel plant in Orissa and around $1.3 billion for iron ore mines in the State.  The company will focus on producing flat steel products for automotive industry and others.  In addition, the company is also implementing an expansion project at Jamshedpur to increase its current capacity of 6.8 MTPA to 9.7 MTPA and the project is expected to be completed by March 2012. Rashtriya Ispat Nigam Limited (RINL) is currently expanding its capacity from 3 MT to 6.3 MT and also modernizing its existing facilities with investment of $1.5 billion, to take its total capacity to 7.3 MT by 2013-14. The company also has plans to invest $5.5 billion to expand its capacity to 20 MT by 2020.  The country’s largest steel producer Steel Authority of India (SAIL) is currently implementing its modernization and expansion plan in a phased manner.  The company is currently executing phase 1 and the company’s hot metal production capacity is expected to grow from 13.8 MT to 23.46 MT by 2012-13. 

Additionally, global players such as POSCO, South Korea and Mittal Group have announced their individual plans of setting up 12 million tons integrated steel plants in India; but so far there has been no significant progress on these projects.  The projects are still facing serious, long-drawn out issues related to several government clearances and land acquisition. 

In recent months the profitability of the industry has been affected mainly due to the higher input prices of coking coal, iron ore, and others.  The country does not have sufficient deposits of coking coal and is mainly dependent on imports.  Companies are facing challenges due to increase in the price of coking coal and its fluctuations; and steel companies are finding it difficult to pass on the rising input costs due to the customer’s resistance.  However, companies such as SAIL are making efforts to overcome these challenges through better product mix and higher value added steel production, such as cold rolled coils, electrical steel, alloy steels, and others. 

ARC believes that the immediate concern of steel producers in India must be to focus on improving productivity, becoming more energy efficient, and eliminating all unwanted manufacturing costs.  While they align their production to meet the emerging demand for value-added products, they must increase the return from existing assets. 

In a competitive market, companies earn margins by eliminating all unwanted manufacturing costs.  While significant cost allocation is determined at the plant design and engineering stage, the rest is determined by asset utilization, operational efficiency, and supply chain efficiency, among others.  Manufacturing IT solutions, comprising automation systems, enterprise solutions, enterprise asset management solutions, and manufacturing execution systems, play an important role in improving productivity and efficiency during plant operation and maintenance stages.  ARC believes that the steel industry must deploy advanced manufacturing IT solutions, which help the companies to manage costs and improve operational efficiency. 

We welcome your views on this topic. Please write to pdewangan@arcweb.com or raja@arcweb.com.​