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A new minister has been appointed for mines. And a new minister of state will now be looking after steel. That has, once again, filled the hearts of steel producers with hope, and fear.
Hope that its demand for captive iron ore mines will finally be granted; fear, because they see a grave danger for the industry if iron ore exports are allowed to continue like before.
At the heart of all that hope and fear is the question - will the country lead a hand-to-mouth existence for the next 5-10 years, or does it plan to stay in the reckoning for much longer?
This is because the country’s policy of allowing companies to export iron ore made sense in the past, when India needed every bit of foreign exchange, and selling iron ore was one of the easy ways to achieve this.
But, with India consuming 53 million tonnes per annum (mtpa) of steel, and slated to consume 100 mtpa in less than five years, a clear policy decision needs to be taken on whether to continue with iron ore exports, or encourage steel producers to use it for the manufacture of steel within India.
Of course, we can choose to sell the ore today, and import both iron ore and steel in future at much higher costs. The prices are obviously bound to soar, because iron ore prices have been climbing - by almost 50% last year — thanks largely to the surging demand from China and India.
If Indian steel producers have their own iron ore, it would mean importing that much less iron ore and steel, both of which are bound to become more expensive in the coming years.
Taking a decision will not be easy. There are companies like Sesa Goa, which have specialised in exporting iron ore. And there are players like Arcelor-Mittal who also want to own iron ore mines in India, ostensibly for setting up a captive steel plant in India, but also with an intention to export the same to feed their overseas steel plants.
To appreciate the seriousness of the situation, one needs to look at two factors. First, we need to determine the size of iron ore reserves in India and the quantities exported. Second, we need to determine the quantity of iron ore India’s steel producers will require.
Take the reserves first. As on April 1, 2005, iron ore resources in the country were estimated to be 25 billion tonnes, largely distributed over six states. Production of iron ore has been growing, but exports have been growing faster
Now, for the second issue — how much iron ore does the steel industry require? For making each tonne of hot metal, the industry requires 1.6 tonnes of processed iron ore or 2 tonnes of run of the mine output.
At 53 million tonnes, the industry currently requires around 106 million tonnes of iron ore. That would not be worrisome except for the fact that India’s production has jumped from 25 million tonnes to 53 million tonnes only during the past decade. Earlier, thanks to a closed-door policy, demand for steel was kept suppressed and hence was low. But with industrialisation, this demand has to go up.
India’s per capital consumption of steel is just 40 kg today. Compare this with 250 kg for China and over 350 kg for developed economies (world average: 140 kg).
With greater focus on infrastructure, and with more vehicles and cities emerging, India’s demand could increase by at least four times over the next two decades. Not surprisingly, the industry expects steel production to cross 100 million tonnes (almost double the current levels) by 2012.
That will require 200 million tonnes of iron ore, or just 100 years of supply. Within two decades, India’s steel consumption should cross 200 million tonnes, too, requiring a whopping 400 million tonnes of iron ore, which leaves it with just 50 years’ supply.
India’s ability to produce more steel, and competitively, will depend on the
government’s mining policy. Will it allocate iron ore mines to steel manufacturers, or to merchant exporters?
Will it encourage steel production by ensuring that export or iron ore becomes unattractive? This is extremely critical because the world’s raw material supplies are getting scarce, and China has been going around the world securing iron ore supply for the future. Unlike Brazil and Australia, which are blessed with huge land areas with scant populations, and can hence continue exporting ores and minerals, India needs to consume the iron ore itself.
Will the new mining policy benefit the steel industry? Or will it favour merchant exporters? That question will decide the long-term fortunes of the steel industry in India.