Paran Balakrishnan: Steel barons turning up the heat

Here's A 21st century economic quiz: How far is India behind the growth kings of the Middle Kingdom?

Anyone who wants to answer that poser should probably check the steel production statistics of the two emerging behemoths.

China's blast furnaces turned out a stupendous 410 million tonnes of steel last year.

India needed only 50 million tonnes to keep its growth engine chugging along.

That is a sobering figure for anyone who reckons that steel is the framework of all economic growth. India is on a growth trajectory but it is still a tortoise compared with the Chinese hare. If steel is a metaphor for growth, it is obvious that India has a long way to travel.

But for those who equate steel with economic growth, there is hope on the horizon. The steel barons have suddenly turned up the heat in India's blast furnaces. They will not be catching up with the Chinese soon, but they aim to post robust growth rates until at least 2020, by which time it is conservatively reckoned India will be producing 180 million tonnes of steel.

For a start, take a look at the newcomers who have suddenly appeared like Vasco Da Gama on the horizon and discovered a quicker route to India.

There is the Korean steel colossus, Posco, which has signed an initial agreement to put up a 12 million tonne steel plant in Orissa, the east coast region which is dirt poor but filthy rich when it comes to minerals like iron ore.

Then, there is India's own golden boy, Lakshmi Mittal, the world's fifth wealthiest man, who seems to have perfected an alchemist-like skill at turning steel into unimaginable riches. Mittal's scouts are doing aerial surveys of three or four sites they have been offered by the government of Jharkhand, another of India's poor regions which happens to be abundant in minerals.

Amazingly, Mittal stayed away from India for years while he snapped up steel plants in every other corner of the world. Now, he is also attracted by the India growth story and is planning a 12 million tonne plant. (The Luxembourg-based Arcelor had Indian ambitions until swallowed up by Mittal's ever-growing empire).

Inevitably, India's homegrown steel barons are making their own plans to ensure that the furnaces are burning bright.

Essar Steel, a company that struggled through the 1990s after India's growth failed to meet expectations, is commissioning a new wing at its plant in Hazira, Gujarat, to take production from 3 million tonnes to 8.5 million tonnes by 2008.

It is also on the prowl for a site in eastern India, where the largest iron ore deposits are located, to put up another plant which will be operational by 2012.

The fact is that zooming steel prices and strong demand has revived the Indian steel industry and with cash in their kitties, everyone's looking at ways to grow at high speed. Even the country's biggest steel producer, the Government-run Steel Authority of India, is rationalising production at its creaky rustbucket plants and going for growth. It makes about 12 million tonnes but that's scheduled to rise to 22 million tonnes by 2012.

The Tatas, who opened India's first steel mill back in 1907 but whose momentum slowed in recent years, are trying to play catch-up by snapping up companies abroad and in the last year it has bought Singapore's National Steel and Thailand's Millennium Steel.

Is the universal optimism justified? What happened in the previous decade is an object lesson for any businessman who gets carried away by industrial fads and unwarranted optimism. In the early part of the 1990s, it looked a dead certainty that India had moved to a higher growth trajectory and several business houses figured that steel would be a safe bet.

The Indian economy slowed soon afterwards and newly emerging steel barons such as Essar went into a tailspin from which they only emerged in 2002 when the steel industry globally began to pick up.

Nevertheless, that grand smash-up hasn't dampened their enthusiasm for India's growth prospects. They are now betting heavily that India's 8 per cent-plus expansion will continue and that the country's resource-hungry economy will swallow up all the steel it can get.

If you have rapid GDP growth you must have infrastructure growth. So its quite pragmatic to believe the industry will grow at between 10 per cent and 12 per cent, says a senior steel industry executive.

They predict 10 per cent to 15 per cent growth in consumption that will take demand to about 100 million tonnes in the next two years and 180 million tonnes by 2020.

They are also counting, perhaps optimistically, on the world being able to maintain the healthy growth rates that have bolstered India's expansion.

What is more, they insist they have emerged smarter from the trials and tribulations of the 1990s. This time round, they say they have learned how to slice costs and be globally competitive. So even if times get tough, they'll be able to export and take on producers anywhere in the world in terms of cost and quality.

They also point out that much of the growth is coming from the India's boom in sales of products like vehicles, refrigerators, air-conditioners and microwaves.

Growth should, they argue, get an additional push when the Government finally starts to improve the dilapidated infrastructure and build new ports and airports.

Certainly, they have shown a new global-scale adventurousness that would not have been dreamed about in the past.

For instance, look at the Jindals who faced tough times in the mid-1990s and who are now offering several million for an iron ore mine in faraway, landlocked Bolivia.

The Jindals also plan to boost production from 4.5 million tonnes to almost 15 million tonnes in the coming years. But even in this era of sky-high prices, steel is still a tough industry. Would-be producers must scan the globe for potential competitors.

There is also the ever-present danger that the Chinese may one day find their domestic markets cooling and start scanning foreign shores. And that is when the tough will really have to get going.