INDIAN FERROALLOY INDUSTRY AT THE CROSSROADS

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The paper to be published as the lead article in the Metals & Minerals Review – Ferroalloy Special – January 2013 issue makes a case that while there are many positives for the ferroalloy industry in India, viz. scalability, location near high growth markets, cost advantages of labour, technical manpower domestically available ore and reducing price of reductant blend; the growth in ferroalloy production is stymied by inadequate infrastructure, rising cost & availability issues in thermal coal, fear of getting saddled with old technology, and lack of capital.

The global slowing of demand for ferroalloys, the re-emergence of China as a major exporter and the threat of imports are other factors that the Indian ferroalloy industry would need to tackle.

Therefore it is very difficult to predict if the ferroalloy industry in India can repeat the spectacular double digit growth of the last five years. The only certainty is of ferroalloy prices; which have been volatile and unpredictable in the past – they will remain volatile and unpredictable in the future: some things will never change!!

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INDIAN FERROALLOY INDUSTRY AT THE CROSSROADS

  1. 1. The Indian Ferroalloy Industry At Cross RoadsInvited Paper for Metals & Minerals Review – Ferroalloy Special – January 2013 issue The Indian Ferroalloy Industry At Cross Roads Prabhash Gokarn, Tata Steel1.0 INTRODUCTION TO THE INDIAN FERRO ALLOY INDUSTRYThe Indian Ferroalloy Industry; a part of the Core Sector under Ministry of Steel; isengaged in supplying crucialintermediates to the Steel Industry;namely ferroalloys. The Industry hascompleted five decades of its existence.Bulk Ferroalloys (viz. Ferro Manganese,Ferro Silico Manganese, Ferro Silicon,Ferro Chrome, etc., manufacturedthrough Submerged Arc furnaces), andNoble Ferroalloys (viz. FerroMolybdenum, Ferro Vanadium, FerroTungsten, Ferro Silico Magnesium,Ferro Titanium, Ferro Boron, etc.manufactured through the Alumino-Thermic process), are used in the production ofsteel (as deoxidants, for refining and for alloying).Depending upon the process of steel making and the type of steel being made, therequirement of different ferroalloys varies widely. The principal functions of alloyingsteel is for increasing its resistance to corrosion and oxidation, improving hardenability,tensile strength, high temperature properties (such as creep strength), wear andabrasion resistance, etc. Sincenoble ferroalloys constitute avery small proportion of the total,this paper is written with a focuson bulk ferroalloys.The furnace capacity in theIndustry was around 600 MVAprior to liberalization. Capacityaddition was over 700 MVAbefore the 11th Five Year Plan;another 1600 MVA of capacityhas been added during the 11thPrabhash Gokarn Page 1 of 21
  2. 2. The Indian Ferroalloy Industry At Cross RoadsFive Year Plan. As a result, the furnace capacity has crossed 2,900 MVA and bytonnage it has crossed 5 million tonnes per annum (Figure 1). Thus, ferroalloymanufacturing capacity has increased far ahead of the growth in ferroalloy requirementby the domestic steel industry, and has been export driven. About 30% of the capacityis idle due to a combination of poor planning, poor economics and local problems(labour, electricity, management issues etc.).1.1 New Capacities Coming UpExisting units are expanding and new ferroalloy units coming up (Haldia-West Bengal,Visakhapatnam-Andhra Pradesh, parts of Chhattisgarh, Orissa and Jharkhand). It isexpected that another 800 MVA to 1000 MVA capacity will be installed and will be incommercial production in the next two to three years. These units are also setting newcapacities for electricity generation and it is expected that about 1000 MVA of CPPcapacity will be added in next two years.2.0 GLOBAL TRENDS IMPACTING THE INDIAN FERRO ALLOY INDUSTRY2.1 Global Shift in Stainless Steel and Carbon Steel Production2.1.1 Stainless Steel production has seenshift in production from EU and Japan toChina. There has been a steep reduction instainless steel production in EU (due to theeconomic crisis) and in Japan(partly due toeffects of the Tsunami and due to globalrecession). This reduction in stainless steelproduction in the developed economies islikely to continue. (Figure 2)On the other hand stainless steel productionin China and India has seen significantgrowth: with over 45% of global stainlesssteel likely to be produced in China by 2015as against 35% today; India is also likely tosee a growth in stainless steel production atPrabhash Gokarn Page 2 of 21
  3. 3. The Indian Ferroalloy Industry At Cross Roads~ 10% in the next 5 years.2.1.2 Carbon Steel production in China has grown at a CAGR of 12% and in India at 8% since early 2000 and this growth is not likely to taper off anytime soon. On the other hand the developed economies of Japan, US, and EU grew in single digits in the same period and are now declining. (Figure 3). Thus the demand for ferroalloys too has become Asia Centric. Given both China and India are also large producers of ferroalloys (China & India - FeCr, Mn alloys, additionally, China – FeSi, refined alloys and most noble ferroalloys), and are large exporters to the rest of the world; the growing consumption at home has very significant impact on global trade. China has imposed export taxes on ferroalloy exports and has in many casesbecome a net importer; India seems to be going the same way.2.2 Borderless World2.2.1 Trade Barriers : Globally, trade barriers to imports are decreasing, for examplethe decrease on duties on ferro alloy imports has reduced from a peak of 105% in 1993to 0% in 2008 with duties currentlyjust 5% (Figure 4)Prabhash Gokarn Page 3 of 21
  4. 4. The Indian Ferroalloy Industry At Cross Roads2.2.2 Ocean Freight : Withdevelopment of shippinginfrastructure, ocean freightno longer remains asignificant cost, a steptowards making geography,history (Figure 5)2.3 Reducing Differential in Power Situation in Major Ferroalloy ProducingCountries :Power is the second most important requirement for bulk ferroalloy production. Indiahas historically suffered from huge power shortages, inefficient power generation &transmission and high cost, partly due to cross subsidies and T&D losses (which includepower theft). However, privatization of power generation (both CPPs & IPPs) and powerdistribution has brought significant improvement in the Indian power situation in the lastdecade.While India is still at a disadvantage with respect to power cost in South Africa andKazakhstan, the gap between China and South Africa on the one hand and India on theother regarding cost of power and its availability has clearly reduced, making ferroalloyproduction in India much more sustainable. The power crisis in South Africa is wellknown, while China too has seen acute seasonal shortages of power and rising powercosts.Prabhash Gokarn Page 4 of 21
  5. 5. The Indian Ferroalloy Industry At Cross Roads3.0 OPPORTUNITIES FOR GROWTH OF THE FERRO ALLOY INDUSTRY IN INDIAThe above factors havegiven the Indian FerroAlloy Industry immenseand very significantgrowth opportunities thathave led to a very rapidgrowth in ferro alloyproduction and exports inthe last decade. (Figure6).3.1 Exports from India : China is the world’s largest Manganese Ore producer byvolume and by Manganese content producing 35% of the world’s total production. Chinahas traditionallybeen a largeexporter ofManganese Alloys.Since late 2009,China has becomea net importer ofSiMn. Ironically, itwas China that inthe past exportedthe highest volumeof SiMn. Also, thesteep increase inthe production ofstainless steel andcarbon steel inChina (Figure 7and Figure 8) means it has become a significant market for ferroalloys, located atIndia’s doorstep.Prabhash Gokarn Page 5 of 21
  6. 6. The Indian Ferroalloy Industry At Cross RoadsChina’s withdrawal from supplying bulk ferro alloys and instead importing them on alarge scale has led to a steep increase in Indian exports of ferro alloys. (Figure 9).Prabhash Gokarn Page 6 of 21
  7. 7. The Indian Ferroalloy Industry At Cross Roads3.2 Domestic Consumption of Ferroalloys : The increase in production of bothcarbon and stainless steel in India over the last decade has led to a significant increasein the domestic consumptionof Ferroalloys in India (Figure10)The projected growth of ~8 to10% of stainless steel andcarbon steel till 2015 augurswell for the continued growthof ferro alloy production inIndia (Figure 11 and Figure12).Prabhash Gokarn Page 7 of 21
  8. 8. The Indian Ferroalloy Industry At Cross RoadsPrabhash Gokarn Page 8 of 21
  9. 9. The Indian Ferroalloy Industry At Cross Roads4,0 FERROALLOY INDUSTRY IN INDIA - ADVANTAGESTo summarize, the Indian Ferro Alloy industry has many advantages that have so faraugured well and resulted in the spectacular growth of ferro alloy production in India.These advantages are : 4.1 Ability to immediately scale up : 1. Large Capacity for Ferroalloys 2. Industry currently operating at 60% of rated capacity 3. New capacities coming up - near ports (Vizag, Haldia). 4.2 Location near high growth regions: 4. Freight advantage in markets such as China, Korea and Japan compared to Ukraine, Kazakhstan and South Africa 5. Short sailing time, freight advantage 4.3 Cost Advantages over China: 6. Domestically sourced LG & MG Mn Ore available for blending with imported HG Mn Ore. 7. Power, labour and inland freight costs comparable to China.Prabhash Gokarn Page 9 of 21
  10. 10. The Indian Ferroalloy Industry At Cross Roads 4.4 Power availability no longer such a large differentiator: 8. Commissioning of many new power plants including captive ones(CPP)- may help reduce power availability issues (faced today by SA, China) 4.5 Backward linkage to Ore: 9. Chrome Ore - Indigenous Chrome ore of high grade quality available to some players (integrated players like IMFA & Tata Steel, and those based in Orissa with allocations from OMC) 10. Manganese Ore – Low and medium grade Manganese ores abundantly available but need to be sweetened by import of high grade/high Mn/Fe Manganese ores. 4.6 Reductants : 11. Coke : India has been almost totally reliant on imports of coke from China specially for making Ferro Chrome. High coke prices and the 40% export tax levied on coke exports by the Chinese government have reduced the cost competitiveness of the ferro alloy industry in India. Increasing use of alternative reductants including indigenous coke/coal for ferro alloy making has helped the industry to mitigate the high cost to some extent. The slowing GDP growth in China and the global recession have prompted the Chinese government to withdraw this tax, which will further help the Indian industry to grow. 4.7 Rising domestic consumption of ferroalloys : The projected ~8% growth in carbon steel and ~10% growth in stainless steel production augurs well for the ferroalloy industry in India.Prabhash Gokarn Page 10 of 21
  11. 11. The Indian Ferroalloy Industry At Cross Roads5.0 THEN WHY IS THE INDIAN FERRO ALLOY INDUSTRY AT THE CROSS ROADS ?There are however significant developments that can either derail the Indian ferro alloygrowth story or propel it to greater heights. These developments are : 1. Increasing restrictions in the availability of the key raw materials – i.e. Manganese and Chrome Ores India has been self sufficient in both Manganese and Chrome Ore and till recently was even a very significant exporter. However, because of a deficiency in lumpy chrome ore and restrictions in the free availability of friable chrome ore due to internal policies of the largest supplier (OMC); imports of chrome ore into India are rising rapidly.Prabhash Gokarn Page 11 of 21
  12. 12. The Indian Ferroalloy Industry At Cross Roads High Grade Manganese ore being in short supply, imports of Manganese ore into India have risen dramatically. Manganese ore imports into India are at 1.6 Mn tonnes for Jan-Aug 2012, a rise of 78% from the same period in 2011. (Figure 13) India, like China, is highly dependent on South Africa, Gabon, Australia and Brazil for sourcing of Manganese ore; these four countries account for ~ 90% of the imports in 2011.Prabhash Gokarn Page 12 of 21
  13. 13. The Indian Ferroalloy Industry At Cross Roads What is worrying is China’s use of its financial muscle to buy mining assets and securing exclusive tie ups that may make sourcing of ores costlier for India and hamper the growth of ferro alloy production. 2. Electricity As explained earlier, with the increase in generation of electricity by public sector utilities, IPPs (Independent Power Projects) and CPPs(Captive Power Plants); Power Shortages which were the bugbear of power intensive industries in India such as the ferro alloy industry were mitigated to a large extent and that allowed for the spectacular growth of this sector(Figure 14). However, coal being the predominant energy source(Figure 15), there is likely to be an impending power crisis in this country due to thermal coal availability issues, coal linkage issues; delay in startup of new coal mines and de-allocation of coal blocks due to the “Coal-gate” scam. The rising cost of thermal coal globally and restrictions imposed in Indonesia on thermal coal asset ownership and preferential allocation agreements too have been affecting the growth of the power sector.Prabhash Gokarn Page 13 of 21
  14. 14. The Indian Ferroalloy Industry At Cross Roads 3. Infrastructure Indian industry has had to grapple with inadequate and crumbling infrastructure – stretched and overburdened roadways, railways and ports - that raises the cost of business. However we are seeing a rapid improvement in infrastructure : a. Roads - India plans to spend approximately US$70 Billion by 2013 to modernize its roads. India has rebuilt over 18,300 kilometers of 4 or 6-lane highways(including the 4-lane Golden Quadrilateral) inter-connecting major manufacturing centers and ports. The country is adding ~11 kilometers of new highways daily, and it is likely that we would add about 600 kilometers of modern highway per month till 2014.Prabhash Gokarn Page 14 of 21
  15. 15. The Indian Ferroalloy Industry At Cross Roads b. Railways - India has one of the worlds largest railway networks comprising 115,000 km of track over 65,000 km carrying 2.8 million tons of freight daily. Despite this the rail network is stretched and requires urgent expansion and modernization. Improvements in the form of “own your own wagon”, freight rationalization etc have helped. c. Sea Ports - India has a long 7500km coastline in which there are 13 major ports and 187 smaller ports, handling about 560 million tonnes of cargo (which is growing at a rate of 7.7%) annually. While many major ports are stretched to capacity, specially Paradip, Vishakapatnam and Haldia, which handle most of the ferroalloy traffic; upcoming ports like Dhamra in the east; Pipavav, Adani, Dahej, Mundra and Hazira in the west and Vallaradam in the south would help reduce traffic congestion.Prabhash Gokarn Page 15 of 21
  16. 16. The Indian Ferroalloy Industry At Cross Roads These improvements in infrastructure will help in the further growth of the ferroalloy industry. The concern is that these improvements will not happen rapidly enough. 4. Capital – Lack of capital and high rates of interest on loans have in many ways stymied the growth of ferroalloy units in the past. With many units having fallen sick due to poor project planning, execution and economics, Indian banks have become wary of exposure to this sector. Like in other sectors, there is increasing foreign investor interest in the ferroalloy sector. This has come in terms of both investments through the stock exchanges in listed entities (FIIs) and more recently, in form of direct investments through JVs (FDI). This increased availability of finance for well planned projects could result in further rapid expansion of the ferroalloy industry. However, talks of lowering India’s Credit Rating due to the slow pace of reforms, the negative sentiments caused by issues such as debate over FDI in Retail and the feeling of Government inaction could badly affect availability of foreign funds. 5. Lack of Technology Infusion and Innovation While Indians have been past masters of local innovations (jugaad – Figure 16), systematic industrial research, (that allowed the US, Japan, the former Soviet Union, South Korea and some countries in the EU to leapfrog in industry led GDP growth) is severely lacking in India.Prabhash Gokarn Page 16 of 21
  17. 17. The Indian Ferroalloy Industry At Cross Roads As a result India risks being continually overshadowed by China and significant development of new technologies in ferroalloy making bypassing the Indian ferroalloy industry (Figure 17). 6. Markets – The rapid growth in exports of ferroalloys led to rapid growth in ferroalloy production in India and today exports form a substantial proportion(~50%) of the market for ferroalloys (Figure 18). Ferroalloys from India were exported to EU, Japan and South Korea. The first exports of ferroalloys to China (hitherto a major ferroalloy exporter) from India occurred in 2004.Prabhash Gokarn Page 17 of 21
  18. 18. The Indian Ferroalloy Industry At Cross Roads The shift in steel production from the developed nations to China has led to China becoming the largest consumer (and in some cases producer) of ferroalloys. Thus, till recently, China has been the dominant destination for ferroalloys from India. With slowing Chinese steel growth and a healthy growth in demand for ferroalloys domestically, it is likely that exports, currently almost 50% of total production, will fall to a level of 30-35%(level attained during 2005-08) in 2013. The two factors of concern are : a) With reduction in export duties in China, the re-emergence of China as a large exporter of ferroalloys may make it difficult for Indian ferroalloy players to retain market share in a shrinking global market and b) The domestic demand for ferroalloys, although growing, will not be able to take up the slack if exports are hit. This would mean that the bulk ferroalloy industry could see a period of de-growth in the short term.Prabhash Gokarn Page 18 of 21
  19. 19. The Indian Ferroalloy Industry At Cross Roads 7. Rising Ferro Alloy Imports into India Although India is a large exporter of Ferroalloys due to the uncertain economic condition in the developed world, many ferro alloy companies (mainly from the CIS, Russia and Kazakhstan) which restricted themselves to supplying to customers in the developed world(US, EU, Japan) and to China have started making in-roads into India. This has led to a steep rise in imports of ferroalloys (25% CAGR over last 5 years) and does not augur well for the Indian Ferro Alloy industry (Figure 19).Prabhash Gokarn Page 19 of 21
  20. 20. The Indian Ferroalloy Industry At Cross Roads6.0 CONCLUSIONThus while there are many positives for the ferroalloy industry in India, viz. scalability,location near high growth markets, cost advantages of labour, technical manpowerdomestically available ore and reducing price of reductant blend; the growth in ferroalloyproduction is stymied by inadequate infrastructure, rising cost & availability issues inthermal coal, fear of getting saddled with old technology, and lack of capital.The global slowing of demand for ferroalloys, the re-emergence of China as a majorexporter and the threat of imports are other factors that the Indian ferroalloy industrywould need to tackle.Therefore it is very difficult to predict if the ferroalloy industry in India can repeat thespectacular double digit growth of the last five years. The only certainty is of ferroalloyprices; which have been volatile and unpredictable in the past – they will remain volatileand unpredictable in the future: some things will never change!!Acknowledgements The author (Prabhash Gokarn) would like to thank the management of Tata Steel for allowing him to write this paper. The views expressed in this paper are his own and should not be construed as the official opinion of Tata Steel or the prevalent views within the company.References & Sources of Data1. Indian Ferro Alloy Producer’s Association : Annual Reports & Presentations2. International Manganese Institute and International Chromium Development Association : Reports & Conference Presentations3. CRU, Metal Bulletin & TEX Publications : NiCrMo, Bulk FAM, Ferroalloys Market Track, Tex Report4. Data Monitor : Trends & Developments in the Indian Power Market (May’10)5. Planning Commission Website – Energy Sector (Dec 2012)6. Prayas Energy Group : Overview of Indian Energy Trends (2009)7. Tata Quality Management Service Publication on Innovation (2011)8. Metal Junction Conference : Indian Steel 2011 (Nov’11)9. iMaritime : India Port Report (Aug’03)10. Wikipedia and other sources on the internet.Prabhash Gokarn Page 20 of 21
  21. 21. The Indian Ferroalloy Industry At Cross RoadsAbbreviations Fe – Ferro, c/lb – US cents per pound of GDP – Gross Domestic Mn – Manganese, Chrome Content, Product, Si – Silicon, LG - low grade, CIS – Confederation of Cr – Chrome, MG – medium grade, Independent States, Ch – Charge HG – high grade, US – United States, MVA – Million Volt Ampere, T&D – Transmission & CAGR – Compounded Annual MT – Metric Tons, Distribution, Growth Rate, IPP – Independent Power OMC – Orissa Mining FII – foreign institutional Plant, Corporation, investment, CPP -Captive Power Plant, SA – South Africa FDI – foreign direct EU – European Union, investmentPrabhash Gokarn Page 21 of 21

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