The Indian Ferroalloy Industry At Cross Roads


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The Indian Ferroalloy Industry At Cross Roads

  1. 1. The Indian Ferro Alloy Industry At Cross RoadsInvited Paper The Indian Ferro Alloy Industry At Cross Roads Prabhash Gokarn, Tata Steel1.0 INTRODUCTION TO THE INDIAN FERRO ALLOY INDUSTRYThe Indian Ferro Alloy Industry; a part of the Core Sector under Ministry of Steel; isengaged in supplying crucial intermediates to the Steel Industry; namely ferroalloys.The Industry has completed five decades of its existence.Bulk Ferroalloys (viz. Ferro Manganese, Ferro Silico Manganese, Ferro Silicon, FerroChrome, etc., manufactured through Submerged Arc furnaces), and Noble Ferroalloys(viz. Ferro Molybdenum, Ferro Vanadium, Ferro Tungsten, Ferro Silico Magnesium,Ferro Titanium, Ferro Boron, etc. manufactured through the Alumino-Thermic process),are used in the production of steel (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. Since noble ferroalloys Table 1 Ferro Alloy Capacity in Indiaconstitute a very small proportion of the total, this 2012 estimatespaper is written with a focus on bulk ferroalloys. Ferroalloy Capacity, Mn TPAThe furnace capacity in the Industry was around Manganese Alloys 3.16600 MVA prior to liberalization. Capacityaddition was over 700 MVA before the 11th Five Chrome Alloys 1.69Year Plan; another 1600 MVA of capacity has Ferro Silicon 0.25been added during the 11th Five Year Plan. As a Noble Alloys 0.05result, the furnace capacity has crossed 2,900 Total 5.15 * source - IFAPAMVA and by tonnage it has crossed 4.65 milliontonnes per annum (Table 1). Thus, ferroalloy manufacturing capacity has increased farahead of the growth in ferroalloy requirement by the domestic steel industry, and hasbeen export driven. About 30% of the capacity is idle due to a combination of poorplanning, poor economics and local problems (labour, electricity, management issuesetc.).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 inPrabhash Gokarn et al. Page 1 of 16
  2. 2. The Indian Ferro Alloy Industry At Cross Roadscommercial 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 seen shiftin production from EU and Japan to China. Therehas been a steep reduction in stainless steelproduction in EU (due to the economic crisis) andin Japan(partly due to effects of the Tsunami anddue to global recession). This reduction instainless steel production in the developedeconomies is likely to continue. (Figure 2)On the other hand stainless steel production inChina and India has seen significant growth: withover 45% of global stainless steel likely to beproduced in China by 2015 as against 35% today;India is also likely to see a growth in stainless steel production at ~ 7% in the next 5years.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 globalPrabhash Gokarn et al. Page 2 of 16
  3. 3. The Indian Ferro Alloy Industry At Cross Roadstrade. 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 currently just 5% (Figure 4) Source : IFAPA2.2.2 Ocean Freight : With development of shipping infrastructure, ocean freight nolonger remains a significant cost, a step towards making geography, history (Figure 5) Source : ICDA Kyoto ConferencePrabhash Gokarn et al. Page 3 of 16
  4. 4. The Indian Ferro Alloy Industry At Cross Roads2.3 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.3.0 OPPORTUNITIES FOR GROWTH OF THE FERRO ALLOY INDUSTRY IN INDIAThe above factors have given the Indian Ferro Alloy Industry immense and verysignificant growth opportunities that have led to a very rapid growth in ferro alloyproduction and exports in the last decade. (Figure 6). Source : IFAPA3.1 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 traditionally been a large exporter of Manganese Alloys.Prabhash Gokarn et al. Page 4 of 16
  5. 5. The Indian Ferro Alloy Industry At Cross RoadsSince late 2009, China has become a net importer of SiMn. Ironically, it was China thatin the past exported the highest volume of SiMn. Also, the steep increase in theproduction of stainless steel and carbon steel in China (Figures 2 and 3) means it hasbecome a significant market for ferroalloys, located at India’s doorstep.China’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 7). Source IFAPAPrabhash Gokarn et al. Page 5 of 16
  6. 6. The Indian Ferro Alloy 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 consumption of Ferroalloys in India (Figure 8) Source IFAPAThe projected growth of over 8% of stainless steel and carbon steel till 2015 augurs wellfor the continued growth of ferro alloy production in India (Figure 9A and 9B). Source : IFAPA 5 year documentPrabhash Gokarn et al. Page 6 of 16
  7. 7. The Indian Ferro Alloy Industry At Cross Roads Source : IFAPA 5 year document4,0 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. 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) (Figure 12)Prabhash Gokarn et al. Page 7 of 16
  8. 8. The Indian Ferro Alloy Industry At Cross Roads 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.5.0 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.Prabhash Gokarn et al. Page 8 of 16
  9. 9. The Indian Ferro Alloy Industry At Cross Roads 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. 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 10) Source : IMnI, own estimates 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. 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 werePrabhash Gokarn et al. Page 9 of 16 Source : Data Monitor
  10. 10. The Indian Ferro Alloy Industry At Cross Roads 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 12). However, 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. 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 Source : Data Monitor 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 et al. Page 10 of 16
  11. 11. The Indian Ferro Alloy 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. 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 13), 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 et al. Page 11 of 16
  12. 12. The Indian Ferro Alloy Industry At Cross Roads Source : TQMS 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 14). Figure 14 : Some New Technologies in Ferroalloy Making Source : Metal Junction Conference, 2011 6. Markets – The rapid growth in exports of ferroalloys (Figure 7) led to rapid growth in ferroalloy production in India(Figure 6) and today exports form a substantial proportion(~50%) of the market for ferroalloys (Figure 15). FerroalloysPrabhash Gokarn et al. Page 12 of 16
  13. 13. The Indian Ferro Alloy Industry At Cross Roads 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. Figure 15 : Rising Proportion of Exports (kT) 47% 52% 32% 1,533 38% 40% 1,555 30% 863 961 28% 960 640 517 1,819 1,740 1,558 1,520 1,460 1,424 1,308 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 Dom Exp, %Exp Source : IFAPA The shift in steel production from the developed nations to China (Figures 2 and 3) 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 et al. Page 13 of 16
  14. 14. The Indian Ferro Alloy Industry At Cross Roads Source : IFAPA 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 11).6.0 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 globalslowing of demand for ferroalloys, the re-emergence of China as a major exporter andthe threat of imports are other factors that the Indian ferroalloy industry would need totackle.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!!Prabhash Gokarn et al. Page 14 of 16
  15. 15. The Indian Ferro Alloy Industry At Cross RoadsAcknowledgements 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. Prayas Energy Group : Overview of Indian Energy Trends (2009)6. Tata Quality Management Service Publication on Innovation (2011)7. Metal Junction Conference : Indian Steel 2011 (Nov’11)8. iMaritime : India Port Report (Aug’03)9. Wikipedia and other sources on the internet.Abbreviations 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 et al. Page 15 of 16
  16. 16. The Indian Ferro Alloy Industry At Cross RoadsPrabhash Gokarn et al. Page 16 of 16