Steel’s
Irony

Indian
steel exports to China zoom and the Chinese are showing concern

Question #
1: Which is the world’s largest consumer of steel?
Answer: China.
Question #2: Which is the world’s largest producer of steel?
Answer: China.

Nothing surprising so far. But here is a new one.

Question # 3: Which country became the world’s largest importer of steel
in 2002?
Answer: China.

This has happened because steel imports by the USA has dropped following
protectionist measures adopted by that country. But with Olympics 2008
in Beijing, the trend should continue.

But here is something totally unexpected.

Question#4: Which country has the highest rate of increase in market
share of Chinese steel imports in 2003?
Answer: You would never have guessed–India

In 2003, China’s steel consumption is estimated at almost 240 million
tonnes which is almost a whopping eight times India’s pathetically low
consumption. This year, China’s steel imports are expected to be around
32-34 million tonnes which will be more than all the steel we will consume.
This is phenomenal growth by any standards. In 1990, steel consumption
was just at about 50 million tonnes. This doubled by 1993. 1993-97 showed
little growth. But during 1997-2002 yet another doubling took place.

The phenomenal difference in steel use between China and India does
not reflect Indian efficiency or some new economic growth trajectory
invented by us. It reflects the huge gap in infrastructure, in manufacturing,
in industry, in construction and in investment spending. In many ways,
the difference in steel consumption sums up the economic story of the
two countries-what is particularly ironic is that a NRI group-owned
by L.N Mittal-is now the world’s second largest steel producer.

In the past fifteen months, India has gained significantly from the
growth in the Chinese steel market so much so that presently about half
of India’s exports of steel go to China. Steel exports have caused the
trade balance to swing in India’s favour for the first time in 2003
so far. Going by Indian figures, India exported just 20,000 tonnes of
steel in 2000 to China. This trebled to 64,000 tonnes in 2001. But in
2002, there was a massive jump to about 262,000 tonnes and even further
to 709,000 tonnes during January-July 2003. The big five accounting
for around three-fifths of all steel exports to China are SAIL, Ispat,
Tata Steel, Jindals and Essar.

The figures being used by the Chinese are different and show even greater
penetration of Indian steel in Chinese markets. For the period January-September
2003, the China Iron and Steel Association reports Indian exports of
1.58 million tonnes. For 2002, the Chinese figure is 480,000 tonnes,
as compared to the Indian figure of 262,000 tonnes. Indian exports have
been mainly in hot rolled coils/sheets, cold rolled coils/sheets, galvanized
products and even stainless steel. The Indian companies have been so
successful that the Chinese have begun to worry. They have asked the
Indian companies to slow down their exports. The Indian companies, not
wanting to antagonize a newly found market, have been defensive saying
that as the Indian steel market picks up, exports to China would automatically
get moderated. Price and “dumping” of steel is not the issue-if
anything, China benefits on this score since India is now among the
lowest cost producers of steel and Indian prices can be used by China
as a benchmark.

What is irking the Chinese seems to market share. In 2002, India accounted
for just about 2% of China’s steel imports. But in 2003 so far, India’s
market share has jumped to 6-7%, close to that of Russia but well below
that of Japan, Taiwan and South Korea. This has caused Chinese discomfort.
The Chinese say that they are entitled to take protective measures under
the WTO when imports of steel from a particular country cross 3% of
all steel imports. They are technically right. India says anti-dumping
duties can be imposed only after determining “material injury”
in relation to imports as a proportion of consumption or production.
This position is also right. Last November, China imposed “safeguards”
duties of between 10-23% on selected categories of steel imports from
countries like Japan, South Korea and Germany. India was spared at that
time on the grounds that it was a “developing country”. Indian
companies gained. But they have become the victims of their own success.

Why is China expressing concern in regard to steel imports from India?
Perhaps, it finds it galling that of all countries India has done so
well in its steel market. It is not that India is a threat. New capacity
is coming on stream in China itself and while old capacity will be moth-balled,
the notion that the Indian steel industry is a significant competitive
threat to China is laughable. The roots of China’s changing stance on
galloping steel imports from India lie beyond steel. It lies in the
Chinese belief, not entirely unfounded, that India continues to have
reservations about Chinese investments in our country, whether it is
power, consumer goods, telecom, software, ports and mining. Clearly,
the momentum and goodwill generated by high-level political visits has
not had any impact on our bureaucracy and security establishment. The
Chinese are also unhappy that China attracts the maximum number of anti-dumping
investigations by India–in the last five years, China accounts for
about a fifth of all Indian anti-dumping duty cases. We look at China
in sectoral compartments-steel, chemicals, software,etc. On the other
hand, the Chinese have a holistic approach.

China’s steel industry offers new avenues for investment cooperation
with India. China requires iron ore desperately-high-grade reserves
are scarce. Roughly one-third of iron ore requirements are presently
imported largely from Australia, Brazil, India and South Africa, with
India accounting for about a seventh of imports. Imports are bound to
increase and some estimates are that by the end of the decade the proportion
of imports could well exceed 50%. Clearly, India offers a number of
advantages as a source of iron ore. One option would be to entice China
into long-term contracts of the type we have with Japan and South Korea
with the prospect of China investing in mine development and exploitation,
apart from ports as well. Chinese steel companies like Baosteel have
already made major joint venture investments to acquire and develop
iron ore mines in Australia and Brazil.

But a better option was suggested very recently by B. Muthuraman, the
dynamic Managing Director of Tata Steel and one of India’s most outstanding
techno-managers. In a round-table discussion between Indian steel exporters
and the China Iron and Steel Association organized by the Confederation
of Indian Industry (CII) on October 17th at Beijing, he advocated a
joint venture to produce semi-finished steel in India and finished steel
in China. This way the legitimate concern that we should export value-added
and not just natural resources gets addressed. It also ensures China’s
security of iron ore supply. In the last two years a number of steel
joint ventures between Chinese companies on the one hand and Japanese,
German and South Korean companies on the other have been announced and
launched. The Muthuraman proposal is a “win-win” proposition
for both countries and should be actively pursued by our government.