In today's Finshots we see what's holding back India's steel producers

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The Story

India is on a spending spree — primarily directed toward infrastructure. Back in February, the government announced a whopping ₹7.5 trillion dedicated to improving roads, bridges and railways across this country — anything that can propel economic growth. Now ideally this should be a boon for steel companies. After all, the country is built on steel. But even as domestic demand for the metal keeps booming, steelmakers across the country seem to be sulking.

So what’s happening here?

Well, it probably has to do with coking coal — a key raw material used to forge steel.

Let us explain. Steel production primarily involves two key raw materials — iron ore and coking coal. First, you take the coal and heat it at high temperatures. Do it right and you get coking coal or coke. The coke is then fed into a blast furnace and you get molten iron in its purest form. But this isn’t steel quite yet. So you take the molten iron and feed it into a basic oxygen furnace, alongside scrap steel and limestone. And voila! You get steel.

But despite being the second-largest coal producer in the world, India is still dependent on imported coking coal. And even though we have coking coal reserves of about 34.5 billion tonnes, it’s not really high-quality stuff. So every year, we end up importing coking coal in large quantities to keep up with steel production. In fact, imports surged from 17.08 million tonnes in 2020 to 22.27 million tonnes last year.

And about 80% of this comes from just one country — Australia. Needless to say, this kind of dependence isn’t exactly something to brag about. As one report from government think-tank NITI Aayog put it, “when it rains in Queensland-Australia, the Indian Steel sector starts shivering.” And that’s how it’s playing out now. Prices of Australian coking coal have surged from $200 to a staggering $700 a tonne — due to supply-side constraints, logistical challenges and other such things. And it’s hurting Indian steelmakers.

Now obviously, they’re trying to diversify a bit with some companies turning to Russia — a country besieged by international sanctions. They’re trying to get a discount, but truth be told, this strategy won’t work in the long run. You can’t always get a bargain. You need to do something about this internally. And if we don’t, we may miss a massive opportunity.

Take for instance China. Right now, China is the largest producer of steel and accounts for about 57% of the world’s steel production. However, they also want to turn carbon-neutral by 2050 and cutting down on steel production can go a long way in achieving this goal. So in effect, they’ve been shutting down polluting steel mills and have even turned to imports, of late.

Obviously, this is an opportunity for India, if you ignore the fallout associated with pollutants, India can step up in a big way. We even formulated the National Steel Policy in 2017 just to create a more globally competitive industry.

So the final question is — “How do we deal with the coking coal conundrum?”

Well, for starters, we recently signed a trade agreement with Australia to remove the 2.5% customs duty on coal imports. This will definitely reduce the input cost for Indian steelmakers. But that may still not be enough. We are trying to reduce import dependency from 85% to 65% within the next decade. So, we need to do something domestically. And one suggestion comes from Shantanu Rai, a consultant at NITI Aayog.

He wants the country to look at Jharia.

Now Jharia is a region in the mineral-rich state of Jharkhand. And it’s known for its high-quality coking coal deposits. An estimated 5,300 million tonnes in total. But it’s also famous for another thing — A fire that’s been raging inside the coal fields for over 100 years. You heard that right. It's been burning for nearly a century and it’s eating away at the deposits every single day. Now people still mine in Jharia, despite the fire. But it’s a nightmare for folks living in the area. Opencast mining is rampant and the toxic fumes — it’s killing people. So if we had to somehow access the full potential at Jharia, then it’s imperative to relocate and rehabilitate people in the region. And despite working on this matter for close to 10 years, the government has made little to no progress.

So yeah, now you know why India isn’t a steelmaking giant just yet and we will just have to wait and see if something changes on this front.

Until then...

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