Global Steel Trade; Structural Problems and Future Solutions

Continued Overcapacity
In the meantime, overcapacity will continue to result in increased inventories and reduced prices, and it will
adversely affect profitability. 184 One source indicates that much of the new capacity added in recent years is
nonviable and will only survive if long-term lenders write off large portions of debt. 185 This may lead
private companies to look for the type of government intervention exemplified by the SAIL bailout
package. Such measures, including debt-to-equity swaps, may clear the books of bad debt but do little to
keep the debt problem from recurring.
By all accounts, the most promising strategy for addressing the overcapacity problem would be to more
fully develop India’s domestic steel demand. There are a number of standard uses for steel which India has
not yet developed (e.g., truck bodies are still constructed of wood, and scaffolding of bamboo). If India
adopted these uses, domestic steel consumption would improve. 186 To this end, four private sector
producers (Ispat, Essar, Jindal, and Lloyds) formed Indofer, a representative body intent on exploring
avenues for increased domestic steel consumption. Representatives of the group have stated that they
expect to increase domestic consumption by at least 2 million MT, using measures such as a ban on
asbestos corrugated sheets to increase steel consumption in construction. 187
Recently, domestic demand for steel in India picked up. Infrastructure development, a major use of steel,
grew at an annual rate of almost 8 percent during the first four months of calendar year 2000. 188 Although
overall demand is growing, it is not keeping pace with India’s crude steel output, which grew by 12.5
percent during the first quarter of calendar year 2000. 189
Technology and Labor Issues
Further exacerbating the precarious situation for steel producers is the continued use of antiquated technology.
About 26 percent of India’s steel continues to be made with highly inefficient open hearth furnaces, while only 40
percent is produced by continuous casting. 190 In order to become internationally competitive, the industry must
modernize, especially older integrated producers. While some newer mills are producing high-end niche products,
most Indian mills are inefficient. Even SAIL has its 11 million MT aggregate capacity spread across five integrated
mills. Both SAIL and TISCO have recognized this problem and made plant modernization a top priority. 191
Labor productivity is a major issue closely associated to technology. Total labor costs to produce a ton of
steel in India are higher than those in either Japan or Korea, 182 given that the production process in India is
much more labor intensive than that of the more developed producers. This translates into relatively low
labor productivity numbers, especially for the major steel producers. SAIL and TISCO produced only 49
MT and 52 MT, respectively, per employee in FY 1998–1999. 193 In total, SAIL employed more than
175,000 workers in 1999, while TISCO employed about 60,000.
While labor is abundant and labor costs are low in India, high employment inhibits the major producers
from rationalizing production and introducing new technologies. The steel industry in India employs an
estimated 2 million people. As much as producers appear to want to reduce their labor forces through
voluntary retirement schemes, they face stiff opposition from vocal and disruptive labor unions. 194 Labor, a
very powerful force in India, is wholeheartedly opposed to streamlining the steel industry. Thus, it is
unlikely that labor productivity will be improved any time in the near future.
Export Growth
While low product quality makes India’s older producers uncompetitive, the new steel plants are poised to export
a significant portion of their production given the higher quality of the products, 195 particularly of hot-rolled flat
products. Many of India’s steel producers, old and new, have targeted export markets as the principal source of
170 Global Steel Trade: Structural Problems and Future Solutions