India's mollycoddled ironmen

Tue, Nov 3 01:49 AM

India's economic growth is contingent upon the growth of the Indian steel industry. The per capita consumption of steel in India, around 46 kg, is well below the world average of 150 kg and the developed country average of 400 kg. It is important that the steel industry in India is prepared to meet the growing demand, projected to rise to 200 million tonne by 2015.

However, the status of competition in the industry leaves much to be desired. On the one hand, there have been alleged anti-competitive practices by steel producers and on the other hand, market distortions are largely brought in by flawed government interventions and regulations, as pointed out by a recent research study by Indicus Analytics done for the Competition Commission of India (CCI). These policies of favouritism blunt competition and create an industry that is immune to the incentives of competition, thus restraining growth.

Policy induced distortions such as discriminatory subsidies, non-tariff barriers to trade, discriminatory customs duty (on exports and imports) etc go against the principles of free and fair competition and alter the competitive positioning of individual players in the market. Ideally the government should be taking measures to bring in competition and eliminate market distortions, but what the government does is exactly the opposite.

In a chapter of the study, by AS Firoz, it has been noted that although the choice of technology has become increasingly market determined and is based on commercial considerations, the policies related to ownership and leasing of mines do significantly influence the technology choice and hence the level of competition.

Captive mining historically arose from steel enterprises starting iron ore or coal based production when there were no independent mining enterprises. Such action was more valid in the context of administered pricing regimes of the past. When the output price was regulated on the basis of costs, it did not matter whether raw materials such as iron ore or coal were mined by steel producers or were bought from an external mining agency at a market-determined or administered price.

However, the relevance of continuing such a system has to be reviewed when there are no restrictions on output prices and free market conditions prevail in the market. Historically, Tata Steel and SAIL got into steel production based on iron ore mines leased out to them on a captive basis. Between them, the country had steel production only from scrap-based units which had nothing to do with iron ore. A host of other distortions arise in the market of iron ore that, in turn, get reflected in the economics of steel production and consequently raise intra-industry competition issues.

Much of the government policy favouring captive mining is based on the objective of providing supply security, thereby reducing supply side risks of the usually bulky investments in steel. However, under conditions of long-term annual contracts that drive the iron ore business today, captive mining cannot be seen as the only way to provide supply security. Clearly, as seen from the MoUs signed by various entrepreneurs with different state governments, captive mines are an integral part of the steel projects proposed. Arguably, supply security may not be the prime issue, rather it is the assured returns.

The other major competition issue associated with captive mining is that the right of use of these mines is related to the size of the lease holding. For example, SAIL and Tata Steel have large iron ore resources under their control, far more than what they are likely to require in the foreseeable future. They are being allowed to hold on to these resources on rather uncertain expansion projects. In a situation where there is apparently a shortage, significant resources are getting locked up under the lease holding of a few companies that in turn create shortage of capacity and subsequent rise in the prices of iron ore in the open market. This has gone against the interest of the steel or iron producers dependent on the market.

Issues with captive access to raw material arise, when steel producers are provided with an iron ore or coal mining lease grant at a price/cost that has no relevance to the value of the asset, when captive mining leases are provided priority over the rest without any additional obligation to fulfill, and when a prospective investment is incentivised with the promise of a captive mining lease by the state government. Not only are all these cases in contravention of free market conditions, these are being seen by the government itself as a subsidy to the industry.

There is no doubt that the concentration level in certain products market such as HR coils is significant with the dominance of a few at the top. However, there is no evidence of formal 'agreements' to fix prices. The evidence of HR coils' producers responding identically to external conditions such as changes in global prices etc is not enough to be rated as anti-competitive. HR coils segment, is by far the most likely to be 'cartelised', the competition levels and/or imports in other segments of steel production are too high to enable any sustainable joint action by the current incumbents. The government's approach to informally control steel prices is based on the assumption that a few steel producers have sufficient command over the market and that they can be talked into uniformly cutting prices.

Rather than informally setting prices to control the market power of a few producers, a far-sighted pro-competitive action would be more to do with enabling rapid entry and expansion, reducing controls on international trade and ensuring a level playing field. These are not so much regulatory but policy issues, but they will have ramifications on competition in the sector. The Competition Act has in fact paid very little attention to government policies and actions which support anti-competitve conditions in business. Opinions by the Commission in matter of competition policy of the government are not binding on it and there are no provisions for taking any suo motu action. For encouraging a flourishing competition culture, government policies in various sectors have to promote and not limit competition.

The author is advisor,Indicus Analytics. Her coauthor Ramrao Mundher is senior research associate, Indicus Analytics. payal.malik@gmail.com

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