Will regulating the steel sector help

Updated: Jan 26 2005, 05:30am hrs
Theres been talk of creating a steel regulatory authority ever since the Honble Ram Vilas Paswan took over as steel minister. He offers this as a panacea whenever there is an interaction with steel consumers. During the steel consumer council meeting last month, he said that the steel regulatory authority (SRA) can be set up through an ordinance any day. But will the structure and supply chain in the steel industry permit the implementation of the dictates of a regulatory authority The long products segment, consisting of bars and rods and other products used in construction is highly fragmented. And the major producers (Sail, RINL, IISCO and Tata Steel) account for only about 30% of the total production. The balance 70% comes from SMEs numbering over 1,000 and scattered all over the country. Many of these units have been under-reporting capacity and production to stay out of the tax-net and, therefore, correct data is not available about these units. It is difficult to imagine how the regulatory authority will bring them under its control.

The flat product segment is more consolidated with over 90% of the products produced by five major producers (Sail, Tata Steel, Essar, Ispat and JVSL). While institutional customers and original equipment manufacturers may be able to buy steel directly from the producers, small buyers who account for 50% of the total market have to buy from the distributors and retailers. Can the steel regulator monitor the prices at which these transactions take place

In the last one-and-half-years, whenever consumer lobbies have pressurised the government to step in and control prices, the latter has targeted public sector units and the four bigger producers. This has allowed the middlemen to make windfall profits while the major producers and consumers have suffered.

Since 1992, the private sector has invested over Rs 30,000 crore in the steel industry and more than 13 million tonne of capacity has been added. Another wave of investment is under way which may result in the creation of another 20-25 million tonne in the next five years. If Mr Paswan wants to bring in a regulator at this stage, he has to ensure adequate returns to the investors. While this may not look too difficult when the international steel market is booming, the situation will be quite different when the steel industry goes through a down-cycle. At that time, consumers will be reluctant to pay at controlled rates which may be more than market prices.

Since there are no licensing restrictions on import of steel and the duties are very low, customers would go for wholesale imports instead of buying domestic materials at higher, controlled prices. Considering the governments obligations under Gatt and WTO agreements, it is unlikely that it will go back to import licensing or high import tariffs. Clearly, the government cannot give guarantees to investors without rolling back many policy measures taken as part of the liberalisation process.

Steel regulatory authority is offered as a panacea by Ram Vilas Paswan
Consumers will benefit only if steel is freely available at reasonable prices
Steel is covered by the Essential Commodities Act which empowers the government to control its prices and distribution in national interest. The joint plant committee which is responsible for controlling production, distribution and pricing of steel has become a moribund organisation since 1992 when the government decided to decontrol steel and allow market forces to determine distribution and pricing. As long as steel remains under the Essential Commodities Act, there will always be the temptation for steel ministers to try and take the industry back to the old days of licence and control in the name of public interest.

The consumer will benefit only when there is plenty of material, freely available, and at reasonable prices. This can be achieved by encouraging investment in the sector and not by frightening off investors by talking of regulation of prices. Fortunately, neither Indian nor foreign investors seem to have taken the ministers promise or threat, depending upon ones viewpoint, seriously and are going ahead with their investment plans. It would be a good idea if the steel minister follows the example of many state chief ministers by wooing investors to this sector by making it easier and more attractive. It is also high time steel was removed from the purview of the Essential Commodities Act so that the threat of price control is removed forever. This will buoy investor confidence and help attract more funds to this sector.

The writer is chief commercial manager, Tata Steel. These are his personal views