The auction route may invite participation by multinational investors whose activities can be put to use in the best interest of the country under a properly laid-out regulatory mechanism
Steel and mining sectors are of strategic importance in any industrialised nation. India is fortunate to possess a strong base for both these sectors. Together the industry contributes to creating jobs and wealth, especially among mineral-rich states that are on the path of economic and social development.
Raw materials are crucial in determining the competitive growth for steel, which supports core sectors such as infrastructure and manufacturing. It is important to keep the costs of raw materials, energy, labour, capital and logistics competitive as the steel industry is extremely capital-intensive and energy-intensive. These cost savings allow companies to increase their investment in the communities around them and also allow additional investment in value and capacity addition.
One of the primary reasons for slow growth in steel exports (-6.6% in April-December 2014) from India has been that Indian steel cannot match the prices offered by most other producers in the major markets. It is, therefore, imperative for a long term sustainability of the steel industry in the country to secure a stable raw material linkage and thereby keep the procurement cost of raw materials within manageable limits.
In the coal sector, the government has recently framed rules for the auction of coal blocks, giving weightage to companies with existing power, steel or cement plants and experience in developing mines and follow the best practices in mineral extraction. This is a forward-looking step that safeguards the investment of companies in the mining and steel sector in establishing linkages between raw materials, plants and end-user companies, as well as in the development of the lease area or the block allotted to them.
The auction is a mechanism adopted to bring in transparency. In the case of coal, preference will be given to bidders on the basis of the readiness of their end-user plants, proximity of their projects to the mine, and their financial and past development records. This is certainly a blueprint that can be very successfully replicated for the iron ore mines of steel companies. There is a need to define the rules of value addition, encourage optimum mine exploration activities, and ensure competitive pricing with respect to commercial mining. And in all these aspects, the role of a regulatory mechanism is paramount. The auction route may invite participation by multinational investors whose activities can be put to use in the best interest of the country under a properly laid-out regulatory mechanism.
A competitive steel industry is also crucial for the success of a robust manufacturing sector, which has been languishing for the past two years. Growth in this sector can be facilitated by guaranteeing assured supply of raw material (steel) at competitive rates. If the manufacturing industry is burdened with stiff raw material pricing, the businesses will no longer remain viable as the consumers have an option to prefer cheap imports facilitated by declining global prices.
With the advent of an industry-friendly government, it is widely believed that an enabling environment is created to permit long-term investment in mining and steel projects to promote the development and growth of manufacturing. Indian steel industry has a dream of achieving nearly 3 times more from the current level of production in the next one and a half decade to cater to the rising industrial and manufacturing demand and become the second largest steel producer in the world. The dream can only be realised if iron ore and coking coal sourcing strategy clearly outlines a transparent framework of exploiting, to the maximum extent possible, the indigenous resources and imports for the residual volume.
The author is DG, Institute of Steel Growth and Development. Views expressed are personal.