Steeling for Growth
India's Government Wants to Ramp Up Steel Production, But Big Risks Await
India's steel producers face a problem. The country's national government wants to create new cities from scratch, develop a new industrial corridor and expand the country's freight rail network. All of that requires a lot more steel, so the prime minister's Cabinet last year revamped the national steel policy to call for tripling production capacity to 300 million metric tons by 2030.
But government infrastructure spending isn't a sure thing. Steel producers aren't sure how much and exactly when demand will rise—which complicates the process of greenlighting projects to expand capacity. “Projection of 300 million metric tons of crude steel production is very optimistic,” says Chandrakumar Badala Jaganathan, group manager, chemicals and metals for Technavio Research in Bangalore, India.
For now, Indian steel-producing organizations are proceeding cautiously, calibrating production aspirations somewhat lower than the government's goal while still investing in massive new plants and expansions, according to Anjani Kumar Agrawal, partner and national leader, metals and mining, EY, Mumbai, India.
Slow and Steady
Organizations are likely to focus early efforts on projects to expand existing production sites, Mr. Agrawal says. These brownfield projects tend to be cheaper and faster to execute because much of the basic infrastructure and permitting already exists.
India's prime minister's Cabinet revamped the national steel policy to call for tripling production capacity to
metric tons by 2030.
The JSW Steel Ltd. plant in Dolvi, India
PHOTO BY DHIRAJ SINGH/BLOOMBERG VIA GETTY IMAGES
Rendering of a proposed new state capital in Amaravati, India
To that end, Jindal Steel & Power Ltd. (JSPL) completed an expansion project at its plant in Angul last May, pushing production at the site from 2 million to 6 million metric tons annually. JSW Steel, the country's largest steelmaker, plans to invest INR192 trillion in different brownfield projects, including doubling steelmaking capacity at its Dolvi site in Maharashtra to 10 million metric tons per year.
The big risk facing organizations is that expansion project timelines won't sync up with the launch of infrastructure projects, creating a mismatch between supply and demand. For example, both the state-owned steelmaker Rashtriya Ispat Nigam Ltd. and privately listed Steel Exchange India Ltd. signed agreements in 2016 to expand their steelmaking capacities in support of government plans to build a new state capital in Amaravati. But 19 months later, both projects were postponed due to waning demand from the regional construction sector and insufficient funding. “Delay in implementation of government-supported infrastructure projects will have a direct negative impact on demand and adverse effects on expansion plans,” Mr. Jaganathan says.
Demand-side risks aren't the only issue facing brownfield expansions. Project owners also have to take local stakeholders into account when assessing their risk mitigation strategies. For example, Tata Steel had been planning an expansion project in the state of Odisha to bump annual production capacity from 3 million to 8 million metric tons. (Earlier plans called for a 6 million metric ton expansion.) But villagers refused to leave the site, delaying the project for years. They finally vacated in May of last year.
Brownfield projects are only part of the solution for India to hit the government's stated steel production goal. More time-consuming greenfield projects that create new production sites from scratch will also need to move forward to meet future demand, Mr. Agrawal says. JSW Steel, for instance, is building two new plants in Odisha and Jharkhand that will help the organization more than double its installed capacity to 40 million metric tons by 2030. Each facility will produce 10 million metric tons per year.
With new plant projects, land acquisition is a major barrier. But the industry is hopeful that the government will help drive progress by identifying land for project sites, Mr. Agrawal says. This could help to strategically locate new production capacity—for competitiveness and sustainability.
Ultimately, though, funding remains the biggest challenge for both types of projects. Many steel companies struggling to secure funds may turn to capital markets for financing, Mr. Agrawal says. “This is quite a good opportunity for foreign players to engage and take the entrepreneurial plunge, as this is perhaps the most promising growth market for steel in the world.” —Sarah Fister Gale
“Delay in implementation of government-supported infrastructure projects will have … adverse effects on expansion plans.”
—Chandrakumar Badala Jaganathan, Technavio Research, Bangalore, India