The steel story! Will Indians finally use Chinese labour to surge ahead?

I have very fond memories of a great patriotic politician of India (very few such men can be found amongst today’s politicians), Vasant Sathe. Apart from his very intelligent, practical and radical views on the tax structure, I remember how he always compared Korea to India to show how a small nation could surge ahead so fast while we kept cheating our countrymen. When I went to Korea recently, I couldn’t but help feel the same; I even wrote about this a few weeks ago in one of my editorials. In the week gone by, I had the opportunity to sit with a gentleman who is a consultant to a company called Electrosteel Steels Limited. He told me the most amazing story of a venture – for setting up a steel plant – by one Mr. Kejriwal near Bokaro on about 1500 acres of land. It is a steel plant being set up with a capacity of 2.2 million tonnes. Hearing the fascinating story (I’ll explain later on why I found it fascinating) of this plant made me remember Mr. Sathe again. Amongst various things, steel was of special interest to him – as should be to any politician with vision, for after the Stone and Bronze Age, it was the Iron Age that was decisive for building the comparative advantage for nations. And it was during the Industrial Revolution when the entire world saw and realised the power and economies that this metal could create. With the invention of steel, everythingchanged further. Today, almost all industries ranging from automobiles to defence use steel and related products extensively. Steel has been one commodity that to a large extent has been pivotal for economic development and social prosperity, and thus has been a key ingredient in the nation’s future plans. Mr. Sathe would always compare the Indian productivity to Korean productivity to explain the rot in the Indian system – and then, of course, he would invariably talk about China too. So today I thought I’ll dig a little deeper into some facts and figures about this key aspect symbolizing a nation’s development.

A recent Wall Street Journal report foretells decisive growth in China and India’s steel industry for 2012. The details are very interesting. India’s position in steel production is meek and lagging, mainly on account of government control, bureaucratic hurdles and red-tapism, coinciding with poor planning, unprofessional functioning, and poor productivity. Not just Asian countries like South Korea, but even countries like Malaysia have productivity standards much better than India’s. A research report titled “Indian Steel Industry: Outlook to 2012” predicts that Indian crude steel production will grow at a CAGR of 10% during 2010-2013. Still, India’s average consumption of finished steel is significantly less than that of its neighbours. Not only is India’s annual steel production capacity, in absolute numbers, far less than what nations like China and South Korea have; but the per capita consumption is also at a rock-bottom figure. A time-series analysis indicates that both India and China started their tryst with steel production approximately during the same time. Just after Independence, India’s and China’s annual steel production were at the same level. However, by the end of 1990, where the per capita steel consumption in China increased by 65 kg and touched a figure of 160 kg, India’s per capita consumption languished at 29 kg (an increase of just 7 kg per capita) by the end of 2003. As per the latest ASSOCHAM report, the per capita consumption of steel in India is only 35.5 kg per capita per year compared to 220 kg in China and 950 kg in South Korea.

The same goes for production too. China’s steel production increased by 105 million tonnes while that of India increased by just 7 million tonnes! As per the World Steel Association, India’s annual production of steel in 2010 was merely 66.8 million tonnes compared to China’s 626.7 million tonnes and Korea’s 58.5 million tonnes. Unlike India, which saw an increase in steel production by a shameful figure of 13.3 million tonnes, the Chinese steel production grew at a whopping 131.8 million tonnes in a span of just four years ending 2010. Putting this number in a different perspective, India’s population in 2010 was 17 per cent of the global population while the corresponding steel production was merely 4.5 per cent of global steel production. The same was not true for China and Korea. China’s contribution to global steel production in 2010 was more than 44 per cent and Korea’s was 4.13 per cent in spite of their population being 20 per cent and less than 1 per cent of the world population respectively.

Steel production capacity and consumption capacity of a nation (especially per capita), as I said earlier, speak volumes about any nation’s fundamentals. Both production and consumption has a direct correlation with infrastructure development. The steel industry, by any measure, forms the very foundation of almost all manufacturing units and acts as a backbone for industrial development. With India growing demographically, and the nation relying heavily on steel imports, it is imperative for our policy makers to increase steel production by leaps. However, our archaic and non-liberal industrial policies did not allow many steel plants to come up. Barring Tata Steel (that produced 23.5 Million tonnes in 2010) and SAIL (13.6 Mt in 2010), there are literally no big names in steel production. On the contrary, China and Korea both allowed an array of steel plants to mushroom in order to meet the growing demand and facilitate their hunger of infrastructural development. South Korea has two large companies namely Hyundai INI Steel and POSCO, which respectively produced 12.9 and 35.4 million tonnes of steel in the previous year; still, China’s more than 10 large steel plants seem to be far ahead in the race. Chinese steel plants like Hebei Iron and Steel (produced 52.9 million tonnes in 2010), Baosteel Group (37.0), Wuhan Iron and Steel (36.6), Jiangsu Shagang (30.1), Shougang (25.8), Shandong Iron and Steel Group (23.2), Ansteel (22.1), Benxi Steel (22.1), Maanshan Iron and Steel Company (15.4) and Valin Steel Group (15.1) are standing as stalwarts in the global steel sector. Going by these numbers, China’s biggest steel plant is twice as big as India’s biggest steel plant.

Most of India’s steel plants – that too, mind you, could be set up thanks to the then USSR which benevolently came and virtually donated most of the plants to us around fifty odd years back – are labour intensive and over a million people are employed in the Indian steel industry either directly or indirectly. However, this number has no correlation when measured against labour productivity. This huge number does not reap the desired results as the average labour productivity in the Indian steel industry is very low at 144 tonnes per worker per year. The productivity at India’s two biggest steel plants is more horrifying, with SAIL having a labour productivity of 75 tonnes per man per year while Tata Steel with has a labour productivity of 100 tonnes per man per year. This is against POSCO’s (Korea) labour productivity, which stands at a mind boggling 1345 tonnes per man per year. This simply means that a single Korean worker produces 10 times more steel than an Indian worker! No wonder then that Mr. Sathe used to be so much in awe of Korea. In the same light, India’s labour productivity in the steel industry has increased from 11 per cent to 16 per cent (during 2002-2008) while that of China has increased from 12 per cent to 23 per cent. China’s steel industry enjoys low employment cost (labour cost being $1.5 per hour) and equally low operational cost (low cost of energy, equipment and transport). According to studies, cost of incepting a steel plant in China is just 60 per cent the cost of starting a plant in Europe. Steel companies in India have to pay a huge interest on capital apart from managing high costs of electricity and transport. Overall, as per estimates, the cost of capital in India is 14 per cent per year compared to 5-6 per cent in China and 6 per cent in South Korea. The average energy consumption in India is 2 million kilocalories per tonne more than the global standard of 4 million kilocalories per tonne, which is a crying example of how outdated and inefficient our steel plants are!

Anyway, coming back to the fascinating story of Electrosteel Steels, here is why the story made me look into India’s steel situation and make comparisons vis a vis China in particular. This steel plant near Bokaro, being set up on about 1500 acres of land, has a planned capacity of 2.2 million tonnes. This is a private factory. No Indian company or technology can set up such a big plant before 4 to 6 years. But this plant is being set up in 18 months flat! The typical cost of setting up a plant would have been two times higher than what it is costing now to build this new plant. And yes, it seems a visit to this tract of land, which is being developed out of nowhere, is like visiting heaven compared to the typical steel plants that are set up elsewhere. The facilities for people who are setting up the factory are no less than almost five star.

Any guesses why all this? Well, that’s because those are not Indians who are setting the plant up. The entire plant has been contracted out to a Chinese company! So the Chinese firm has got 1200 odd Chinese workers, engineers and supervisors working day and night to finish the project on time! The Indians associated with the project say that the Chinese workers work most sincerely and their output is two to three times that of the Indian worker on a daily basis. The Indian worker just doesn’t want to work. And the Chinese? Even female Chinese workers work with equal zeal and passion. And guess what? The deal comes with another guarantee. If Electrosteel Steels can’t sell their produce, the Chinese will buy it back from them as well. What else could any businessman ask for??

Now are you still wondering why the Chinese are far, far, far ahead of us in almost every possible respect, and even in capturing businesses worldwide, including in India? Well, this is why. It’s a shame politicians in India try to take the name of China and India in the same breath. India is nowhere, absolutely nowhere in comparison to them. But it’s time we learnt from them and started doing something; else, even India and Indians will be not just importing Chinese technology but also getting their workers to work in India.