Iron and Steel exports and imports

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					                    INDIAN INSTITUTE OF FOREIGN TRADE




      The impact of WTO
   agreement on Indian Iron
      and Steel Industry
    History, Development of industry – global and
           Indian scenario, Trend analysis




Submmitted to:

Dr. Vijaya Katti

(Professor, IIFT)                                       Dr. Debashis
Chakraborty

(Professor, IIFT)
                                Indian Institute of Foreign Trade, Kolkata

Contents
Introduction.................................................................................................................................................... 5
THE GLOBAL STEEL INDUSTRY .............................................................................................................. 13
REGION WISE STEEL PRODUCTION FOR 2009 ......................................................................................... 14
India - Steel Industry Overview ................................................................................................................... 18
   Steel Producers ....................................................................................................................................... 19
   Production................................................................................................................................................ 20
   Consumption ........................................................................................................................................... 21
   Trade ....................................................................................................................................................... 21
Performance of the Indian Steel Industry.................................................................................................... 22
   Production................................................................................................................................................ 22
   Imports ..................................................................................................................................................... 23
   Exports..................................................................................................................................................... 23
INDIAN STEEL INDUSTRY......................................................................................................................... 25
   India is one of the world‘s top ten steelmakers .............................................................................................. 27
   Structural Deficiencies................................................................................................................................ 27
   Further large increase in steel capacity inevitable .......................................................................................... 30
   Booming automobile industry ..................................................................................................................... 31
   Country ..................................................................................................................................................... 31
   Car Density ............................................................................................................................................... 31
   India ......................................................................................................................................................... 31
   China ........................................................................................................................................................ 31
   World........................................................................................................................................................ 31
   Russia ....................................................................................................................................................... 31
   Korea ........................................................................................................................................................ 31
   Europe ...................................................................................................................................................... 31
   Japan......................................................................................................................................................... 31
   US ............................................................................................................................................................ 31
Data Analysis .............................................................................................................................................. 33
   RCA ......................................................................................................................................................... 33
   dRCA ....................................................................................................................................................... 34
   RCDA....................................................................................................................................................... 35
Advantages of Steel sector in India ............................................................................................................ 36
   Types of Steel .......................................................................................................................................... 38
Institutional Design - Introduction ................................................................................................................ 43
Policy Measures by Government of India ................................................................................................... 44

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   Policy regime for the Steel sector in India ............................................................................................... 45
   Measures Taken by the Government to support Steel Industry .............................................................. 46
Role of Government .................................................................................................................................... 49
Structure of the Iron Ore Market ................................................................................................................. 51
Present conditions ....................................................................................................................................... 57
   STEEL SECTOR TRENDS ..................................................................................................................... 57
   Major initiatives taken by the Indian Government ................................................................................... 59
      Action taken to control inflation in the steel sector .............................................................................. 59
      Action taken to control demand and supply of steel ............................................................................ 60
      Action taken to facilitate conservation of iron ore resource ................................................................. 60
Production, consumption and growth of steel ............................................................................................. 61
Present growth scenario and future outlook ............................................................................................... 63
A peek into the supply chain ....................................................................................................................... 64
   Iron Ore.................................................................................................................................................... 65
      Issues ................................................................................................................................................... 65
   Coal ......................................................................................................................................................... 65
      Issues ................................................................................................................................................... 66
   Transportation ......................................................................................................................................... 66
      Ports ..................................................................................................................................................... 68
      Recycling ............................................................................................................................................. 68
ANTI DUMPING CASES .............................................................................................................................. 70
A special Case - CHINA .............................................................................................................................. 71
   Cash grants ............................................................................................................................................. 71
   Land grants .............................................................................................................................................. 71
   Transfers of ownership interests on terms inconsistent with commercial considerations. ...................... 72
   Conversion of debt to equity in steel companies ..................................................................................... 72
   Debt forgiveness and inaction regarding non-performing loans.............................................................. 72
   Preferential loans and directed credit ...................................................................................................... 72
   Tax incentives, including a variety of income tax exemptions and reductions ........................................ 72
   Targeted infrastructure development ...................................................................................................... 72
   Manipulation of raw material prices ......................................................................................................... 73
   Manipulation of the value of the Chinese RMB. ...................................................................................... 73
INTRODUCTION......................................................................................................................................... 73
   Subsidies and the Chinese Steel Industry............................................................................................... 74
   Chinese Subsidies and the WTO ............................................................................................................ 75
THE CHINESE STEEL INDUSTRY ............................................................................................................ 76

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   The Government’s Creation of the Chinese Steel Industry ..................................................................... 76
   The Structure of the Chinese Steel Industry ........................................................................................... 77
   Government Grants to the Steel Industry ................................................................................................ 79
      Cash Grants ......................................................................................................................................... 79
      Energy and Raw Material Grants ......................................................................................................... 80
      Land Grants ......................................................................................................................................... 80
      Transfers of Ownership........................................................................................................................ 80
   Debt-to-Equity Swaps .............................................................................................................................. 81
   Tax Incentives for Firms in Special Economic Areas .............................................................................. 82
      Regional incentives .............................................................................................................................. 82
      Sectoral incentives ............................................................................................................................... 84
      Export incentives and free trade zones ............................................................................................... 85
      Other incentives ................................................................................................................................... 86
      Statutory tax rate.................................................................................................................................. 86
   Government Intervention in Raw Material Prices .................................................................................... 87
INDIRECT GOVERNMENT SUBSIDIES TO THE STEEL INDUSTRY ...................................................... 88
   Import Barriers ......................................................................................................................................... 89
   Barriers to Foreign Investment in the Steel Industry ............................................................................... 89
   Restrictions on Foreign Investment in the Steel Industry ........................................................................ 89
   Chinese Tax Policies as a Barrier to Foreign Investment ....................................................................... 89
   Other Barriers .......................................................................................................................................... 89
STRUCTURAL SUBSIDIES TO THE STEEL INDUSTRY ......................................................................... 90
   Weak Environmental Regulation ............................................................................................................. 90
   Labor Laws and Ensure Worker Safety................................................................................................... 91
The Cost Competitiveness of Manufacturing in China and India ................................................................ 92
REFERENCES ............................................................................................................................................ 94




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Introduction
“Adaptability is not imitation, it means power of resistance and assimilation”
                                                                                  : Mahatma Gandhi


        The aim of this report is to provide insight into what impact continued development of
the Indian steel industry will have on the global steel industry, the opportunities this growth will
present to the Indian trade and the situation faced by Indian steelworkers today.
        China has been the focus of attention for many unions since its rapid economic expansion
began a number of years ago. By following a policy that has supported heavy industries and
foreign investment, the Chinese government has been able to enjoy growth that has seen
industries such as steel and shipbuilding boom.
        India has implemented similar policies to support industrial growth and its steel industry
is set to grow by around 6% per annum over the next ten years. According to recent research by
Deutsche Bank, India could become the world‘s third largest economy by around 2010,
surpassing Japan. With India and China home to 40% of the world‘s population it appears that
their economic modernisation will establish both countries as truly global players and continue to
drive a sharp rise in the demand for steel. However, with both India and China also planning to
raise their export share, concerns remain about future overcapacity in the market.
        The Indian Steel Ministry plans to raise India‘s export share from 15% at present to 24%
in the next 15 years. Part of this development programme has been the signing of 50 memoranda
of understanding to set up steel plants in the state of Orissa. Posco of South Korea has agreed to
construct a large US$12 billion steel plant near Paradip port, which is the largest single
investment in India‘s history. ArcelorMittal is also investing in a major steel plant at a cost of
US$10 billion and Russian major, Magnitogorsk Iron and Steel (MMK) is planning to establish a
steel plant with a capacity of 10 million tonnes.
        Orissa is one of India‘s poorest states with 47% of the population below the poverty line,
despite the fact that it has a fifth of India‘s coal reserves, a quarter of its iron ore and a third of its
bauxite. India is still a low income country with a per capita income of just US$730. Although
some industrial development has occurred and there has been a rise in living standards, over one
third of the world‘s poor live in India, with over 800 million people living on below US$2 a day.



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Eradicating poverty and redressing the inequality in Orissa and elsewhere in India is a significant
challenge that must be addressed as the country continues to industrialise.
       As the Indian economy develops home-grown companies, such as Tata, it will
increasingly look outward. With new found confidence Indian entities are investing overseas as
the country tries to develop a larger global footprint. The most recent example is Tata‘s bid for
Land Rover, which closely followed an earlier successful bid for Corus by Tata Steel.
Tata Steel‘s purchase of Corus in early 2007 transformed the Indian producer, previously ranked
as the 56th largest producer in the world into a steel giant ranked fifth in global production.




       According to the Organisation for Economic Co-operation and Development (OECD),
China continues to drive world production developments. In 2006, China accounted for one-third
of the world‘s total demand growth and two-thirds of the world‘s output growth with production
climbing to 419 million tonnes, an 18% increase over 2005.
       Elsewhere in Asia in 2006, Japanese steel production rose to its highest level since the
earliest 1970‘s, climbing 3.3% to 116.2 million tonnes. South Korean steel production increased
by 1.3% to 48.4 million tonnes.
       In the European Union-27, annual growth slowed to 2.8% in the second quarter of 2007,
down from a strong 3.4% in the first quarter. Growth has slowed visibly in several of the larger
economies, including Germany, France and Italy, but others such as the United Kingdom and
some new member states continue to enjoy strong rates of expansion.

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       Crude steel production in Europe rebounded in 2006, growing by 6.5% over the previous
year to 235 million tonnes. Of the largest producing countries, Germany, Italy and UK recorded
the fastest growth, all in excess of 5%, while France and Spain posted more moderate
expansions.
       In the Commonwealth of Independent States countries, steelmaking activity has re-
accelerated, led by Russia, where crude steel production increased by 4 million tonnes to reach
70.6 million tonnes in 2006, an increase of 6.8% over 2005, which was supported by capacity
expansion in electric-arc furnace steelmaking.
       North American steel consumption for 2006 as a whole was up almost 12% on 2005.
Steel deliveries to the domestic market rose by 3.5% to 98.5 million tonnes. Meanwhile crude
steel production rose by 3.8% in 2006 to 98.5 million tonnes. Steel imports rose to a record level
of 41.7 million tonnes in 2006 a 41.6% increase on 2005 with imports from China increasing the
fastest to become the world‘s largest source of U.S. imports.
       Overall Latin America is also enjoying strong growth. Brazil is the region‘s largest steel
producer, where production was almost 31 million tonnes in 2006, a 2.2% decline from 2005.
The decline was due to a five month outage of a blast furnace in the first half of the year.
Nevertheless, consumption of steel increased by 10.1% and the industry continues to expand
rapidly.




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       Although India has modernised its steelmaking facilities considerably over the past
decades, nearly 6% of its crude steel is still produced using the outdated open-hearth process. In
order to address this, SAIL‘s Corporate Plan 2012 does contain a variety of measures to
modernise its plants and processes including the closure of crude steel capacities that use the
traditional open-heath process.

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       According to the German Steel Federation, crude steel output at the largest Indian
steelmaker is roughly 144 tonnes per worker per year, whereas in Western Europe the figure is
around 600 tonnes.




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      THE GLOBAL STEEL INDUSTRY

              The global steel industry is still very fragmented around the world, the industry as a
      whole has seen huge consolidation, contracting nearly 50% in size compared to where it was in
      the early 1980s. This consolidation has seen many mergers and acquisitions across the industry
      and it has reached a point where there are a number of steel producers such as Arcelor Mittal and
      ThyssenKrupp who are now becoming known as steel ‗solution‘ providers rather than just steel
      producers. The biggest steel manufacturing country is China which produced nearly a third of the
      world‘s steel during 2008.



                                         Supplier Power
                                      ->Fluctuations in raw materials
                                      cost across different materials
                                      ->Relatively high transportation
                                      cost




  Barriers to Entry                             Rivalry                      Threat of Substitutes

->High steel plant start up costs     ->China steel Production Levels       ->OEMs introducing stronger,
->Government imposed                  affecting Global steel Prices         lighter materials eg carbon fibre
restriction on steel plants CO2       ->Emergence of Global Rather          ->Low cost steel products
related emissions                     than local steel producers            sourced from emerging markets




                                           Buyer Power
                                      ->Companies using new material
                                      to meet customer demands
                                      ->Lower steel demand due to
                                      economic conditions




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              Figure6: Global Steel Industry: Porter’s 5 Forces Analysis                         Page 13
               Indian Institute of Foreign Trade, Kolkata

REGION WISE STEEL PRODUCTION FOR 2009

Figure 7: EUROPEAN UNION

                                 Total
   140000
   120000
   100000
      80000
      60000
      40000
      20000                                                  Total

          0




              Total - European…
                          France




                           Latvia
                        Belgium
                        Bulgaria




                        Slovakia
               Czech Republic




                         Greece




                  Netherlands




                           Spain
                       Portugal
                         Finland




                       Hungary
                            Italy

                  Luxembourg

                         Poland

                       Romania




                        Sweden
                         Austria




                      Germany




                       Slovenia




               Other E.U. (27)
              United Kingdom
  Figure8: CIS COUNTRIES


                                 Total
      90000
      80000
      70000
      60000
      50000
      40000
      30000                                                  Total
      20000
      10000
          0




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 Figure9: NORTH AMERICA



                               Total
      80000
      70000
      60000
      50000
      40000
      30000
      20000                                                Total
      10000
          0




 Figure10:SOUTH AMERICA


                               Total
  35000

  30000

  25000

  20000

  15000

  10000                                                    Total
      5000

         0




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         Figure11:AFRICA


                                                Total
      14000
      12000
      10000
       8000
       6000
       4000
       2000
          0                                                                             Total




      Figure12:MIDDLE EAST
                                                Total
  16000

  14000

  12000

  10000

      8000
                                                                                         Total
      6000

      4000

      2000

         0
              Iran    Israel   Jordan   Qatar     Saudi    Syria    United    Total -
                                                  Arabia             Arab     Middle
                                                                   Emirates    East




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           Figure13:ASIA



                                              Total
  800,000
  700,000
  600,000
  500,000
  400,000
  300,000
                                                                               Total
  200,000
  100,000
          0




         Figure14:WORLD
                                               Total
  1200000

  1000000

      800000

      600000
                                                                                Total
      400000

      200000

           0
               Asia     Middle   Africa    South   North    CIS   EU   World
                         East             America America




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India - Steel Industry Overview


        At the time of independence, India had a small Iron and Steel industry with production of
about a million tonnes (mt). In due course, the government was mainly focusing on developing
basic steel industry, where crude steel constituted a major part of the total steel production. Many
public sector units were established and thus public sector had a dominant share in the steel
production till early 1990s. Mostly private players were in downstream production, which was
mainly producing finished steel using crude steel products. Capacity ceiling measures were
introduced. Basically, the steel industry was developing under a controlled regime, which
established more public sector steel companies in various segments.

        Till early 1990s, when economic liberalization reforms were introduced, the steel
industry continued to be under controlled regime, which largely constituted regulations such as
large plant capacities were reserved only for public sector under capacity control measures;
price regulation; for additional capacity creation producers had to take license from the
government; foreign investment was restricted; and there were restrictions on imports as well as
exports.

        Undoubtedly there has been significant government bias towards public sector
undertakings. But not all government action has been beneficial for the public sector companies.
Freight equalization policies of the past were one example. The current governmental ‗moral-
suasion‘ to limit steel price increases is another.

        However, after liberalization—when a large number of controls were abolished, some
immediately and others gradually—the steel industry has been experiencing new era of
development. Major developments that occurred at the time of liberalization and thenceforth
were:

   1. Large plant capacities that were reserved for public sector were removed;

   2. Export restrictions were eliminated;

   3. Import tariffs were reduced from 100 percent to 5 percent;

   4. Decontrol of domestic steel prices;
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   5. Foreign investment was encouraged, and the steel industry was part of the high priority
       industries for foreign investments and implying automatic approval for foreign equity
       participation up to 100 percent; and

   6. System of freight ceiling was introduced in place of freight equalization scheme.

       As a result, the domestic steel industry has since then, become market oriented and
integrated with the global steel industry. This has helped private players to expand their
operations and bring in new cost effective technologies to improve competitiveness not only in
the domestic but also in the global market. Private sector contribution in the total output has
since been increasing in India. Development of private sector has caused high growth in all
aspects of steel industry that is capacity, production, export and imports. During the last decade
more than 12 mt of capacity has been added in the steel industry, this is mostly in the private
sector. Recently, the steel industry is receiving significant foreign investments such as POSCO—
South Korean steel producer—and Arcelor-Mittal Group—UK/Europe based steel producer—
announcing plans for establishing about 12 mt production units each in India.

       The Indian steel industry, with a production of about 1 mt at the time of independence,
has come long way to reach the production of about 57 mt in 2006-07. Moreover, the steel
industry is showing promising future growth as major players in the industry have announced
their plans for significant investments in expanding their capacities.

       Impressive development of the steel industry with active participation of private sector
and integration of India steel industry with the global steel industry has also induced the
government to come up with a National Steel Policy in 2005. The National Steel Policy 2005
was drafted with the aim of establishing roadmap and framework for the development of the
steel industry. The policy envisages steel production to reach at 110 mt by 2019-20 with annual
growth rate of 7.3 percent.



Steel Producers

       Broadly there are two types of producers in India viz. integrated producers and secondary
producers. Integrated steel producers have traditionally integrated steel units have captive plants
for iron ore and coke, which are main inputs to these units. Currently there are three main

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integrated producers of steel namely Steel Authority of India Limited (SAIL), Tata Iron and
Steel Co Ltd (TISCO) and Rashtriya Ispat Nigam Ltd (RINL). SAIL dominates amongst the
three owing to its large steel production capacity plant size.

       Secondary producers use steel scrap or sponge iron/direct reduced iron (DRI) or hot
briquetted iron (HBI). It comprises mainly of Electric Arc Furnace (EAF) and Induction Furnace
(IF) units, apart from other manufacturing units like the independent hot and cold rolling units,
rerolling units, galvanizing and tin plating units, sponge iron producers, pig iron producers, etc.
Secondary producers include Essar Steel Ltd., Ispat Industries Ltd., and JSW Steel Ltd. There are
120 sponge iron producers; 650 mini blast furnaces, electric arc furnaces, induction furnaces and
energy optimizing furnaces; and 1,200 re-rollers in India.

       The integrated producers constitute most of the mild steel production in India. Their main
products include flat steel products such as Hot Rolled, Cold Rolled and Galvanised steel. They
also produce long and special steel in small quantities. On the other, secondary producers largely
produce long steel products.

       Re-rollers are the units that come under secondary producers‘ category, and produce
small quantity of steel like long and flat products. These units either procure their inputs from the
market or through their backward integrated plants. They use sponge iron, pig iron or
combination to produce finished steel or ingots.




Production

       During the last five years finished steel production (alloy and non-alloy) grew at the rate
of 8 percent (CAGR) to reach at 57.66 mt in 2006-07 from 39.22 mt in 2002-03 (table 2.2). In
2006-07, the secondary producers alone contributed about 76 percent and the rest came from the
main producers.

After liberalization, on the account of active participation of private sector in the steel industry,
public sector share in the total production started dwindling. In 2003-04, share of public sector in
the finished steel production (alloy & non-alloy) was 28 percent, which was reduced to 23
percent in 2006-07.

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                    Indian Institute of Foreign Trade, Kolkata
            According to estimates of Ministry of Steel, Government of India—production
capacity of the steel industry will be 124 mt at the end of the year 2011-12. It is mainly attributed
to positive trends in the consumption. Main producers such as TISCO, SAIL and JSW are
aggressively investing in expanding their plant capacities. TISCO has an installed production
capacity of 7.5 to 8 mt with another 2.4 mt would be added by 2009. The TISCO is the front
runner with an expansion plan of about 30 mtpa by 2020. JSW and SAIL have expansion plans
of about 27 mtpa and 24 mtpa, respectively.



Consumption

        During last five years (2002-03 to 2006-07) the steel consumption has grown by about 11
percent, which was higher than the estimation of National Steel Policy 2005. Especially in last
two years (2005-06 and 2006-07) consumption growth has been quite impressive, 13.90 percent
and 12.91 percent, respectively. The consumption has reached its ever highest level of 46.78 mt
in 2006-07 (see figure 2.2). Some estimations state that this upturn trend in consumption will
continue in the future mainly owing to healthy economic growth and promising demand from
growth driving sectors such as infrastructure, construction, housing, consumer durables, etc.

        India‘s per capita consumption of steel stood at 46 kg, whereas world average is 150 kg.
Average for developed world is 450 kg. Thus, it is clear that there is much scope for the growth
of consumption in India. Major sectors which contributed to steel consumption in 2005-06 are
depicted in the figure below (figure 2.3). Infrastructure and manufacturing sectors together
contributed almost 50 percent of total demand for the steel in 2005-06.



Trade

          In last five years (2002-03 to 2006-07) imports are growing at much faster rate than
exports. As a result net trade in steel is getting narrower (see table 2.1). While imports have
grown by CAGR of 24.49 percent, exports have grown just by a CAGR of 2.16 percent in last
five years. Overall net trade in steel has managed to be in surplus till 2006-07.




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Performance of the Indian Steel Industry
       Data from a range of sources including Joint Plant Committee, Prowess Database, as well
as international trade data, all reveal that there is no single entity that dominates either the sector
as a whole, or any of the major product segments.           But the key point is that this is not a
monopoly, either in its aggregate form, or in any of its components. .

       In segment after segment, the pattern is very clear; the more aggressive growth oriented
firms have been capturing greater market shares. In some cases, they may be relatively smaller
secondary producers, and in others the larger one.



Production

       As mentioned above, growth of the Indian steel industry has been quite rapid; production
growth CAGR was about 8 percent (see table 2.2), very much in line with economic growth
during 2002-03 and 2006-07. The private sector constituted 77 percent of the total production in
2006-07, and its share has been rising for the past few years. While SAIL is a major public sector
undertaking, it is also the largest producer of steel in the country accounted for 17 percent of the
total production in 2006-07, followed by TSL and RINL with shares 8 percent and 5 percent,
respectively.

       At-least where market sizes are concerned, whether individually or as a group, the public
sector is no longer at the ‗commanding heights‘ of the steel sector. But a better understanding is
received when we look at the segment-wise break-up in later sections.

       In 2006-07 non-alloy steel constituted 95.6 percent of total finished steel production and
rest was alloy steel. Out of total non-alloy production non-flat products were 49.27 percent, and
in the rest 48.34 percent were flat products and 2.39 percent were pipes (large dia).

       Of total finished (non-alloy) productions of bars & rods (non-flat product) and hot rolling
coils/skelp/strips (flat product) were 37.48 percent and 22.27 percent, respectively. Together
these two major products constituted for 59.75 percent of total finished (non-alloy) steel
production in 2006-07. This trend has been more or less constant for last five years (table 2.3).


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        The top six segments: Bars & rods, structurals, HR coild/strips/skelps, cold rolling
coils/strips, plates and GC/GP sheets, contributed about 93.50 percent of total finished steel
(non-alloy) production in 2006-07.

        About 70 percent of bars and rods production came from secondary producers in 2002-
03, which was increased to 72.3 percent in 2006-07. For HR coils/sheets/strips/skelps the figure
was 55 percent. Secondary producers comprising ESSAR, JSWL, ISPAT and other small
secondary producers have experienced rise in their shares in total production of HR
coils/sheets/strips/skelps.



Imports

        Top six steel products were responsible for 73 percent of total imports of steel in India in
2006-07. Main contributors were HR coils/skelps/strips/sheets, Plates and CR coils/sheets, which
together constituted 56 percent of total imports in 2002-03, which increased to 62 percent in
2006-07. Particularly in the last two years (2005-06 and 2006-07) imports of BR and structurals
have declined. Flat products such as plates, CR coils/sheets and GP/GC sheets have seen positive
growth from 2004-05 to 2006-07. Imports of HR coils/skelps/strips/sheets, a single largest
import item, have observed marginal decline in 2006-07. In general India is becoming net
importer and expected to be so in 2007-08. Imports grew at a CAGR of about 24 percent in last
five years. This is mainly due to increase in domestic demand for specific quality/size/grade of
steel. Moreover, price considerations for specific quality/size/grade of products have pushed
imports upwards.

        Imports as percentage of total consumption have grown in last five years. India imported
5.42 percent of its total steel consumption in 2002-03, which rose to 10.64 in 2006-07.




Exports

        GP/GC sheets constituted a single largest product in total exports of steel. Share of
GP/GC sheets were 30 percent in total steel export in 2002-03, which dipped by 5 percent in the
following year. However, it recovered to reach at 37 percent in 2006-07. Although exports of

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three major segments: GP/GC sheets, HR coil/strips/skelps/sheets and CR sheets/coils have
declined in the last three, these segments still formed 70 percent of total exports of steel in 2006-
07. Overall moderate growth of exports during the last five years has been mainly due to the
need to meet the growing domestic demand and to some extent appreciating rupee was also
responsible for the slow growth in exports.

       During the last five years share of exports in total finished steel (alloy & non-alloy)
production has declined. As can be observed from table 2.14, India exported 14.21 percent of
total production in 2002-03, which reduced to 11.24 percent in 2006-07.



Table 1: India’s Trade in finished Steel (alloy & non alloy)

                                                           in million tonnes

          Year                  Import              Export                 Net

          2002-03               1.77                5.28                   3.51

          2003-04               1.83                5.89                   4.06

          2004-05               2.60                4.97                   2.36

          2005-06               4.81                5.19                   0.38

          2006-07               5.30                5.91                   0.61

                  Source: Joint Plat committee, Annual Report 2007-08.




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INDIAN STEEL INDUSTRY



       The steel industry is expanding worldwide. For a number of years it has been benefiting
from the exceptionally buoyant Asian economies (mainly India and China). The economic
modernisation processes in these countries are driving the sharp rise in demand for steel. In India
the rise is likely to be higher than average. We forecast that Indian crude steel production will
rise from 38 million tonnes in 2005 to 68 million tonnes (+6% p.a.) in 2015. Extensive capacity
increases are planned for this same period. Global crude steel output should increase somewhat
less vigorously during the forecast period (by around 5% p.a.) to 1,800 million tonnes. Despite
the stellar increase in production India‘s share of global crude steel output is forecast to rise to
just under 4% in the next ten years. This is still comparatively tiny compared to China‘s share of
41%.




                       Figure 15: Growth factors for India


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                     Indian Institute of Foreign Trade, Kolkata
       The biggest boost to efficiency in the steel industry has come from the increased use of
continuous casting – an indicator of the modernity of the production process. Its share of Indian
crude steel output has climbed from 38% in the mid-1990s to 66% now. India is thus well on its
way to joining the ranks of the leading steelmakers among the industrial nations (share in EU-25:
96%). However, in India some 6% of crude steel is still made using the outdated open-hearth
process (EU-25: 0.3%), which suggests there is restructuring potential.


Major Emphasis:
             •   Critical Input Raw Materials: Iron Ore and Coking Coal
             •   Infrastructure facilities like Roads, Railways and Ports.
    Focus:
             •   Human Resources
             •   Technology
             •   Research and Development
             •   Market outlook on prices of steel
             •   Environmental Concerns.
Critical inputs for Steel Production
             –   Iron Ore
             –   Coking Coal



                            Iron Ore                 Coking Coal             Non Coking Coal

 2019-20                    190                      70                      26

 2004-05                    54                       27                      13




                        Table2: Projected Requirement of Critical inputs



       The Indian steel ministry plans to raise the export share from 15% at present to 24% in
the next 15 years. Big companies like SAIL and Tata Steel want to become global players by
acquiring stakes in foreign firms.
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                    Indian Institute of Foreign Trade, Kolkata

India is one of the world’s top ten steelmakers


Over the past ten years India‘s crude steel output rose nearly 6% per year to 38 million tonnes,
while global crude steel output increased by 4% (Germany managed an increase of just under 1%
p.a.). Although India is the world‘s eighth largest steel producer, its 3%-plus share of global steel
output is still very low; it is roughly the same as Ukraine‘s share of world steel production.
China, the world‘s biggest steelmaker, produces nearly ten times as much as India.




    800

    700

    600

    500

    400

    300

    200

    100

      0
                 India                China                Japan                 EU




                      Figure 16:Crude Steel Output Forecasts: Market Growth in
                      India


Structural Deficiencies


Although India has modernised its steelmaking considerably over the past decades, nearly 6% of
its crude steel is nevertheless still produced using the outdated open-hearth process. The biggest
boost to efficiency in the Indian steel industry has come from continuous casting, which is seen
as an indicator of modernity. The continuous casting share of crude steel output has risen from

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                                                   Indian Institute of Foreign Trade, Kolkata
nearly two-fifths in the mid-1990s to twothirds now. On top of this, labour productivity in India
is still very low. According to the German Steel Federation, crude steel output at the biggest
Indian steelmaker is roughly 144 tonnes per worker per year, whereas in Western Europe the
figure is around 600 tonnes. However, labour costs in India are very low at EUR 1 per hour
worked compared with EUR 26 per hour in Germany and EUR 18
per hour in Japan, for example.


  30
                                                                                                                                       Labor
  25
                                                                                                                                       Charges in
  20                                                                                                                                   India vis a
                                                                                                                                       vis other
  15                                                                                                                                   Nations
                                                                                                                 Series1
  10

   5

   0
                                IN     CN       RU     PL    CZ     HU     JP    US     GB     FR    DE


                                                      Figure 17: Labour Charges in India

                                                                  Figure 18: Indian imports from world


                                                            India - Imports from -- World --
                                     15000
       Millions of US Dollars




                                     10000




                                     5000




                                        0
                                             Jan-Dec 1999        Jan-Dec 2001        Jan-Dec 2003        Jan-Dec 2005        Jan-Dec 2007
                                                       Jan-Dec 2000        Jan-Dec 2002        Jan-Dec 2004        Jan-Dec 2006        Jan-Dec 2008




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                                                     Indian Institute of Foreign Trade, Kolkata

                                                               India - Exports to -- World --
                                   10000




                                    8000
        Millions of US Dollars




                                    6000




                                    4000




                                    2000




                                          0
                                              Jan-Dec 1999        Jan-Dec 2001        Jan-Dec 2003        Jan-Dec 2005        Jan-Dec 2007
                                                        Jan-Dec 2000        Jan-Dec 2002        Jan-Dec 2004        Jan-Dec 2006        Jan-Dec 2008




                                               Figure 19: Indian exports to the world


                                                     India -Balance of Trade with -- World --
                                   1000



                                   500
  Millions of US Dollars




                                     0
                                          Jan-Dec 1999        Jan-Dec 2001        Jan-Dec 2003        Jan-Dec 2005        Jan-Dec 2007
                                                    Jan-Dec 2000        Jan-Dec 2002        Jan-Dec 2004        Jan-Dec 2006        Jan-Dec 2008
                                   -500



                                  -1000



                                  -1500



                                  -2000



                                  -2500




                                 Figure 20: Indian balance of trade with world of HS 72 (HS 2002)




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                     Indian Institute of Foreign Trade, Kolkata

Further large increase in steel capacity inevitable


        Given the expanding economy, it is not surprising that India‘s steel industry capacities
are to be increased significantly in the years ahead to meet the prospective demand. Many more
basic oxygen steelmaking plants are planned than electric steel mills. The ―oxygen steel route‖
(in which iron ore and coke are the key raw material inputs) makes flat products for the
automotive, iron & steel and metalworking industries, for example. By contrast, electric steel
making (in which scrap is used) provides long products that are primarily used in the
construction and mechanical engineering sectors. Whether the planned capacity increases can be
realised in their entirety is however doubtful as the firms‘ first priority is only to secure access to
iron ore deposits.




    12000

    10000

      8000

      6000

      4000

      2000

         0




Figure 21: Planned Increase in capacity by various firms in past years or coming years




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                    Indian Institute of Foreign Trade, Kolkata

Booming automobile industry


        The automotive industry may consume a relatively small proportion of steel output, but
its growth rate is the highest of the most important clients for the steel industry. In India a small
but flourishing automobile industry has now developed that sees its future primarily in the
budget price segment and views the domestic market and other emerging nations as potential
markets.7 Vehicle ownership (cars and trucks) in India at 11 per 1,000 inhabitants is even less
widespread than in China with its very low figure of 21. The growth of the Indian automobile
industry is being driven by healthy domestic demand. The consumption-minded, fast-growing
middle class is a major factor. The continuing increase in incomes and low-cost financing
facilities are boosting sales.

                    Country                                         Car Density

                      India                                              11
                      China                                              21
                      World                                             136
                      Russia                                            207
                      Korea                                             308
                     Europe                                             391
                      Japan                                             572
                        US                                              790
Figure 23: Car density


        In the medium term the global steel industry is likely to undergo a more extensive
process of consolidation since industry players are engaged in an unfettered rush for scale. In so
doing steelmakers are pursuing two main objectives: by purchasing additional production
capacity they aim to both improve their cost structure and increase their market clout. The

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                   Indian Institute of Foreign Trade, Kolkata
merger of the world‘s two biggest steelmakers Mittal Steel (Netherlands) and Arcelor
(Luxembourg) will create an industry giant whose output is nearly four times as much as that of
the next biggest player (Nippon Steel) and eight times as much as SAIL‘s. In India the three
biggest steelmakers, whose combined output is almost 20 million tonnes, have a market share of
51%. Their domestic competitors are numerous medium sized and smallish companies. One of
these, for example, is Ispat with an output of 2 million tonnes. More mergers can be expected
between companies of this size as these firms need to improve their position with regard to the
powerful suppliers of raw materials.




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                    Indian Institute of Foreign Trade, Kolkata

Data Analysis

RCA

                                       RCA
  2.5

    2

  1.5

    1                                                                         RCA

  0.5

    0
        1962
        1964
        1966
        1968
        1970
        1972
        1974
        1976
        1978
        1980
        1982
        1984
        1986
        1988
        1990
        1992
        1994
        1996
        1998
        2000
        2002
        2004
        2006
        2008
Figure 24: RCA – HS 72 iron and steel


        As we can see that the revealed comparative advantage of Indian steel exports has seen a
drastic improvement when compared to the early sixties that is the start of the planning period.
        India has slowly bulit up it‘s capacities and is now one of the most prominent players in
the global steel sector.
        However a very interesting trend that we can see here is that Indian steel had a
comparative adavantage in which came down drastically in the late 70‘s, now this may be
attributed to the policies of the then Janta government which did not pay much attention to the
needs of the steel sector companies and it was alos staunch opponenet of the MNC‘s which were
then trying to have a partnership with the Indian companies
        It again started looking up when the congress government and since then it has been
rising up continously, riding on strong demand from across the world.
The lows that we see here are nothing more than the cyclical ups and downs that are a part and
parcel of the steel industry.
        Recently the RCA has come down a bit this is primarily due to the rise of China and it‘s
steel companies since it joined the WTO.

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                     Indian Institute of Foreign Trade, Kolkata

dRCA

                                           dRCA
   1.2
      1
   0.8
   0.6
   0.4
   0.2                                                                                dRCA
      0




          1994
          1962
          1964
          1966
          1968
          1970
          1972
          1974
          1976
          1978
          1980
          1982
          1984
          1986
          1988
          1990
          1992

          1996
          1998
          2000
          2002
          2004
          2006
          2008
  -0.2
  -0.4
  -0.6
  -0.8

Figure 25: dRCA – HS 72 iron and steel


          Apart from the 70‘s there has been no other period when the DRCA has varied too much
this shows that Indian Steel sector has been stable and has been performing well without too
many major ups and downs.
          Though for the recent past India‘s DRCA has been negative which shows that the
competitiveness of the Steel sector is not increasing and some steps are needed by the
government to again give a fillip to the industry.
          Ideally the dRCA should be continuously increasing to show that the particular sector has
been continuously doing better and better.




WTO                                                                                          Page 34
                                    Indian Institute of Foreign Trade, Kolkata

RCDA

                                                                                        RCDA
  3.5
    3
  2.5
    2
  1.5
                                                                                                                                                                                RCDA
    1
  0.5
    0

                                                                                            1986
        1962
               1964
                      1966
                             1968
                                    1970
                                           1972
                                                  1974
                                                         1976
                                                                1978
                                                                       1980
                                                                              1982
                                                                                     1984


                                                                                                   1988
                                                                                                          1990
                                                                                                                 1992
                                                                                                                        1994
                                                                                                                               1996
                                                                                                                                      1998
                                                                                                                                             2000
                                                                                                                                                    2002
                                                                                                                                                           2004
                                                                                                                                                                  2006
                                                                                                                                                                         2008
Figure 26: RCDA – HS 72 iron and steel


         The graph here shows that the RCDA for India has been decreasing continously over the
past 50 years barring exceptions in the recent years.
         This shows that Indian companies have increased increased their cpacities and India
relies less and less on imports.
         Morover the steel making capacity of Indian companies has been increasing starting from
Tata Steel and SAIL we now have many large scale integrated steel plants like Jindal steel, RINL
in vizag, essar etc they have not only built up huge capacities but also brought in modern
technology and know how, this has helped them to move up the value chain and increase their
revenues and profits. India also has discovered large reserved of iron ore reserves due to which it
the steel producers has captive mines and they are not exposed to the huge variations in the
International raw material prices that much as companies of raw material deficient companies do.




WTO                                                                                                                                                                             Page 35
                        Indian Institute of Foreign Trade, Kolkata

    Advantages of Steel sector in India


   Sizeable future economic growth seems assured, although it will not match China‘s because of
    lower Fixed Asset Investment (FAI) and savings ratios to GDP. Someday, services in India may
    rise to about 60% of GDP versus 51% at present; just as FAI in China someday may rise to 54%
    of GDP versus 45% at present.
   The sharply improving infrastructure is a boon for many steel plants. A new major highway has
    been built to connect the country‘s major cities. The improved road system from the East Coast
    (Kolkata) to the West Coast (Mumbai) is important for SAIL, Tata Steel and others.
   A steel demand growth rate of 10% per year in the next decade seems plausible. It would boost
    steel demand from 52.4 million tonnes in 2007 to 130 million tonnes in 2017.
   Steelmaking capacity expansions, both Greenfield and round-out, will be huge because low cost
    iron ore properties can be obtained on a favourable basis. Also, Indian entrepreneurs are often
    less fearful than others to take on debt.
   India‘s location is ideal to serve steel markets in the Middle East, China, Southeast Asia and
    even Europe.
   A number of ports in India are deep and expandable. Additional ones will be built.
   India has a large, low-waged and often skilled workforce. Despite the low wage rates, some
    Indian steel plants (JSW in Karnataka) have close to world-class manning.
   A large pool of highly-skilled management personnel with a good background in steel also
    exists. Many of these have come from government-owned SAIL. In fact, Lakshmi Mittal, the
    Chairman of ArcelorMittal, over the years made great use of prior SAIL managers when he was
    seeking skilled managers willing to travel to remote regions of the world (Trinidad, eastern
    Mexico, Kazakhstan and Romania) in order to turn around just-acquired steel plants.
   Indian integrated steel companies have low costs versus many competitors in Japan, South
    Korea, China and Taiwan.
   Indian steelmaking plants someday will also provide sizeable quantities of low cost slabs to hot-
    strip mills and plate mills elsewhere in the world.
   The Indian steel industry benefits from high global steel scrap prices because it has many sponge
    iron facilities.


    WTO                                                                                       Page 36
                       Indian Institute of Foreign Trade, Kolkata

   India‘s sponge-iron and induction furnace sector may continue its 10 to 20% per annum growth
    rate for another few years because it has a good success formula. Excess energy from coal-based
    sponge iron units is used to generate relatively low-cost electricity for use in induction furnace
    plants.
   The Indian steel industry is a hotbed of new technologies. Two plants have a blast furnace, a DRI
    unit and a Corex unit.
   The social fabric of India is far different from China because the central government has little
    control over what goes on at the state level – including the approval of new steel plants (of which
    a huge number have been announced for Orissa on the East Coast).
   Because India is a country with a long history of democracy and a well-established legal system,
    the country risk factor is less than in China and some other countries/regions.
   It often takes months, if not years, to get approval to build new steel plants because of the
    incredible bureaucracy, graft problems from the near-top to the bottom of the government, and a
    complex political environment at the local level that respects the opinion of all groups.
   The Indian rupee will probably not strengthen as much as the Chinese RMB because the country
    will have less manufactured goods to export and the agricultural sector would be damaged if the
    currency was too strong.
   Indian manufacturers may have an adequate supply of natural gas in the future because a number
    of new natural gas pipelines are being built – including one from the East Coast to the West
    Coast.
   Four of WSD‘s ―world-class steelmakers‖ are located in India. They are Tata Steel, SAIL, Essar
    and JSW. SAIL is largely government owned. All are positioned to be winners in the future.




    WTO                                                                                         Page 37
                   Indian Institute of Foreign Trade, Kolkata

Types of Steel




Figure 27: Categories/types of steel products




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                   Indian Institute of Foreign Trade, Kolkata




Figure 28: Share of main and secondary producers in total finished steel production




Figure 29: Finished steel production




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                  Indian Institute of Foreign Trade, Kolkata
Figure 30: Major consumers of steel in 2005-06




Table 3: Production - Company wise




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                 Indian Institute of Foreign Trade, Kolkata

Table 4: Production - Segment wise




Table 5: Segment wise imports of steel




Table 6: Imports as a percentage of production




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                  Indian Institute of Foreign Trade, Kolkata

Table 7: Segment wise exports




Table 8: Exports as a percentage of total steel production




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                    Indian Institute of Foreign Trade, Kolkata

Institutional Design - Introduction

       Steel was under a fairly strict framework of regulation till 1992 and the erstwhile policy
was to allocate scarce investment and infrastructure resources for optimum and planned
development of the industry and to make available this scarce industrial intermediate to the users
at a reasonable price. The basic purpose of the past policy was to manage a scarcity driven
market towards an announced objective of establishing a fair and equitable distribution of this
product and to keep it affordable as far as possible.
       The pre-reform steel market in India was controlled in all relevant areas. Competition
was limited in this shortage-infested market that had no real role to play in the growth of the
individual companies or their performance and the allocative efficiency of investible resources.
The prices set by the government were more on political consideration and not strictly on the
basis of costs of production or markets demand and supply balance.11 In the absence of an
elaborate and an efficient distribution mechanism, one can expect such a system of controlled
prices to be favourable to the consumers. However, the trading intermediaries, with whatever
role they were allowed to play, gobbled up the margin between the market and the administered
prices, with little benefits left to the vast number of small consumers.
       This was natural given that supply was limited, and higher demand required an allocation
mechanism between the many competing consumers. And the intermediaries used price as a
means of allocation. In free market such price ‗controls‘ only lead to rents for those not facing
the controls. In this particular case this would have only adversely affected the willingness of
those facing the controls to invest in increasing production or improving technology.
Following the reforms ushered in the nineties this regulatory regime was dismantled. The steel
market and the industry currently are free from all regulations in trade, production and
investment. Till some time ago, steel was included in the list of essential commodities. After it
has been removed, the government‘s scope for direct policy backed intervention has reduced
considerably.




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                    Indian Institute of Foreign Trade, Kolkata

Policy Measures by Government of India
      Steel was under a fairly strict framework of regulation till 1992 and the erstwhile policy
was to allocate scarce investment and infrastructure resources for optimum and planned
development of the industry and to make available this scarce industrial intermediate to the users
at a reasonable price. The basic purpose of the past policy was to manage a scarcity driven
market towards an announced objective of establishing a fair and equitable distribution of this
product and to keep it affordable as far as possible.

      The pre-reform steel market in India was controlled in all relevant areas. Competition was
limited in this shortage-infested market that had no real role to play in the growth of the
individual companies or their performance and the allocative efficiency of investible resources.
The prices set by the government were more on political consideration and not strictly on the
basis of costs of production or markets demand and supply balance. In the absence of an
elaborate and an efficient distribution mechanism, one can expect such a system of controlled
prices to be favourable to the consumers. However, the trading intermediaries, with whatever
role they were allowed to play, gobbled up the margin between the market and the administered
prices, with little benefits left to the vast number of small consumers.

      This was natural given that supply was limited, and higher demand required an allocation
mechanism between the many competing consumers. And the intermediaries used price as a
means of allocation. In free market such price ‗controls‘ only lead to rents for those not facing
the controls. In this particular case this would have only adversely affected the willingness of
those facing the controls to invest in increasing production or improving technology.

       Following the reforms ushered in the nineties this regulatory regime was dismantled. The
steel market and the industry currently are free from all regulations in trade, production and
investment. Till some time ago, steel was included in the list of essential commodities. After it
has been removed, the government‘s scope for direct policy backed intervention has reduced
considerably.




WTO                                                                                        Page 44
                    Indian Institute of Foreign Trade, Kolkata


Policy regime for the Steel sector in India

       Under the new industrial policy, iron and steel has been made one of the high priority
industries. Price and distribution controls have been removed as well as foreign direct investment
up to 100% (under automatic route) has been permitted.

       The Trade Policy has also been liberalized and import and export of iron and steel is
freely allowed with no quantitative restrictions on import of iron and steel items. Tariffs on
various items of iron and steel have drastically come down since 1991-92 levels and the
government is committed to bring them down to the international levels. With the abolishing of
price regulation of iron and steel in 92, the steel prices are market determined.

       The Government announced the National Steel policy in 2005. The policy targets
indigenous production of 110 million tonnes (mt) by 2019-20 from the 2004-05 level of 38 mt at
a compounded annual growth of 7.3 percent per annum. Similarly targeted consumption is 90 mt
by 2019-20 from the 2004-05 level of 36 mt, implying a CAGR of 6.90 percent.

       The policy devises a multi-pronged strategy to achieve these targets with following focus
areas - removal of supply constraints especially availability of critical inputs like iron ore;
improve cost competitiveness by expanding and strengthening the infrastructure in roads,
railways, ports and power; increase exports; meet the additional capital requirements by
mobilizing financial resources; promote investments by removing procedural delays. In addition
the policy also addresses challenges arising out of environmental concerns, human resource
requirements, R&D, volatile steel prices and the secondary sector.

       The Eleventh plan working group for steel recommends the following for effective
development of the steel industry:


   Full utilization of the existing policy framework of Public-Private Partnerships (PPPs) in
    development of infrastructure like Railways.
   Set up an R&D Mission in order to provide accelerated thrust on R&D and thereby improve
    the competitiveness of the industry.



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                    Indian Institute of Foreign Trade, Kolkata

   Spread awareness about hedging mechanisms available in exchanges like MCX and NCDX
    and develop appropriate regulatory mechanism to avoid any manipulative practices.
   Develop an appropriate Institutional Framework for collection of data and dissemination of
    Information.
   Consider setting up of a multi-disciplinary organization along the lines of the International
   Iron & Steel Institute (IISI).
   Proposal to have a dedicated plan fund of Rs. 25 crores for the 11th Five Year Plan in the
    Ministry of Steel towards grant for development of human resources for iron and steel and
    for ad campaigns for promotion of steel usage.
   A Technology Up gradation Fund Scheme (TUFS) for the Small and Medium Enterprises
    (SME) sector in steel industry to upgrade the technological profile of the plants in the SME
    sector.




Measures Taken by the Government to support Steel Industry:

       Take for instance the import duty on steel that remained at very high levels for a long
        time, at 25 percent till January 2004. It is only now that anti-inflationary action has led to
        import duty being waived.

       Also, the industry benefited from the floor prices imposed on prime steel products, not
        only when the global prices dropped to abysmal levels, but also when they started rising
        to reasonable positions. Though these have finally been abolished, the protracted
        protection unduly supported the steel makers at the cost of the consumers.

       The industry also gained from certain procedure related non-tariff barriers like mandatory
        certification requirement for quality of imported products by the Bureau of Indian
        Standards (BIS). This involved lengthy and cumbersome procedures involving high
        transactions costs for the importers.

       The government also designated specific ports for imports of certain categories of steel
        with a clear (though not formally stated) intention to curb their imports.


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                   Indian Institute of Foreign Trade, Kolkata

      The imposition of an anti-dumping duty on non-alloy steel a few years ago on an
       absolutely flimsy ground was also questioned widely by the consumer industry.

      Further, a prohibitive import duty on seconds and defectives also went against genuine
       consumer forcing them to buy prime materials against their wishes and requirement.
       Given the fact that there is a large number of diverse industries dependent on low priced
       defective materials and there are no specific reasons why such consumers should be
       forced to buy high cost raw materials for their low value products, the government‘s
       persistent stand against imports of seconds and defectives violate the spirit of competition
       with openly doled out favours to the major steel makers. The steel industry often raised
       health issues in certain cases which are nothing but administrative and law enforcement
       matters having no relation either to the policy or the market.



       Table9: Exports of Iron Ore
                                                                           South
      Year     Australia        Brazil          India        Canada
                                                                           Africa(CU)

      1997     147266           140419          32856        32340         20730

      1998     136424           143197          32828        30601         22093

      1999     139420           140200          30972        26886         21096

      2000     157331           160114          34918        26510         21397

      2001     157079           155741          36607        21981         23520

      2002     165583           170015          54929        25638         24304

      2003     186123           184442          57345        27126         23412

      2004     210450           236758          62650        22453         24745

      2005     238763           225135          89585        27303         27413

      2006     248147           246580          86785        27484         26161


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                    Indian Institute of Foreign Trade, Kolkata
  Source: Steel Statistical Yearbook 2007, IISI Committee on Economic Studies Brussels, 2007

        Table10: Imports of Iron Ore


 Year      China         Japan         Germany        South Korea         Netherlands

 1997      55106         126601        41687          38592               8596

 1998      51771         120782        52530          33612               8831

 1999      55274         120107        38802          35400               7911

 2000      69971         131733        47503          38980               7334

 2001      92393         126297        40095          45875               7703

 2002      111423        129088        44298          43311               7370

 2003      148128        132081        33876          43069               14705

 2004      208089        134884        38861          44225               30279

 2005      275260        132285        39061          42250               37637

 2006      326303        134287        44850          42807               33562

Source: Steel Statistical Yearbook 2007, IISI Committee on Economic Studies Brussels, 2007




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                    Indian Institute of Foreign Trade, Kolkata

Role of Government

       In the pre reform era, the ministry of steel played the role of key regulator and was
involved in decision making related to pricing, allocation and distribution. With dismantling of
the strict regulatory regime, the role of Government in all sectors has changed to that of a
facilitator. So is true of the steel industry. In the post-de-regulation period, the role of the
Ministry of Steel is now considered that of a facilitator. This is how the government itself sees its
role.13 The box below excerpts the annual report of the Ministry overseeing the steel sector.
Given the oligopolistic features of the steel industry, the role of Government in promoting
competitive forces in the industry is of some importance. Government intervention may be called
for, especially to protect larger consumer interests. But whether it is done via policy or through
some regulatory/judicial mechanism is the question of interest. However, the government
continues to intervene in ad-hoc ways through its administrative ministry on and off. For
instance government's diktat to the steel producers to hold prices down in the face of rising
domestic and global demand for steel is a clear example of government's undue intrusion in the
market.


Figure31: Market prices and landed prices of Imports




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                 Indian Institute of Foreign Trade, Kolkata


Table 11: Comparison of import and domestic prices of steel




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                     Indian Institute of Foreign Trade, Kolkata

Structure of the Iron Ore Market

       From the supply side, today, the iron ore market is divided into the following segments:
      Merchant mining companies in the public sector such as NMDC, OMC OMDC etc. Who
       sell iron ore either at market based or government determined prices.
      Merchant mining companies in the private sector who sell iron ore at market based prices
      Steel producers‘ captive mines.


       From the demand side of the market, the market is segmented in the following way:
   1. Iron and steel companies making use of their own captive resources mined directly or
       indirectly at the actual cost of mining (plus freight)
   2. Iron and steel companies obtaining assured allocations from NMDC or any other
       government company at prices fixed by the concerned iron ore company with or without
       the government clearance/approval.
   3. Iron and steel companies buying partly or fully their requirement from the merchant
       mining companies/traders at market prices.


       The structure of the market seen both from the supply and the demand sides provides
extremely interesting scenarios. In terms of supply assurance, the steel producers with captive
mines are best placed followed by those with assured allocations from the merchant mining
companies in the public sector. The iron and steel companies who have to depend on the market
are the worst placed. Among them, those with long term arrangement with then iron ore miners
are placed better.
       While the market price of iron ore is driven by specific demand and supply conditions in
the market and is also linked to the prices of steel scrap, steel, sponge iron etc.., the public sector
behemoths such as NMDC provides iron ore at non-market prices, mostly far lower than the
prevailing domestic or global market prices on allocation basis. Since the basis of allocation is
not well defined, this market remains far from being competitive, with built in subsidies, and
clearly provides a competitive edge over all those who are to buy their iron ore from the market.




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       There is no problem per se if a raw material resource such as iron ore or coal is available
to a user industry at cost when they have captive access. The difficulty arises under the following
circumstances,


   1. When the user industry, say, a steel producer is provided with a iron ore or coal mining
       lease grant, at a price/cost that has no relevance to the value of the asset, especially when
       other producers who are dependent on the same raw material are outside of this favour. It
       is like providing land or a factory to one free of cost and to another at market prices to do
       the same business. The established incumbents, especially the public sector entities and
       TISCO gain inordinately from such actions of the past.
   2. When an overriding priority is assigned to an applicant for mining leases when linked to
       forward integration that is when captive mining leases are provided priority over the rest
       without any additional obligation to fulfill. Also, when a priority is assigned to state
       owned mining companies ignoring the fact that they operate in the same market under
       exactly the same conditions.
   3. When a prospective investment is incentivised with the promise of a captive mining lease
       by the state government.


Not only that all the above cases are in contravention to the free market conditions, the captive
mining is being seen by the government itself as a subsidy to the industry.




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                   Indian Institute of Foreign Trade, Kolkata

Figur32: Pricing




Figure 33: Cost of production




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                  Indian Institute of Foreign Trade, Kolkata

Figure 34: Region Wise crude steel production




Figure 35: Top five steel producing regions
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                  Indian Institute of Foreign Trade, Kolkata




Figure 36: Top five steel producing countries
Figure 37: Top steel producing companies and their percentage share




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                  Indian Institute of Foreign Trade, Kolkata

Figure 38: Top five consumers of steel




Figure 39: Exports of Iron Ore (in ‘000 tons)




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                   Indian Institute of Foreign Trade, Kolkata

Figure 40: Imports of Iron Ore




Present conditions


STEEL SECTOR TRENDS


      India remained the fifth largest producer of crude steel in the world during 2008.
      India also maintained its lead position as the world‘s largest producer of direct reduced
       iron (DRI) or sponge iron with nearly 20 million tonnes production in 2008-09.
      As per the revised estimates, the country is likely to achieve a steel production capacity
       of nearly 124 million tonnes by the year 2011-12.
      The steel sector is expected to generate additional employment of around 4 million by
       2020 for production of around 295 million tonnes of crude steel by 2019-2020.
      222 MoUs have been signed with various States for planned capacity of around 276
       million tonnes.
      Major investment plans are in the States of Orissa, Jharkhand, Chattisgarh, West Bengal,
       Karnataka, Gujarat and Maharashtra.



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Highlights of 2008-09
      Crude steel production was at 54.52 million tonnes, a growth of 1.23% over last year with
       capacity utilisation at 89% during the year. It grew at more than 9% annually from 38.72
       million tonnes (MT) in 2003-04.
      Production for sale of total finished steel was at 56.39 million tonnes, a growth of 0.6%
       as compared to last year. As against 40.71 MT in 2003-04, an average annual growth of
       7.3% was registered.
      Total finished steel exports decreased by 26 % as it reached an estimated 3.75 million
       tonnes while imports were at an estimated 5.77 million tonnes, a decline of 18 %.
      At 51.85 million tonnes, domestic consumption of total finished steel declined marginally
       by 0.53%.
      The growth was driven by capacity expansion from 43.91 million tonnes per annum
       (MTPA) in 2003-04 to 64.40 MTPA in 2008-09.
      The induction furnace route accounted for 32% of total crude steel production during
       2008-2009.


       The total financial requirements covered in Demand No.91 of the Ministry of Steel for
Budget Estimate (BE) 2008-09, Revised Estimate (RE) and Actual for 2008-09, are summarised
in the following table:




Figure 41: Budgetary allocations




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Major initiatives taken by the Indian Government


_ The Inter Ministerial Group (IMG), under the Chairmanship of Secretary (Steel) has been
conducting regular review and coordination meetings with the steel investors, Central
Ministries/Departments and the State Governments concerned. During the year, review meetings
with investors (July 2008 and September 2008), a meeting with State Government (May 2008 at
Bhubaneswar) and two coordination meetings with Central Ministries and State Governments
(October 2008 and December 2008) were held.
_ Steel Quality Control Orders to ensure availability of 17 critical steel products of certified
quality to consumers were issued during 2008. The order has since been revised subsequently
whereby three products have been excluded and implementation of the order on 8 products have
been deferred.
_ Around 127 CDM projects from the iron and steel plants in India have been accorded Host
Country Approval (HCA) by National CDM Authority in India. These projects will result in
Green House Gas abatement worth 99 million tonnes of CO2 equivalent, resulting in generation
of 99 million tonnes of Certified Emission Reduction (CER) till the year 2012 which can be
traded in the International Market for earning substantial foreign exchange.



Action taken to control inflation in the steel sector
          Government took the following measures to contain steel prices to control inflation
during the period April-June 2008:
(Rs. in crore)
_ Reduction in Custom Duty in respect of non-alloy steel products and Zinc, Metcoke and Ferro
alloys.
_ The Counter Vailing Duty (CVD) on TMT rods and bars was reduced from 14% to NIL.
_ Export duty was imposed on the following steel categories w.e.f. May 10, 2008:
_ Export Duty of 15% on Pig iron, sponge iron, steel scrap, steel ingots, and all categories of
non-alloy semi-finished steel
_ Export Duty of 15% on non-alloy Hot Rolled (HR) steel
_ Export Duty of 10% on non-alloy Cold Rolled (CR) steel
_ Export Duty of 5% on non-alloy Galvanised and Coated steel


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_ Export Duty of 10% on bars, rods, wire rods, angles shapes
_ Export Duty of 10% on pipes and tubes
_ Export duty was modified on June 13, 2008 as follows:
_ Export duty in respect of flat steel products was reduced from previous levels to NIL
_ Export duties on bars and rods of non-alloy steel increased from 10% to 15%
_ An ad-valorem export duty of 15% levied on iron ore of all categories and grades



Action taken to control demand and supply of steel
_ Action taken in October-November 2008 consequent upon the global financial crisis:
_ Export duty on steel exports withdrawn w.e.f. October 31, 2008
_ Duty Entitlement Pass Book benefit restored on steel exports w.e.f. November 14, 2008
_ Import duty @ 5 % imposed on import of non-alloy steel (except melting scrap) w.e.f.
November 18, 2008
_ Excise duty on steel products reduced from 14 % to 10 % w.e.f., December 07, 2008
_ Excise duty on steel has been further reduced to 8 % on February 24, 2009



Action taken to facilitate conservation of iron ore resource
        As a result of consistent efforts of Ministry of Steel, export duty on iron ore was imposed.
Imposition of Export duty on iron ore has been an important step for enhancing raw material
security for the domestic steel industry.
_ Following rates of duty were imposed on iron ore exports in the Finance Bill 2007-08:
_ Iron ore fines (iron content upto 62%) — Rs. 50 Per Metric Tonne (PMT)
_ Iron ore fines (iron content 62% and above) — Rs. 300 PMT
_ Iron ore lumps (all sorts) — Rs. 300 PMT
_ Iron ore concentrates (all sorts) — Rs. 300 PMT
_ The matter of export of iron ore was further deliberated by a Group of Ministers (GoM)
constituted to consider the National Mineral Policy. In the GoM meeting to consider National
Mineral Policy, there was an agreement that iron ore resources of the country should be
conserved for the use of domestic steel industry. It was decided that although conservation of
iron ore resources of the country is of paramount importance, the same may not be achieved by
banning or capping the export of iron ore but by taking recourse to appropriate fiscal measures.

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Accordingly, Government of India imposed an ad-valorem export duty of 15% on all varieties of
iron ore, irrespective of Fe content w.e.f. June 13, 2008.
_ Subsequently, export duty on iron ore fines was amended to Rs. 200/Metric Tonne (MT) with
effect from October 31, 2008, which was further modified to 8% ad-valorem with effect from
November 7, 2008. The export duty on iron ore lumps remained at 15% ad-valorem.
_ Ministry of Finance vide notification dated December 7, 2008 has revised the rates of duty on
iron ore exports in the following manner:
a) Iron ore fines (all sorts): NIL
b) Iron ore other than fines(including lumps and pellets) - 5% ad-valorem




Production, consumption and growth of steel

        The National Steel Policy 2005 had projected consumption to grow at 7% based on a
GDP growth rate of 7-7.5% and production of 110 million tonnes by 2019-2020. These estimates
will be largely exceeded and it is envisaged that in the next five years, demand will grow at a
considerably higher annual average rate of over 10% as compared to around 7% growth achieved
between 1991-92 and 2005-06. It has been assessed that, on a ‗most likely scenario‘ basis, the
steel production capacity in the country by the year 2011-2012 will be nearly 124 million tonnes.
The table below shows the trend in production for sale, import, export and consumption of total
finished steel (alloy + non-alloy) in the country during the last six years




Table 12: Total finished steel


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       Crude steel production has shown a sustained rise since 2003-04 along with capacity.
Data on crude steel production, capacity and capacity utilisation is given in the table below




Table 13: Production and capacity


       The growth was driven by capacity expansion from 43.91 million tonnes per annum
(MTPA) in 2003-04 to 64.4 MTPA in 2008-09.
_ Crude steel production grew at more than 8.16% annually from 38.72 million tonnes in 2003-
04 to 54.52 million tonnes in 2008-09.
_ Production of finished steel at 56.39 million tonnes during 2008-09 as against 40.71 million
tonnes in 2003-04 at average annual growth rate of 7.7%.
_ With growth in production for sale lagging behind consumption growth, India has turned into a
net importer of finished steel in 2008-09. Exports also declined to ensure greater domestic
availability. The above performance has been contributed largely by the strong trends in growth
of the electric route of steel making, particularly the induction furnace route, which accounted
for 32 per cent of total crude steel production in the country during 2008-09 and has emerged as
a key driver of crude steel production.
       The process route-wise production of crude steel in the country during 2003-04 and
2008-09 are shown in the table below and indicates the emergence of the electric route of
production compared to the oxygen route:




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                   Indian Institute of Foreign Trade, Kolkata




Table 14: Process route produciton




Present growth scenario and future outlook

       India ranks as the fifth largest producer of crude steel in the world. Domestic crude steel
production grew at a compounded annual growth rate of 7 per cent during 2004-05 to 2008-09.
The increase in production came on the back of capacity expansion, mainly in the private sector
plants, and higher utilisation rates. This growth was driven by both capacity expansion (from
47.99 million tonnes in 2004-05 to approximately 64 million tonnes in 2008-09) and improved
capacity utilisation. India, the world‘s largest producer of direct reduced iron (DRI) or sponge
iron, is also expected to maintain its lead in the near future. Sponge iron production grew at a
CAGR of 16% to reach a level of 20.80 million tonnes in 2008-09 compared to 12.36 million
tonnes in 2004-05. India is expected to become the second largest producer of steel in the world
by 2015-16, provided all requirements for fresh capacity creation are met.




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                            Indian Institute of Foreign Trade, Kolkata

A peek into the supply chain
          The current global steel industry including Indian steel industry is in its best position in
comparison to previous decades. The price has been rising continuously; demand is growing and
is expected to grow further for a long time to come. The current economic crisis threatened to
existence of many established players in the industry along with many Indian. So it becomes
important to manage the supply chain most efficiently to reap maximum benefit and to avoid any
rude shocks. Through this section, we will take a look at the Supply Chain of Steel Industry in
general and some discussion on the Indian Steel industry supply chain.

          The figure below shows the supply chain of Steel Industry in general.




Figure 42: Source: http://blogs.gxs.com




          Iron ore and coal are 2 important raw materials for producing steel. Let us briefly look at
the scenario in India.



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Iron Ore

         The total recoverable reserves of iron ore in India are about 9,602 million tonnes
of hematite and 3,408 million tonnes of magnetite. Madhya Pradesh, Karnataka, Bihar, Orissa,
Goa, Maharashtra, Andhra Pradesh, Kerala, Rajasthan and Tamil Nadu are the principal Indian
producers of iron ore.

World consumption of iron ore grows 10% per annum on average with the main consumers
being China, Japan, Korea, the United States and the European Union.



Issues



   Slow pace of growth

   Current procedures of granting licences, obtaining clearances, etc.

   Less utilization



Coal:

         Indian coal is of inferior quality due to its high ash content. In terms of quantity, there is
no problem but significant amount of Indian coal is not suitable for metallurgical purposes due to
its quality.

                                                 Billion tonnes

Type of Coal              Proved         Indicated          Inferred             Total

Coking                    16.4           13.5               2.1                  32.0

Non-Coking                75.1           102.7              35.8                 213.6

Total                     91.5           116.2              37.9                 245.6

Table 15: (as in 2004)


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                    Indian Institute of Foreign Trade, Kolkata


Issues

   Limited proven coking coal reserves in India

   Quality is an issue

   Huge dependence on imports

   Inferior quality of non coking coal with high ash content



Transportation:

         Transportation is another major concern in India in Supply Chain. Roads, railways and
ports are the major modes of transport. Some important points:

   Every tonne of steel production involves transportation of 4 tonnes of raw material

   Traffics for roads and railways, estimated due to steel industry would increase by 300 % by
    2020

   Inadequate road linkages between mines and steel plants

   Limited Rail linkages between mines and steel plants

   Need for high capacity wagons for improving carrying capacity

   Investments for promoting dedicated rail linkages




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affic




Figure 43: Traffic handled by road

Figure 44: Traffic handled by rail




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                     Indian Institute of Foreign Trade, Kolkata


Ports


   Capacity to hold larger size vessels at the ports
   Development of associated infrastructure like weighment facilities, coal holding facilities
   More draft for handling larger size vessels
   Railway network needs to be strengthened for handling high capacity at ports


                      Bulks to be handled at ports (MT)                                           CAGR


                      2004-05                                 2019-20

                      Import      Export           Total      Import    Export      Total

Raw Materials*        19.3        78               97.3       85        100         185           4.4%

Steel                 2           4                6          6         26          32            11.8%

Total                 21.3        82               103.3      91        126         217           5.1%

Table 16: Port handling



Recycling

        Recycling of steel is another part of the supply chain in steel industry. Due to increased
awareness on environment friendliness and Government regulations, and focus on reducing costs, the
recycling has become a major contributor in the steel industry.

        The fig below shows a very simplified version of recycling in the steel industry. There are
specialized players emerging in this area to reap the benefits.




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                                                 Production of
                                                 Steel products


                        Transport of
                                                                             Use of steel
                       recycled steel
                                                                              products
                       (or products)




                           Steel
                                                                              Enf of Life
                         recovered



                                                    Recycling


Figure 45: Recycling



        Overall, this industry depends on three major categories of supplies for the procurement of raw
materials:

1. Coal/coke

2. Minerals (iron ore, limestone etc)

        This industry needs a well designed a methodology for SCM, wherein it may be controlling the
production of the raw materials to an extent, and depending on demand, supplementing with externally
supplied raw material. The supply chain in this case needs to be totally integrated, as a shortfall in this
case can lead to closing of the furnaces that can lead to their closure, leading to substantial economic and
material loss.




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ANTI DUMPING CASES




                   Short Title                                US-Steel Plate


                   Complaint                                       India


                  Respondents                                      USA


                  Third Parties                 Chile, European Communities, Japan


            Request for Consultations                        4 October 2000


            Panel Report Circulated                           28 June 2002


                    Outcome                    The Result was decided in favor of US




Complaint                                                        India


Respondents                                            European Communities


Third Parties                                                    None


Request for Consultations                                     5 July 2004


Mutually Agreed Solution                                   27 October 2004


Outcome                                   Both the parties agreed on a mutual solution, European
                                               Community removed the anti dumping duty



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A special Case - CHINA

          China has the world‘s largest steel industry. Indeed, in 2005, China made more steel than
the next four largest producers combined. From 2000 to 2005, China‘s steel production increased
by over 170 percent, as the Chinese industry added capacity at a furious rate. Between 1998 and
2005, China‘s steel exports more than quadrupled, as China established itself as one of the
world‘s leading exporters. This explosive growth in both production and exports would not have
been possible without the support of the Chinese government.


          The structure of the Chinese steel industry reflects the Chinese government‘s ongoing
role. The Chinese steel industry continues to be primarily state-owned. The Chinese government
intervenes directly and extensively in the steel industry, and retains a high degree of decision-
making authority over its development. China‘s new Steel Policy specifically provides for
continued direct subsidization of the steel industry in the form of tax refunds, discounted interest
rates, and other preferential policies. The policy also provides various forms of indirect support,
such as restrictions on foreign investment.


          The policy makes consolidation of the industry a priority, and in fact, there have been
several well-publicized mergers of state-owned producers.


The ways in which the Chinese government provides direct and indirect benefits to the steel
industry include:


Cash grants. China's subsidies notification to the World Trade Organization indicates that it
continues to provide cash grants to a number of enterprises. For example, the Chinese
government provides steel producers with cash grants to defray costs for raw materials and
energy.


Land grants. The Chinese government provides steel producers with land at a fraction of its
market value.


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Transfers of ownership interests on terms inconsistent with commercial
considerations.
Shares in state-owned steel producers have been transferred to other state-owned producers at
prices well below their market value. This has enabled producers to acquire new facilities and
expand production at a low or even no cost.


Conversion of debt to equity in steel companies. Chinese steel producers owe billions
of dollars to state-owned banks and asset management companies. In many cases, the asset
management companies and banks have converted nonperforming loans into shares in steel
producers in an effort to reduce the producers‘ debt loads. Two of China‘s largest steel
producers, Shanghai Baosteel and Anben, benefited from this process.


Debt forgiveness and inaction regarding non-performing loans. State owned
banks and asset management companies have also simply forgiven billions of dollars in bad
debts owed by Chinese steel producers. They have also declined to press for payment in cases
where market-oriented lenders would have taken action to collect on loans.


Preferential loans and directed credit. The state-owned banks have loaned the Chinese
steel industry billions of dollars at preferential interest rates at the behest of the Chinese
government. These low-cost loans funded a substantial portion of the industry‘s capacity
expansion between 2000 and 2005.


Tax incentives, including a variety of income tax exemptions and reductions:
These tax benefits are available to and used by a variety of steel producers, including those with
foreign investment, those located in Special Economic Areas and specific regions, and firms that
produce for export.


Targeted infrastructure development. The Chinese government has built industrial
parks, technology parks, and similar areas which provide steel producers with access to
sophisticated facilities at reduced costs. These developments also commonly provide their
tenants with tax advantages.


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Manipulation of raw material prices. The Chinese government has used export
restrictions on coke and scrap to reduce the cost of these inputs for Chinese producers.
The Chinese government also has attempted to use import license schemes and intervention in
price negotiations to control prices for imported iron ore, although it‘s most recent efforts were
signally unsuccessful.


Manipulation of the value of the Chinese RMB. China has a longstanding policy of
deliberately keeping the value of the RMB below its market value. This has the effect of taking
exports of Chinese steel and products containing steel artificially cheap, while effectively
imposing a tax on imports from the United States. The Chinese government has implemented
other measures that provide the industry with indirect support, such as import barriers and
barriers to foreign investment. The latter, in particular, may have prevented the industry from
undergoing the sort of consolidation and closure of facilities that foreign majority ownership
might trigger. China also has failed to enforce its environmental and labor laws fully. Taken
together, hese policies provide the Chinese steel industry with yet another artificial advantage in
international competition.



INTRODUCTION

       Since 1990, the Chinese steel industry has expanded at a phenomenal rate to become the
largest in the world. Over this period, China has gone from being a net importer of steel to a net
exporter. This change would not have been possible without the conscious and persistent support
of the Chinese government. This report describes and analyzes the various ways in which the
Chinese government has supported the unprecedented expansion of the Chinese steel industry.
The explosive growth of the Chinese steel industry has enormous ramifications for the global
economy. It affects the markets of steel producers in other countries directly, as well as the
availability and prices of iron ore, coke and coal, shipping, and other inputs used by steelmakers
and others. China‘s increased steel supply also affects the competitive position in world markets
of manufacturers using steel in China versus manufacturers in other countries. Finally, the
growth of the Chinese steel industry has profound implications for the world‘s environment.
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Subsidies and the Chinese Steel Industry
       The Chinese steel industry in its present form is the direct product of massive subsidies
and other support provided by the Chinese government. The Chinese government intervenes
directly and extensively in the steel industry, and retains a high degree of decision-making
authority over its development. China‘s new Steel Policy specifically provides for continued
direct subsidization of the steel industry in the form of tax refunds, discounted interest rates, and
other preferential policies. The policy also provides various forms of indirect support, such as
restrictions on foreign investment. The Steel Policy, as discussed in detail below, is a clear and
unassailable example of the Chinese government‘s management of nearly every major aspect of
China‘s steel industry.
       The Chinese government has implemented its policy of support for the steel industry by
providing the industry with massive subsidies and other forms of assistance, including:
      Transfers of ownership interests on terms inconsistent with commercial considerations;
      Conversion of debt to equity in steel companies;
      Grants to pay for energy and raw materials;
      Debt forgiveness and inaction regarding non-performing loans;
      Tax incentives, including a variety of income tax exemptions and reductions for Foreign
       Invested Entities, firms in Special Economic Areas, and firms that produce for export;
      Targeted infrastructure development, including government subsidies to build and
       finance industrial parks;
      Control over raw material prices and exports, including import licensing schemes to
       control the price of iron ore and export restrictions on coke;
      Manipulation of the value of the Chinese RMB to make Chinese exports artificially
       cheap;
      Preferential loans and directed credit, including ―policy loans‖ to favoured state-owned
       enterprises on non-commercial terms;
      Import barriers, including high tariffs and other practices that discriminate against foreign
       equipment and technology; and
      Barriers to foreign investment.




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       The result of this pervasive Chinese government support has been the creation of the
world‘s largest steel industry in a form far different from what the market would have created.
       These policies and actions by the Chinese government have distorted world trade
severely and have imposed tremendous economic costs on other countries, especially the United
States. While subsidization of the Chinese steel industry is far from the only cause of the huge
trade deficit of the United States with China, it represents the type of behaviour the Chinese
government has engaged in with respect to dozens of other industries. This analysis describes
how the Chinese government has made one favoured industry artificially competitive in world
markets while disadvantaging market-oriented producers around the globe, including those in the
United States. The massive manipulation of markets by the Chinese government has
substantially impaired the anticipated benefits of China‘s WTO accession and has severely
distorted global markets.



Chinese Subsidies and the WTO

       Many of these forms of assistance – including export subsidies, domestic content
subsides, and selective preferential bank financing – appear to violate China‘s WTO obligation
under the Agreement on Subsidies and Countervailing Measures (―Subsidies Agreement‖). Many
of the subsidies also violate the commitments China made in its WTO accession agreement,
wherein China committed to eliminating immediately all subsidies prohibited under Article 3 of
the Subsidies Agreement – a commitment it has failed to honour.
       China has also failed to comply with its obligation to provide detailed information about
its subsidy programs to the WTO on an annual basis. In fact, until recently, China had failed to
make any of its required subsidy notifications since becoming a member of the WTO, despite
repeated requests by the United States and other WTO member countries that China do so.1
According to the U.S.-China Economic and Security Review Commission, ―this lack of
transparency compounds the difficulties in addressing China‘s complex and pervasive system of
subsidies.
       In April 2006, China finally filed its first subsidies notification with the WTO,
identifying more than 75 types of subsidies.3 The notification provided a great deal of detail
regarding tax incentives provided by the Chinese government, and somewhat less detail

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regarding various types of grants. Somewhat surprisingly, the notification confirmed that China
continues to provide a broad range of subsidies contingent on export performance, even though
such subsidies are specifically prohibited by the WTO Subsidies Agreement.4
       The notification included no discussion whatsoever of major categories of subsidies
provided by the Chinese government, including transfers of ownership on terms inconsistent
with commercial considerations; conversion of bad debts owed to state-owned banks into equity
in the borrowing enterprise; government direction of credit through the state-owned banks; so-
called ―policy loans‖ at preferential interest rates; and the forgiveness of debts by state-owned
banks. Not surprisingly, the notification does not discuss manipulation of the value of the RMB
or government control over raw materials.
       Information regarding the various subsidies provided to the steel industry by the Chinese
government is not readily available. This makes it difficult for the United States and other WTO
members to confirm that China is complying with its WTO obligations.




THE CHINESE STEEL INDUSTRY

       A steel industry has existed in China since ancient times. The current Chinese steel
industry, however, is very much a product of recent government decisions. The Chinese
Government continues to own the overwhelming majority of the steel industry, and to control it
directly and indirectly through a number of methods.



The Government’s Creation of the Chinese Steel Industry


       When the Chinese Communist Party came to power in 1949, the Chinese steel industry
had been decimated by 15 years of war. Although China was an overwhelmingly rural and
agrarian country, the new leadership, under Mao Zedong, gave priority to the establishment of
the steel industry. The government funneled massive resources into the construction of new
mills, consistent with the then-prevalent Stalinist model of development, with its emphasis on
heavy industry. The apogee of this effort was reached in 1958 with the onset of the ―Great Leap

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Forward,‖ when Chairman Mao proclaimed that China would double its steel production over the
course of a single year. This led to the widespread establishment of small steel mills – the so-
called ―backyard blast furnaces‖ – in towns and villages throughout China. The project was of
course an economic, technological, and environmental disaster.
       China subsequently returned to a more traditional approach to developing its steel
industry, as the state continued to pour billions of dollars worth of resources into new steel mills.
As a result of this investment, China emerged by the late 20th century as a major steel producer.
In 1990, the first year for which reliable international statistics are available, China was the
world‘s fourth largest producer. In that year, it produced 67.2 million metric tons of steel,
compared to 88.6 million metric tons in the United States and 110.3 million metric tons in Japan.
       The Chinese steel industry grew steadily throughout the 1990s, as the government
continued to devote a disproportionate share of resources to it. Production skyrocketed between
2000 and 2005, as the Chinese government directed massive amounts of capital into the steel
industry. By 2005, China was by far the world‘s largest steel producer, with production of 349.4
million metric tons and accounting for more than 30 percent of global steel production



The Structure of the Chinese Steel Industry


       The Chinese steel industry is marked by two notable characteristics: the very large
number of steelmaking enterprises and the degree of government ownership. As recently as
2000, there were 1,045 companies in China producing steel, of which only 34 produced more
than one million tons per year. More recent estimates indicate there are as many as 800 steel
mills in China, but only 16 have the capacity to produce more than 5 million tons per year. There
has been some consolidation in the industry, and the China Iron and Steel Association, the
official trade association of the Chinese industry, states that it has over 50 ―medium and large‖
members. Nonetheless, experts predict that, after consolidation, China will still have over 100
different significant steel producers




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Figure46: Provincial Chinese steel production




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Figure 47: Estimated govt ownership in steel companies



Government Grants to the Steel Industry

       The Government of China continues to provide a number of direct government grants to
the steel industry, including cash grants, energy and raw material grants, and land grants.



Cash Grants
       In 2000, the Chinese government announced that it would spend $6 billion over several
years to upgrade and transform its steel industry.48 The actual amount spent is believed to be
much greater. At the time of the announcement, the Chinese Ministry of Commerce stated that
the central government – in administering key investment projects – would likely direct local and
provincial governments to give the steel industry priority with respect to land use, raw materials,
transport, equipment, and water and power supplies.

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Energy and Raw Material Grants
       The government also provides grants in the form of assistance with energy, raw material
and other input costs. According to a March 2006 Steel Business Briefing report, the Beijing-
headquartered steel company, Shougang, recently signed an agreement with the Shanxi
government in northern China to help restructure the steel industry in that province. Shougang is
expected to assist in the ongoing restructuring and up- grading of the region‘s steel industry. In
return, the provincial government has pledged to provide the necessary coking coal and iron ore
for Shougang‘s steelmaking operations – presumably free of cost. In addition, the Chinese
government grants subsidies to Chinese steel companies to help defray costs derived from
overseas steel input operations. The Chinese government recently granted Jiangsu Sha Steel
Group 1.3 billion RMB in subsidies for its iron mine project in Australia



Land Grants
       Chinese steel companies continue to benefit from land grants or reduced land costs
provided by the government. In a recent countervailing duty case involving steel fasteners from
China, the Canadian government found that certain companies located in Special Economic
Areas pay reduced long-term land use fees for land on which factories are located. Beyond this,
by law, all land in China remains the property of the state. Without a market for land, it is
impossible to determine whether Chinese steel producers are paying market rates for their land.
Shanghai Baosteel, the largest Chinese producer, shows deferred expenses of 1.689 million
RMB, or about $200,000, for ―transfer price for land use rights & site formation fee.‖61 The fee
for 2004 was 187,724 RMB. If this figure in fact represents the company‘s long-term cost for
land, it would appear to be far below any market value. For the whole industry, below-market
rents for land represent a subsidy worth tens of millions of dollars to the Chinese steel industry
per year.



Transfers of Ownership
       As part of its role in directing the consolidation and restructuring of the steel industry – as
set out in China‘s Steel Policy – the Chinese government has encouraged and even induced
various mergers and acquisitions within the steel industry through cash grants and grants of

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ownership interest. For example, in January 2005, Wuhan Iron and Steel Group were offered a
51 percent stake in Ercheng Iron and Steel at no cost, to encourage the merger. Ercheng had
crude steel output of 3 million metric tons and profit of 20 million RMB in 2004. The
contribution of profitable assets at no cost is a clear subsidy.



Debt-to-Equity Swaps

   1. Debt Forgiveness and Inaction Regarding Non-Performing Loans by State-Owned Banks


       Another form of direct government assistance to the steel industry is the forgiveness of or
inaction regarding non-performing loans by China‘s state-owned banks. This provides a direct
subsidy to the recipients in the amount of the debt forgiven. WTO members have raised concerns
regarding China‘s ―automatic roll-over of unpaid principal and interest, forgiven and non-
performing loans, and the selective use of below market interest rates.‖ These forms of assistance
were cited as direct financial contributions provided by China‘s state-owned banks to Chinese
industry


   2. Preferential Loans and Directed Credit from State-Owned Banks


       China‘s banking system is dominated by the four state-owned banks – the Industrial
and Commercial Bank of China, the Bank of China, the China Construction Bank, and the
Agricultural Bank of China – which account for over 60 percent of all loans. Traditionally, these
banks have made loans based on political directives from the central or provincial governments,
rather than creditworthiness or other market-based factors.
       These ―policy loans‖ generally have gone to state-owned enterprises and to industries
favoured by the government, including steel.79 Currently, state-owned enterprises account for 25
percent of China‘s GDP, but receive over 65 percent of loans from state owned banks. Moreover,
the government has channelled its finances to preferred in-duties at extremely low, non-market
interest rates. These preferential loans, granted on non-commercial terms to inefficient state-
owned companies, have subsidized the steel industry and have given the industry an unfair
advantage on the market.

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Tax Incentives for Firms in Special Economic Areas


Regional incentives


Special incentives are granted for investment in Shantou, Shenzhen, and Zhuhai in Guangdong
province; in Xiamen in Fujian province; and on the island of Hainan. These areas are known as
special economic zones (SEZs). The rate of income tax levied on production-oriented foreign
investment enterprises (FIEs) in SEZs is 15 per cent. An FIE is defined as a Chinese-foreign
equity joint venture, a Chinese foreign cooperative joint venture, or a wholly foreign-owned
enterprise established in China.


Similar reduced rates are granted for foreign investments in economic and technological
development zones (ETDZs), which include the following coastal cities: Beihai, Beijing,
Dalian, Fuzhou, Guangzhou, Lianyungang, Nantong, Ningbo, Qingdao, Qinhuangdao,
Shanghai, Tianjin, Wenzhou, Yantai, and Zhanjiang. Other regions are following the successful
models of the SEZs and ETDZs. For example, the Pudong new development area, adjacent to the
city of Shanghai, was approved in 1990 to offer incentives to foreign investors, and six free trade
zones have been established, one each in Dalian, Guangzhou, Shanghai, and Tianjin and two in
Shenzhen. Areas throughout China are being designated as high- or new-technology
development zones. Zones similar to the ETDZs are to be created in the mid-western regions.


The incentives can be categorized regionally at 3 levels:

   1. National Level incentives
           a. Based on the location (one of the SEZ or not) and the amount of investment. For
               example:
                      i. The normal corporate tax rate is 30%, but in certain favored areas it drops
                         to 24%.
                  ii. The areas such as certain industrial parks like Suzhou Industrial Park (near
                         Shanghai) and California Industrial City (in central China) have a variable


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                      tax rate. It is zero for first two profit making years, 7.5 thereafter for 3
                      years and reaches 15% thereafter.
               iii. Any enterprise designated by the government as ―Tech Advanced
                      enterprise‖ or ―export oriented enterprise (70% of total production in any
                      given year is for exports)‖ enjoys a tax rate of 10% through its 7th to 10th
                      year of profit making.
               iv. For further reinvestment in local capital goods or in other Chinese
                      enterprise makes the firm eligible for a 40% refund on the invested
                      amount, and if the firm invested in is a Export oriented enterprise or a
                      technologically advanced enterprise, the firm refund rate rises to 100%
                      (Note: Eligible only if the investment is sustained for at least 5 years.)
  2. Regional level incentives
         a. These vary by jurisdiction based on the relative bargaining power of the province
            or autonomous regions etc. For eg: the bargaining power of eastern segments like
            shenzhen or shanghai is more than its western and northern counter-parts.
         b. These incentives tend to become more generous as one move westward from the
            investment saturated coastal provinces, like Beijing, to China's heavily populated
            interior, allowing the investor to cash in on China's fierce domestic competition.
            For example: Central China's Henan province, for example, offers manufacturing
            oriented Foreign Invested Enterprises (FIEs) 100% waivers of business tax and a
            variety of local administrative fees.
  3. Municipal level incentives
         a. Zhengzhou:
                 i.   A refund of 30% if the reinvestment is made by FIEs in this zone only.
                ii. Investment in "Pillar" Industries and State−owned Enterprises Zhengzhou
                      offers a three−year, 50% refund of the locally retained portion of corporate
                      income tax paid on FIE funds invested in certain designated "pillar
                      industries".
               iii. It also offers a financial incentive for investing in and reorganizing
                      provincially administrated state owned enterprises, and this incentive is



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                         magnified if the FIE retains a certain percentage of the enterprise's original
                         employees after reorganization.
                   iv. Inward Remittance of Export Earnings: Zhengzhou offers export
                         incentives in the form of cash payouts of approximately 0.2% to 0.5% of
                         every dollar of hard currency export earnings remitted inwards.
                      v. Antidumping Insurance: Zhengzhou will assist FIEs in responding to
                         anti−dumping initiatives, and will also subsidize expenses arising from
                         participation by exporting enterprises in anti−dumping responses, as long
                         as these initiatives are not otherwise subsidized by national and provincial
                         authorities (which they often are).
                   vi. Interest Subsidies on loans secured from the local administration is also
                         provided which might be as high as 100% in case of an export unit with
                         export amount of over $ 5billion.



Sectoral incentives


Foreign investment enterprises scheduled to operate for at least 10 years, and engaged in
production-oriented activities, are entitled to an exemption from income tax for two years,
starting with the first profit-making year. This is followed by a 50 per cent reduction of the usual
income tax rate (30 per cent, 15 per cent, or 24 per cent) over the subsequent three years.
However, the State Council is authorized to issue separate exemption and reduction regulations
for FIEs engaged in the exploitation of resources such as petroleum, natural gas and rare or
precious metals.


Foreign investment enterprises engaged in agriculture, forestry, or animal husbandry, or located
in a remote undeveloped area may, with the approval of the State Council, be allowed a 15 - 30
per cent reduction in the usual income tax rate for a further 10 years after the expiration of the
initial tax exemption and reduction period described above.


Those FIEs that the Ministry of Foreign Trade and Economic Cooperation has certified to be
technologically advanced enterprises may be granted a 50 per cent reduction of the usual income

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tax rate in the three years following the expiration of the initial tax exemption and reduction
period, provided they remain technologically advanced. A technologically advanced enterprise
must possess technologically advanced production techniques and equipment, and these
techniques and equipment must either be in short supply in China or the enterprise must develop
new products, products that replace existing domestic products, or products that will expand
exports or serve as import substitutes.


       If foreign investment exceeds US$ 5 million, an FIE that is established in an SEZ, that is
engaged in a service industry, and that has a scheduled term of operation of at least 10 years
may, on approval by the tax authorities of the SEZ, be granted an exemption from income tax in
its first profit making year, followed by a 50 per cent reduction of the usual income tax rate in
the next two years.



       A Chinese-foreign equity joint venture with a scheduled term of operation of at least 10
years that is confirmed as a high- or new-technology enterprise and that is established in a high-
and new-technology development zone may, on approval by the local tax authorities, be granted
an exemption from income tax for two years, starting with the first profit-making year.


       Subject to conditions, tax exemption and reduction periods are also available to Chinese
foreign equity joint ventures engaged in harbour and wharf construction, and to foreign bank
branches and Chinese-foreign joint venture banks set up in SEZs , FIEs established in the
Pudong new development area and engaged in construction projects, and FIEs engaged in
infrastructure projects or agricultural development in the Hainan SEZ.



Export incentives and free trade zones


       Export-oriented enterprises (FIEs that produce goods mainly for export and balance their
foreign exchange revenue and expenditure or that earn a foreign exchange surplus) may also be
entitled to further tax reductions after the expiration of the initial tax exemption and reduction
period. In any year in which the FIE exports at least 70 per cent of its total output, it may be
granted a 50 per cent reduction of the usual income tax rate. If, however, the FIE is established in

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a SEZ or ETDZ in which the rate is already 15 per cent, it will pay tax at 10 per cent instead of at
7.5 per cent.


Free trade zones are entitled to the following advantages:
      Goods imported into the zone from abroad are exempt from customs duty. However, if
       the goods are subsequently transferred to another part of China that is not a free trade
       zone, customs duty will be levied; and
      Products manufactured in a free trade zone are exempt from customs duty when sold
       inside the free trade zone or shipped outside China.



Other incentives


       A foreign investor that directly reinvests its share of profits derived from a FIE may
obtain a refund of 40 per cent of the tax already paid by the FIE on the reinvested amount,
subject to the approval of the tax authorities. To obtain the refund, the foreign investor must
either use its share of the profits (before the profits have been distributed) to increase the capital
of the FIE or use the profits (after distribution) as capital to establish another FIE. The profits
must be reinvested for at least five years. If the reinvested amounts are withdrawn within five
years, the foreign investor must repay the tax refunded. A 100 per cent tax refund is granted to
foreign investors if profits are reinvested in an export-oriented enterprise or a technologically
advanced enterprise.



Statutory tax rate


       The standard income tax rate applicable to enterprises with foreign investment in China is
30 per cent. The local governments and municipalities levy a 3 per cent tax on net taxable
income in all areas other than the SEZs. This may be waived or reduced at the discretion of the
local governments. The effective corporate tax rate is therefore 33 per cent (30 per cent income
tax plus 3 per cent municipal tax).

       In principle, withholding tax at the rate of 20 per cent is levied on dividend income
received by foreign companies, enterprises and other economic organizations that do not have
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permanent establishments or sites in China. However, dividends received from FIEs are exempt
from tax on that income which is not effectively connected with a permanent establishment.
Withholding tax on interest is 20 per cent. Interest payments made to international finance
organizations on loans granted to the Government of China or China's state banks, and on
interest payments made to foreign banks on loans granted at a preferential interest rate (as
defined) to China's state banks may be exempt from tax.

       The rate of withholding tax on royalties is 20 per cent. Royalties paid for the use of
technology that is held to be advanced, or provided on preferential terms, may be exempt from
tax. The rate is reduced to 10 per cent on royalties paid for the use of certain proprietary
technology for specific important development areas and paid by foreign investment enterprises
located in specified investment zones.




Government Intervention in Raw Material Prices
      The Chinese Government and Raw Materials for Steel
      Government Intervention in Import Negotiations
      Subsidization of Iron Ore Investments
      Government Restrictions on Exports of Raw Materials
      Government Controls Over Energy Prices
      Currency Manipulation




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Figure 48: Changes in exchange rate




INDIRECT GOVERNMENT SUBSIDIES TO THE STEEL INDUSTRY

       In addition to direct subsidies, the Chinese government has implemented a number of
policies and programs that provide its steel industry with more indirect but nonetheless concrete
benefits. These include barriers to imports and foreign investment.




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Import Barriers
       China has traditionally restricted imports through a variety of means, including high
tariffs and taxes, quotas and other non-tariff measures, and restrictions on trading rights. While
China has made some progress in removing restrictions in these areas, according to USTR,
―bureaucratic inertia and a desire to protect sensitive industries‖ has prevented substantial
progress.



Barriers to Foreign Investment in the Steel Industry
       The Chinese Government strictly regulates investment by foreign firms within China and
prohibits foreign companies from owning majority stakes in most Chinese enterprises. Article 23
of China‘s Steel Policy explicitly forbids foreign companies from owning a controlling stake in
Chinese steel producers, stating: ―For any foreign investment in the iron and steel industry of
China, foreign investors are not allowed to have a controlling share.‖ A foreign investment that is
permitted is channeled toward areas that support national development objectives; foreign
investment not in line with these development objectives is restricted or prohibited.

Restrictions on Foreign Investment in the Steel Industry


Chinese Tax Policies as a Barrier to Foreign Investment
       China‘s tax policies also serve as barriers to foreign investment. China‘s Value Added
Tax (VAT) – the country‘s single most important revenue source which ranges from 13 to 17
percent – continues to be applied in a manner that provides an unfair benefit to certain Chinese
industries.



Other Barriers
       Finally, USTR cites additional barriers to investment that plague China, including a ―lack
of transparency, inconsistently enforced laws and regulations, weak IPR protection, corruption
and an unreliable legal system incapable of protecting the sanctity of contracts




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STRUCTURAL SUBSIDIES TO THE STEEL INDUSTRY

        In addition to direct and indirect assistance, the Chinese government also provides
support to the Chinese steel industry through broader policies and practices. Prominent among
these are the Chinese government‘s failure to enforce environmental and labor laws. In each
case, China has relatively tough laws on the books, but declines to enforce them.



Weak Environmental Regulation
        On paper, China‘s environmental laws are relatively stringent. In practice, the laws are
often laxly enforced. Environmental enforcement in China is primarily the responsibility of local
governments – the same local governments that often own controlling shares in local steel
producers and that look to those producers to provide employment and tax revenues. Given this,
it is no surprise that Chinese government organs have repeatedly allowed the steel industry to
continue to pollute.


        The concentration of pollution in China closely tracks the location of the steel industry.
China‘s steel industry is concentrated in the eastern part of the country, and especially in Hebei,
Jiangsu, Liaoning, and Shandong provinces. As the following chart shows, this is also where
concentrations of a major pollutant, nitrogen dioxide, are located. Moreover, these
concentrations doubtless reflect the presence of other major pollutants, such as sulfur dioxide and
particulates, as well.




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Figure 49: Emission of Nitrous Oxides in China



Labor Laws and Ensure Worker Safety
       Workers in China are regularly denied basic labor rights and remain largely
unprotected by the weak enforcement of China’s existing labor law and policies. China’s
labor law prohibits workers from organizing independent unions and does not provide
for the right to strike. There is only one trade union in China, the All China Federation of
Trade Unions, which is essentially an extension of the Communist Party in workplaces.
Many workers lack minimal health and safety protections and adequate wages.




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The Cost Competitiveness of Manufacturing in China and India


        Here we use a simple competitiveness measure, which is unit labor cost (ULC) defined as
the cost of labor required to produce one unit of output. We prefer this measure which takes
account of output and inputs, over comparing only the cost of the inputs. For instance, high
wages do not mean the same thing in high- and in low-productivity sectors. In low productivity
sectors, high wages mean that production may become too costly and jeopardize the long-run
profitability of businesses. In high productivity sectors, however, high wages are often
compensated by higher output levels per person and can be fully compatible with long-run
profitability.




        Figure50: Relative Levels of Labor Compensation per Person Employed, 1990-2005




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      Figure51: Value Added per Person Employed, 1990-2005
              Figure 52: Unit Labor Cost, 1990-2005




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REFERENCES


     http://mines.nic.in/imsene.html
     http://www.dbresearch.com/PROD/DBR_INTERNET_EN-
      PROD/PROD0000000000202605.pdf
     http://www.worldsteel.org/
     www.steel.nic.in/oecd/A%20K%20Pandey%20SAIL%20%20final.ppt
     www.icrier.org/pdf/Hajime_Sato.ppt
     www.wto.org

     A presentation by Mr. A.K. Pandey, GM, SAIL on ―Indian Steel – Raw Materials and
      Transportation: Issues and Outlook‖

     http://www.wikipedia.org

     International stainless steel company Outokumpu‘s website

     Krugman, P., 1991, ―Increasing Returns and Economic Geography‖,

     Wu, Harry X., 2001, ―China‘s Comparative Labor Productivity Performance in
      Manufacturing, 1952-1997: Catching Up or Falling Behind?‖

     Annual Survey of Industries, 2007, ―A Data Base on the Industrial Sector in India (1973-
      74 to 2003-04)‖, Vol. II, Economic and Political Weekly Research Foundation (EPWRF).




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