How revival in steel and capital goods manufacturing can create cross-sector economic growth

According to the latest EY and Indian Steel Association (ISA) joint study, ‘Steel and capital goods: journey map for future growth’, steel and capital goods have a strong interrelation as the demand in one sector implies the growth in demand for the other. To achieve economic growth, the expansion of manufacturing sector is critical and that in turn requires high quality and low-cost capital goods. This reinforces the need for high quality steel as a crucial raw material.

Capital goods currently account for around 15% of the domestic steel demand, equivalent to around 15mt. With India’s steel demand expected to grow to 230mt by 2030, demand of steel from capital goods is projected at 35mt. This showcases a growth of more than 100% compared to its current usage. However, the ongoing pandemic has impacted both the order inflow and execution for capital goods firms. Incremental focus on increasing the domestic production of capital goods is likely to push for higher demand of domestic steel. Policies such as National Manufacturing Plan (2012), Make in India (2014) and the National Capital Goods Policy (2016) have increased productivity and competitiveness of the capital goods industry, which is likely to benefit domestic steel producers.

Challenges for steel and capital goods manufacturers

The Indian steel producers need the required technology, product profile and scale to cater to the demands of the capital goods manufacturing industry, who in turn need to invest collaboratively with the end users of capital goods. There is a strong requirement of advanced high-strength steel (AHSS), electrical and cold-rolled grain-oriented (CRGO) steel in the capital goods sector.

Scale of domestic capital goods market: The current size of domestic capital goods market in India is small as compared to its global competitors. Lack of economies of scale makes it economically unviable for domestic steel producers to invest specifically in related technologies and train their workforce to produce customized products for all categories of capital goods.

Technological capabilities: Despite the capital-intensive nature of the domestic steel and capital goods industry, there has not been a major breakthrough in reducing the import dependence. Another factor that hinders the growth of indigenous technology is that majority of the Indian manufacturing capabilities are SMEs which have limited financial power to back these initiatives.

Manufacturing supply chains: The inherent construct of supply chains of steel for capital goods creates a base inefficiency for the Indian capital goods manufacturers. Lack of skilled workers, continuous electricity supply, last mile connectivity and high cost of transportation of material are additional challenges for companies operating with very thin margins.

Opportunities that lie ahead

The Indian steel sector is looking for ways to invest profitably in the manufacturing of these products to reduce its dependence on import of such high-grade steel. The government’s push to incentivize new manufacturing facilities on import substitution for domestic manufacturers is likely to push domestic production of at least some steel products which are currently imported. Moreover, under its National Steel Policy 2017, the government’s aim is to be self-reliant on the entire demand of high-grade automotive steel, electrical steel, special steels and alloys for strategic applications.

One of the major impacts of the pandemic was on logistics and movement of goods across the world. Several manufacturers are now adopting a more holistic approach in their procurement policy. Manufacturers intend to expand their supplier network and consider local sourcing with long-term contracts with domestic manufacturer to avoid dependence on any country. This new normal is likely to increase collaborations between domestic steel and capital goods manufacturers.

Way forward for a robust industrial growth

India currently lacks a platform which can act as a collaborator or an intermediator between domestic capital goods manufacturers and steel producers. Capital goods manufacturers and steel companies need to work in tandem to develop customized solutions to manufacture products with domestic steel. The sector is currently dominated by SMEs with limited research and development (R&D) spend. The government and steel manufacturing firms need to collaborate with these enterprises to set up a nodal body to help move the SME sector up the value chain and manufacture high quality equipment rather than just assembling imported parts.

Incentivizing foreign players to set up special steel facilities in India has the potential to improve the production quality and quantity of capital goods in the country. Though the demand for capital goods is increasing in India, its future growth is dependent on higher production of value-added goods, implying higher demand for quality steel. They can in turn help in reducing the share of imports and increasing competitiveness in domestic industry.

To fulfil ‘Atmanirbhar Bharat Abhiyan’, there is an increased need for collaboration of steel manufacturers, sector original equipment manufacturers (OEMs) and users of capital goods to co-innovate, gauge deficiencies, identify gaps and address them in a rapid, proactive and sustainable manner. This process can also help India to achieve sustainable cross sector economic growth over the next decade.