FROM BUSINESS WORLD OF 27 OCTOBER 2006
Oh! For nerves
of steel
Metals can be
strong, malleable and durable. In a world made up of stones, dust, wood, water
and mud, they can be immensely useful to mankind. They are available in
abundance; but except for gold, whose nuggets can be picked up from some
streams, they are all inextricably mixed up with oxygen, nitrogen, sulphur and
such other ‘impurities’. They can be separated, generally by heating to high
temperatures together with carbon. The commonest form of coal was charcoal obtained
by burning wood with insufficient air. But as demand for iron in construction
and machinery grew, Europe began to run out of wood; so mineral coal replaced
it in the eighteenth century. Nowadays, metals are often smelted with
electricity.
Aluminium requires
such high temperatures to separate it from its oxide that it is entirely
smelted with electricity. As electricity has become cheaper, so has aluminium
in the past 50 years, and it has replaced steel in many uses. Glass and
plastics have similarly come into structural use, and have eaten into the
markets for steel.
Today, steel is
mainly used in two sorts of applications: in buildings and large structures,
and in boxes of various shapes and sizes from cars to fridges to ships. The
latter use steel sheets; the former mostly bars, although a sheet can also be
used by bending it into a U or a T. Boxes cost more than houses and use less
steel; so flat steel is more expensive, and pays more. Arcelor is mainly in
sheets, whereas Mittal’s plants mostly produce bars; that is why the managing
director of Arcelor said that the difference between Arcelor and Mittal Steel
was like the difference between perfume and eau de cologne. It has been
reported that Tata Steel produces steel at $160 a ton and Corus at $540. That
is because Corus makes generally higher-quality steel which can be sold in
Europe at three times the price.
After two
centuries of large-scale production, much metal is now available in scrap, and
can be restored for further use simply by heating and melting. So all of it
does not have to produced from ores. The US and Europe, having used much steel
for two centuries, have more scrap available. China, Korea and India, which
were poor and undeveloped, generate less scrap, and need more ore for the steel
they make.
Iron is a very
common element; wherever you see red earth, like in Kerala, it will have iron
in it. Ore may contain iron from anywhere between minute quantities and 70 per
cent; the more iron it has, the cheaper it is to make steel from it. There are
only a few places in the world which have mountains of ore rich in iron;
Australia, India and Brazil are the major ones. Countries whose steel demand is
rising fast and cannot be largely met from scrap or their own ore worry about getting
enough ore. Amongst them, both the Koreans and Chinese have been scouting
around the world. The Chinese, who would not be allowed a toehold in India, are
buying mostly from Australia and increasingly from Brazil. The Koreans, who are
feeling the heat of Chinese competition for ore, are casting an eye at India;
India, being a typical bride, is reacting with suspicion and hostility.
Steel is bulky
and costly to transport. Its production costs vary enormously across the world
depending on the cost of ore, scrap, coal and electricity. Many countries have
old plants employing thousands, and protect their steel industries to protect
the jobs. So however low its costs, a steelmaker like the Tatas cannot produce
steel in one place and sell it round the world.
The Chinese have
been increasing output very fast. And their accounting practices are not the
same as of conventional accountants; they may well subsidize steel exports.
That worries steel producers round the world; they have been looking for
strategies to survive in a Chinese-dominated steel market. Mittal was the first
to devise a strategy. He bought up troubled steel plants in many countries
across the world. He can rely on local protection; if, in addition, he can
raise raise efficiency of any plants, that is a bonus.
Other
steelmakers see the logic of Mittal’s strategy, and are trying to break out of
their national bastions. Hence Pohang Steel’s attempt to enter India, and the
Tatas’ excursions into South-east Asia, and now Britain.
But risks can
only be spread, not reduced. The Tatas are exchanging the risk of a single
location for the risk of being leveraged; if, for some reason, Corus does not
do well under their umbrella, the Tatas can be in deep financial trouble. The
Tatas are a very sound, conservative business house; this is not the kind of
risk they would take without good reason. But with India opening up, the Tatas’
world has changed. They have to think of surviving in an integrating world; the
acquisition of Corus is their survival strategy.
