Does Indian steel really need so much protection?

Akshara (0:04)

In today's episode, we'll do one deep dive and cover another story for the day. First, we'll talk about whether Indian Steel really needs so much protection, and then we'll talk about how CAFE3 ended India's small car fight. Welcome back to The Daily Brief by Zerodha, where we cut through the noise to help you understand what's actually happening in the most important stories from business and markets. I am your host Akshara. Welcome back to Today's Wednesday, 7th October. Coming to the first story.

So in The Daily Brief, we have covered the immense protections enjoyed by India's steel industry, like the safeguard duties and QCOs that shield domestic producers from imports, and the broader pattern of quality control orders functioning as non-tariff barriers across Indian manufacturing. Now, while learning about this, we couldn't help but ask ourselves this. Does the world's second largest steel producer, which has grown 5-fold to 152 million tonnes over two decades, actually need to be so highly protected?

A pair of recent working papers from the Centre for Social and Economic Progress, or CSEP, whose papers we have covered before, steps back and tries to answer this question with some new analysis. Across both papers, the conclusion is the same. Indian steel's profits may be a product of increasing technological efficiency, but they owe quite a lot to policy architecture too. Now, keeping that architecture in place is not just costing many other parts of the economy, but is also making Indian steel itself less attractive to global buyers compared to China or Japan. Let's start with the good news. Indian steel is genuinely cheaper to produce than steel in most developed countries. CSEP makes a direct comparison of the major cost heads between who they call Japan's largest steel producer and India's most profitable steel firm in FY25.

Both were unnamed, but they're most likely Nippon Steel and Tata Steel respectively. The per-turn cost for the Indian firm was found to be lower by approximately 20-40%, and this is largely because Indian labour costs are a fraction of Japanese ones. But additionally, the costs of logistics and coking coal have also narrowed over time with Japan. Now, this isn't a recent development. India's steel sector has made real productivity gain since liberalisation in the 1990s. So when tariffs on steel were slashed after 1991, the prevailing wisdom was that cheaper foreign steel would overwhelm domestic producers. But firms like Tata Steel responded with cost-cutting and modernisation measures. By 2001, Tata Steel was ranked the world's number one steel company by World Steel Dynamics.

The steel industry's average EBITDA margin has always been consistently above its global peers. In 2024, the top three Indian steelmakers posted a EBITDA margin of 13% against a global average of 9% among the world's 49 largest steel firms. It's also been 3-4 percentage points higher than the rest of Indian manufacturing. Now, high margins could simply reflect superior efficiency. But the problem is that Indian steel is more expensive than steel in almost every comparable market. For instance, Indian hot-rolled coil prices or HRC are roughly 6% higher than Japanese HRC prices and 15-30% above Chinese levels. You would expect a low-cost producer to sell cheaply and win on volume. But instead, Indian steelmakers sell at a premium while enjoying fatter margins than their foreign peers. So this means that something other than efficiency is propping up those profits. And one such cause is the cost of financing, which is higher in India. But CSCP identifies two more important pillars, and the first one has to do with the raw material required to make steel. Now, India is 100% self-sufficient in iron ore, which is the foundational material steel uses. And we account for approximately 10% of global iron ore production. Until the mid-2000s, we also exported approximately 60% of all domestically mined ore, and domestic iron ore prices track global benchmarks. But that changed in 2007, when the government began imposing export duties on iron ore. And the duty was ratcheted up to 30% of the selling price by 2011 The duty remains even today for ores with more than 58% iron content. Now, the stated objective of this duty was to discourage exports in favor of ensuring domestic availability for steelmakers at subsidized prices, which was achieved, but at a certain cost to the iron ore industry. So since the export duty kicked in, domestic iron ore prices have consistently sat at a 30% to 40% discount to global prices. Iron ore expenditure accounts for approximately 20% of the total cost of steelmaking. And by suppressing the domestic price, the government transfers value from the iron ore industry to the steel industry. And the distortion doesn't stop here either. Low iron ore prices mean low returns for miners, which means limited incentives to invest in new exploration of iron ore mines. And this problem is only compounded by India's mining policy, where if you discover a new mine, you can't sell the mining rights or develop it yourself. You only receive a share of the auction premium, and that too only when the state eventually auctions the mine and it becomes operational. So the result, as CSCP notes, is that exploration has virtually stopped. Only 22% of deep-seated minerals in areas with obvious geological potential have been mapped.