Protectionism no way to solve India's steel woes

Cooperation could counter talk of higher tariffs

An Indian official says the government is proposing a tariff increase on imported steel at the request of domestic producers, according to a recent Reuters report. Specifically, local Indian manufacturers are calling on their government to raise tariffs from 7.5 percent to 15 percent.

Such a hike would leave a heavy dent in Chinese steel exporters. China is India's largest foreign steel supplier and exported 952,700 tons of steel to the country between April and August, up 71 percent from the same period last year, according to media reports citing data from India's Ministry of Steel.

Over recent years, Chinese steel manufacturers have focused increasingly on India and the massive potential of its market. The interest has only grown since Prime Minister Narendra Modi took office in May. Modi's pledge to spur growth includes plans to promote investment in infrastructure and manufacturing. This and other signals point to an expanding appetite for steel and other construction materials. Indeed, the World Steel Association predicts that India's steel demand will reach 76.2 million tons this year, up 3.4 percent from 2013. Looking at next year, the association foresees demand growing by an additional 6 percent in 2015.

On the Chinese side, mills are turning to export markets to relieve pressure caused by the country's excessive steel capacity. As many know, waning demand in the world's second-largest economy - most notably in the real estate sector - is spreading pain across local steel producers.

With Chinese producers slashing prices on exports, Indian steel manufacturers are finding it hard to compete. For instance, locally produced rebar costs about $244 more per ton than rebar shipped in from China, according to media reports. Large manufacturers such as JSW Steel Ltd are all said to be lobbying the government for higher levies against Chinese producers.

Right now, officials in India are expected to comply with local industry requests. But doing so won't fix all of the problems facing local steel makers.

Indian steel manufacturers are not guaranteed to prevail if their Chinese competitors are squeezed out. They will still have to contend with their South Korean and Japanese counterparts, both of whom enjoy duty-free steel imports under free trade agreements with India. Specifically, Korea exported 855,000 tons of steel products to India between April and September, indicating an annual rise of 22 percent, according to media reports.

Meanwhile, the loss of key competitors could lead to complacency. Indian producers may lose their incentive to reduce operating costs, make technological improvements or otherwise improve their position in the market.

India's second largest steel manufacturer, Jindal Steel and Power Ltd, saw after-tax profits decline 12 percent year-on-year in its second fiscal quarter, with sales declining by 9 percent over the same period, according to media reports.

Such losses cannot be immediately reversed by trade protectionism. Profit-seekers in South Korea, Japan and elsewhere won't give Indian steel enterprises more breathing spaces. Looking at the long-term picture, uncompetitive Indian steel enterprises cannot expect to survive once India fully opens its markets to the outside world.

Additionally, lower priced construction materials will be vital to the Modi administration as it works to build up the country's factory sector, a goal Modi has identified on several occasions. On this point, inexpensive steel from Chinese producers possess a decided advantage.

For Chinese steel manufacturers, there may yet be a practical way for them to cooperate with their Indian counterparts by making steel in India. This may allow Chinese mills to sidestep rising import tariffs.

China's steel manufacturers cannot afford to miss out on rising opportunities in India. Industry data show that Indian per capita steel consumption is less than 10 percent of China's, leaving plenty of space to grow as the country develops and modernizes. But as Chinese mills look to India as a source of growth and a target for their own surpluses, they must figure out how to tap the market's potential without creating trade friction.