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Steel Authority Of India Ltd. Business Information, Profile, and History

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History of Steel Authority Of India Ltd.

The Steel Authority of India Ltd. (SAIL) was created in 1973 as the holding company and supervisory agency for those parts of the Indian iron and steel industry which are wholly within the public sector. Its main product, by volume, is iron ore, most of which is exported. It has a total production capacity of 11 million tons of steel per year, representing more than four-fifths of India's total capacity. It operates its own collieries, a special steels plant, and a foundry for pipes and castings.

The history of the iron and steel industry in modern India is closely bound up with political and economic developments since the country achieved independence from Britain in 1947. Most of the productive units now run by SAIL were built as state ventures with aid and assistance from industrially-developed countries, and operated by SAIL's predecessor, Hindustan Steel Ltd. SAIL's main subsidiary, the Indian Iron & Steel Co. Ltd., which is India's largest single iron and steel company, developed separately as a private company before nationalization, but it depended on state subsidies from 1951 onwards and had to function within the terms of the government's planning system.

However, the industry did not spring from nowhere in 1947. Iron had been produced in India for centuries, while Indian steel was superior in quality to British steel as late as 1810. With the consolidation of the British raj the indigenous industry declined and the commercial production of steel did not begin in earnest till 1913, when the Tata Iron and Steel Company began production at Sakchi, on foundations laid by Jamsetji Tata whose sons had raised the enormous sum of Rs23 million to set up the company, partly from family funds but mostly from Bombay merchants, several maharajahs, and other wealthy Indians who supported the movement for Indian self-sufficiency (Swadeshi) but did not want to appear openly anti-British. Tata was to dominate the Indian steel industry until the 1950s. The Indian Iron & Steel Company was set up in West Bengal in 1918 by the British firm Burn & Co., with plans to become a rival steelmaker. However, steel prices declined in the early 1920s and the company produced only pig iron until 1937. The acute depression suffered by the iron and steel industry after World War I was alleviated by the government's protective measures. The industry continued to make steady progress.

From the late 1920s, when the British authorities introduced a system of tariffs which protected British and Indian steel but raised barriers against imports from other countries, the Indian market was divided in the ratio of 70 to 30 between British producers on the one hand and the Tata company on the other--thus effectively excluding indigenous newcomers. By 1939 the Tata works were producing 75% of the steel consumed in what was then the Indian Empire, comprising the present-day India, Sri Lanka, Pakistan, Bangladesh, and Burma.

In the late 1930s, as European rearmament pushed iron and steel prices upward, the export of Indian pig iron increased and two small firms began to compete directly with the Tata company in steel production. The first was the Mysore State Iron Works, which had been set up by the maharajah of Mysore in 1923, to produce pig iron at Benkipur, now Bhadravati. The second was the Steel Corporation of Bengal, a subsidiary established by the Indian Iron & Steel Company in 1937, the year after it had bought up the assets of the bankrupted Bengal Iron and Steel Company. The Steel Corporation of Bengal was reabsorbed into its parent company in 1953. All three companies profited from the British connection during World War II. Annual output rose from 1 million tons in 1939 to an average of 1.4 million tons in 1940-1945.

In 1947, when India became independent as the biggest, but not the only, successor state to the British raj, the three major iron and steel companies had a total capacity of only 2.5 million tons. A great deal of their plant was already more than three decades old, and badly in need of repair and replacement, while demand for iron and steel was growing.

Like other Third World states that have achieved political independence but still find their economic prospects determined by their subordinate position in the world economy, the new republic's policymakers decided to seek economic growth through a combination of protection for domestic industries, heavy public investment in them, encouragement of savings to finance that investment, and state direction of production and pricing. The Mahalanobis model of the Indian economy, based on the assumptions that exports could not be rapidly increased and that present consumption should be curbed for the sake of longterm growth through import substitution by the capital goods sector, provided the theoretical justification for this set of policies, which closely resembled what was done in the Soviet Union in the 1930s, in China in the 1950s, and in Africa and Asia in the 1960s, though with much less loss of life than in most of these cases.

Under the terms of the new government's Industrial Policy Statement of 1948, confirmed in the Industries Development and Regulation Act three years later, new ventures in the iron and steel industry were to be undertaken only by the federal government, but existing ventures would be allowed to stay in the private sector for the first ten years. Thus the First Five Year Plan, from 1951-1956, involved the use of government funds to help Tata Iron and Steel and Indian Iron & Steel to expand and modernize while remaining in the private sector. As for new projects, in 1953 the government signed an agreement with the German steelmakers Krupp and Demag on creating a publicly owned integrated steel plant, which was sited at Rourkela, in the state of Orissa, to make use of iron ore mined at Barsua and Kalta. Krupp and Demag were chosen after the failure of Indian requests for aid from Britain and the United States, but were excluded from the project by 1959, when the Estimates Committee of the Lok Sabha, the lower house of the Indian Parliament, concluded that getting investment funds from them was equivalent to borrowing at an interest rate of 12%.

In order to carry out its side of the agreement the government set up Hindustan Steel Ltd. in 1954, as a wholly state-owned company responsible for the operation of the Rourkela plant. By 1959, when the plant was commissioned, Hindustan Steel had become responsible for two more plants, at Bhilai in Madhya Pradesh and at Durgapur in West Bengal, under the Second Five Year Plan, that started in 1956. The Bhilai plant, located between Bombay and Calcutta, was designed and equipped by Soviet technicians, under an agreement signed in 1955, and by 1961 it included six open-hearth furnaces with a total capacity of one million tons, supplied from iron ore mines at Rajhara and Dalli. The Durgapur plant, meanwhile, was built with assistance and advice from Britain and sited near the Bolani iron ore mine. Hindustan Steel took over the operation of all the iron ore mines supplying its plants, all three of which had been located to take advantage of existing supplies. This policy of locating steel production near raw materials sources reflected the relatively small and dispersed nature of the domestic market for steel at that time, and contrasted with the market-related location policies of companies in more advanced steel-producing countries, such as the United States.

Hindustan Steel's other major venture was its Alloy Steels Project, also based at Durgapur, which was inaugurated in 1964. Hindustan Steel's tasks included not only steel production but also the procurement of raw materials, and its subsidiaries included, besides the iron ore mines already mentioned, limestone and dolomite mines and coal washeries. It also operated a fertilizer plant at Rourkela.

The modernization of the two private sector leaders and the program of public sector investment together raised Indian steel output from about one million tons a year in the 1940s to three million tons in 1960, then to six million tons only four years later. Pig iron output rose by an even greater margin, from 1.6 million tons in 1950 to nearly 5 million tons in 1961. Both wings of the iron and steel industry contributed to the expansion of the engineering and machinery industries envisaged in the Mahalanobis model, and in turn were stimulated by the increased demand to raise production volume and quality. In 1965 Hindustan Steel's latest project, for an iron and steel plant with an associated township at Dhanbad in the state of Bihar, was transferred to a new company, Bokaro Steel Limited. Contact continued between the two companies, however, mainly through an arrangement whereby the chairman of each company was made a part-time director of the other. Like the Bhilai plant the Bokaro project was initiated with aid and advice from the Soviet Union, including blueprints, specialist equipment, technical training, and a loan at 2.5% interest. After the establishment of SAIL the Bokaro company was changed back into a division of the public sector steel company.

Throughout its first five years of production, 1958 to 1963, Hindustan Steel's losses rose steadily due to Rs7.51 million to Rs260 million it made a small profit in 1965 and 1966, only to slip back into the red and stay there until 1974, the last year of the company's existence under that name. Among the reasons the company gave for these disappointing results were the losses incurred at the Rourkela fertilizer plant, the Steel Alloys Project, and the Durgapur steel plant, an increased rate of interest on government loans, an increase in provision for depreciation, and the high costs of imported plant and equipment.

The rate of growth of the iron and steel industry, and of the engineering and machinery producing sectors with which its fate is so closely linked, declined significantly once the phase of import substitution was complete and the droughts of the mid-1960s had forced a diversion of resources from industry. Pig iron output, which had risen so spectacularly in the 1950s, rose from 7 million tons in 1965 to 10 million tons in 1985, while production of steel rose from 6 million tons to 12 million tons in the same period. The industry suffered due tostate intervention to keep its domestic prices low as an indirect subsidy to steel users, and--though the technical problems were different--from a heritage of outdated and inefficient plant and equipment.

Indian government policy since 1965 has been to use its iron ore less as a contribution to domestic growth than as an export, earning foreign exchange and helping to reduce the country's chronic deficit on its balance of trade. Production of ore increased, from 18 million tons in 1965 to 43 million tons in 1985, in order to supply a growing number of overseas markets.

With the expansion and diversification of Hindustan Steel, the separate establishment of Bokaro and the beginning of planning for new plants at Salem, Vishakhapatnam, and Vijaynagar, it became increasingly clear that public sector iron and steel production would need some new form of co-ordination to avoid duplication and to channel resources more effectively. The Steel Authority of India Ltd. was established in January 1973 for this purpose, to function as a holding company along the lines of similar but older bodies in Italy and Sweden. The new organization was placed on a secure footing when the Indian Iron & Steel Company was nationalized, giving SAIL control of all iron and steel production apart from the venerable Tata Iron and Steel Company and a number of small-scale electric-arc furnace units. At the time of nationalization the Indian Iron & Steel Company comprised a steel plant at Burnpur in West Bengal; iron ore mines at Gua and Manoharpur; coal mines at Ramnagore, Jitpur, and Chasnalla; and a specialist subsidiary, the IISCO-Ujjain Pipe and Foundry Co. Ltd., based at Kulti.

Both SAIL and its predecessor sought to expand capacity to meet predicted rises in demand for steel. In 1971 Hindustan Steel had unveiled plans for India's first coastal steel plant, at Vishakhapatnam. The project, which in 1991 was in the process of being opened, with one blast furnace already in operation, will probably allow productivity of 230 tons per man year compared with less than 50 in SAIL's existing plants. The Authority has also invested heavily in modernizing its oldest plants, at Rourkela and Durgapur.

The 1980s were not a happy decade for SAIL. It made losses between 1982 and 1984 but went back into the black in the following two years. Meanwhile Tata Iron & Steel was consistently profitable. By 1986, when the Indian steel industry's total capacity was 15.5 million tons, only 12.8 million were actually produced, of which SAIL produced 7.1 million. Thus imports of 1.5 million tons were needed to meet total demand, after years of exporting Indian steel. By 1988 all the main steel plants in India except Vishakhapatnam were burdened with obsolescent plant and equipment, and Indian steel prices were the highest in the world. The government proposed a ten-year plan to modernize the plants, based on aid from West Germany, Japan, and the Soviet Union just at a time when the worldwide economic recession was deepening and the World Bank was recommending the privatization of SAIL and the liberalization of steel imports.

In 1989 SAIL acquired Vivesvata Iron and Steel Ltd. In its first year under SAIL's wing this new subsidiary's production and turnover showed an improvement over its last year in the private sector. This progress contrasted with results for SAIL as a whole in 1989-1990, since production declined, and once again planned targets were not met. Various factors contributed to this disappointing outcome, including unrest at the Rourkela plant as a result of the management's decision not to negotiate with a new union, Rourkela Sramik Sangha, which had challenged the established union, Rourkela Mazdoor Sabha, and had even won all the seats on the plant's elected works committee. Another problem, continuing over several years, arose from defects in power supply; the impact of power-cuts on steel output in 1989-1990 was estimated as 170,000 tons lost, and the supply of coal was unreliable.

SAIL remains in the public sector as a central instrument of state plans for industrial development. The country's reserves of iron ore and other raw materials for iron and steel make the industry central to the economy. At the beginning of the 1980s India had recoverable reserves of iron ore amounting to 10.6 billion tons, a natural endowment which it would take 650 years to deplete at then-current rates of production. The high-grade ore within this total--that is, ore with an iron content of at least 65%--was, however, thought likely to reach depletion in only 42 years; yet it still represented about one-tenth of the world total. SAIL has had to struggle to maintain production, let alone expand it, largely because of circumstances outside its control. Since the purchase of raw materials has typically accounted for 30% of the Indian steel industry's production costs, any rise in the prices of coal, ferro-manganese, limestone, or iron ore will cut into the industry's profitability. In the first half of the 1980s, for example, prices for these materials rose by between 95 and 150%, at the same time as electricity charges rose by 150%. Most of these increases were imposed by other state enterprises. Nor has it helped SAIL that the high sulfur content of Indian coal has required heavy investment in desulfurization at its steel plants. Indeed, the industry has had chronic problems in trying to operate blast furnaces designed to take low-sulfur coking coal. The more suitable process of making sponge iron with non-coking coal, then converting it to steel in electric arc furnaces, was introduced in the private sector later, though by 1989 only 300,000 tons were being produced in this way. India's basic output costs of Rs6,420 per ton in 1986 compare well with the averages for West Germany (Rs6,438), for Japan (Rs7,898) and for the United States (Rs6,786). What finally keeps Indian steel from being competitive is the imposition of levies which raise its price per ton by about 30%, and which include excise duties, a freight capitalization surcharge, and a Steel Development Fund charge.

In spite of such problems, and in response to them, SAIL announced in December 1990 that it planned to increase its annual output of steel from 11 million to 19 million tons, thus transforming itself from the world's thirteenth largest steel producer to its third largest, within ten years. SAIL's use of its steel production capacity, running at about 77% in 1990, would be raised to 95% by 1996, thus permitting output of crude steel to rise by two-fifths over its current level. However, output for 1990 had actually been only 6 million tons, compared with 6.9 million tons in 1988, and 8 million tons in 1989. SAIL is no more able than large steel companies in other countries to achieve the optimum balance between demand and supply, between increasing the quantity of output and improving its quality by modernizing, and thus escaping from its heritage of outdated plant and equipment. Neither Hindustan Steel nor SAIL was ever in a position to defy the circumstances of the Indian economy or of the world steel industry on their own, but they have largely achieved the more modest goal of contributing to India's postwar economic growth.

Principal Subsidiaries: Indian Iron and Steel Company; IISCO-Ujjain Pipe and Foundry Co.Ltd.; Maharashtra Electrosmelt Ltd..

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