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Opinion - Steel


The steel end-users' call

G. Ramachandran

Like the Biblical Joseph, steel-makers are `storing' profits in their years of plenty by raising prices. But some users are lobbying to the Government to push the mills to forfeit some profits to their gain. But the real fair brothers are car, home and appliance buyers driving steel prices up because, in their years of plenty, they are buying more things made of steel. India's end users of steel hate corrosive economics, says G. Ramachandran.

SEVEN YEARS of plenty and seven years of famine constituted the business cycle in the Book of Genesis. Joseph, an inspiring hero of the patriarchal narratives of the Book of Genesis, was the gifted child of Jacob and Rachel and was, therefore, sold by his elder brothers as a boy slave to the Potiphar household. Joseph understood the significance of life's cycles and of the fat and lean cows in the Pharaoh's dream. He urged that grain harvested in the years of plenty be stored so that people may remain fed in the years of famine. Joseph shook off slavery and became the `Hebrew' governor of Egypt as his well-earned reward for interpreting the dream. He was renamed Zaphnath-paaneah by the Pharaoh, and his advice was implemented earnestly. Egypt survived the famine years. Joseph's recognition of his elder brothers in the famine years when he was governor is a famous scene.

Two truths emerge: First, brothers may not remain brotherly for long when envy and rivalry take a nasty turn. And, envy and rivalry will turn nasty. Viciousness among siblings will push the less privileged and the weak into misery. Joseph was lucky to have got out of slavery, but not everyone will be a Joseph.

Second, good economics cements racial, cultural and linguistic gaps. When Egypt's survival was at stake, the Pharaoh did not hesitate to look beyond his `own brothers'. Good economics is a powerful force that integrates diverse peoples since it enables the survival of all. Bad economics is a corrosive force that is both divisive and destructive because it seeks to push some into misery while protecting others. After a few rounds of corrosive economics, the protected predators will become victims of their own brutal ideas.

Joseph's brothers could survive the famine only because their brother was decent. They were lucky, but not everyone will be as fortunate to have a decent and humanely ethical brother. Moreover, what would have happened to Joseph's bullying and unloving brothers if he had not become Egypt's governor?

Three millennia ago, people looked up to the morals, kindness and ethics of their kith and kin for survival. Some got it; many did not. In the present era, all of us can be fortunate if we give the `market' a chance to practise good economics so that no brutal brothers will first push weak siblings into slavery and then sink together because brutalised weak brothers cannot become governors.

Three millennia later...

Business cycles in the present era may not last as long as they did three millennia ago, but they have not been dispelled. Consider India's steel sector. It has seen years of misery. It is now into its years of plenty because of rising demand for steel. The general economy is in good shape. The demand for houses, automobiles, refrigerators, washing machines and storage tanks and silos is surging. Steel mills have had to raise their prices so that consumption demand may be met most ethically and economically.

Steel prices would not have risen if demand for steel had not risen. Steel prices would not have risen if India's steel mills had the production capacity to meet the rising demand for steel. India's steel mills could not and did not expand capacity in their years of misery because they required the money to see off the famine. Moreover, we would have cut them to ribbons for wasting shareholder's capital in the case of the private sector mills and taxpayer's funds in the case of the public sector mills if they had invested in capacity in the lean years.

India's steel mills have behaved most responsibly in their lean years by preserving their capital and by protecting their vitality to produce more to meet rising demand in their years of plenty. That is, they have put into practice Joseph's formula most earnestly. The present constitutes their years of plenty, and they have sought to convert rising demand into `storable profits' and `storable capacity' so that they can see off the next famine and yet be ready for the next years of plenty.

Storing steel

Grains have to be stored in a non-market, barter economy because there is no money to buy grains and there is no market that sells grains. Steel is quite unlike grains. It is too bulky to be stored and both unwise and costly when there are inexpensive ways to store steel. Steel mills can implicitly store steel by investing in steel-making capacity and in money that may be used when necessary to establish steel-making capacity.

Markets facilitate the implicit storage of steel. In times of plenty when the demand for steel bounds up, mills can and should sell their output at market prices so that the profits from operations and sales can be used to pay off past loans and to buy new machinery. The paying off of past loans releases new credit to the general economy. That is a rejuvenating first step. The buying of new machinery enables expanded production in the future. That is a reassuring second step that signals availability of new steel when more people buy new homes, automobiles, and refrigerators or when wheat silos are built.

Steel mills require iron ore, coal and human skills. They do not have to store ore and coal because they are there under the earth. Someone is doing the job already. But there is no one storing human skills. Steel mills have to do this themselves. Human skills may migrate away. So, steel mills have to find a way to show they can pay them in the lean years so that steel makers will be around to run the furnaces and smelters when demand picks up. What should they do? Steel mills can hold liquid funds in banks and other asset management companies so that these stored funds could be used to pay employees in lean years.

Hence, what we see as abnormal, greed-driven profits are not really profits. In an accountant's framework they are profits. But in a realist's "Josephian world", today's profits are to be stored through investments in human resources and physical machinery so that Joseph and his unthinking brothers may yet get steel in an even and even-handed manner through famine and plenty.

Unequal brothers?

The Government has acted as Joseph's big brothers through a set of decisions that undermine India's steel economy. It has placed curbs on exports and put in place procedures for the supply of steel to some users at controlled prices. The adverse outcomes of these decisions were discussed in these columns (by Mr S. D. Naik, Business Line, March 23).

The Government does not want some of India's steel mills to store their profits, future capacity and future payments to employees. It wants some steel mills to forfeit some of their profits so that some steel users may earn high profits. Why?

If some users will get steel at lower prices, there is no certainty that they will sell products at lower prices to their customers. There is no way to say that subsidised steel has been used in one set of products and market-priced steel in another. So, users that get cheap subsidised steel will earn abnormal profits. But there is no certainty that these users would support the steel mills in the lean years.

There is more. The surge in demand for steel is a result of the rise in demand for construction steel, rolled steel and flats. This means that the years of plenty and the years of famine are one and the same for the steel mills and their customers. Automakers, parts makers, tubes makers, homebuilders, fabricators and appliance makers are all in their years of plenty simultaneously. But some are pretending that they are in their lean years. And, some are deceiving Government in order to extract more from their years of plenty. This is unfair.

Fair brothers

What is fair, then? Automakers should earn their profits from their core competence. They should make better cars. Steel is merely a bought-used-and-sold object that is very different from a car or a truck chassis.

Parts makers too should earn their profits from their core competence. They should make parts that automakers are willing to pay for, and automakers should make cars that customers are willing to pay for.

Steel is a bought-used-and-sold object for parts makers too, and is different from an automotive part. This logic may be extended to homebuilders and fabricators.

The livelihood of fair brothers lies in the exploitation of their unique core competencies. An automaker cannot predicate its core competence on steel prices though high or low steel prices may alter the sticker prices of cars.

But car buyers pay sticker prices. That is, the automakers, parts makers and fabricators are not the end users of steel.

Car, home and appliance buyers are the end users of steel. They want more steel because they are buying more cars, parts, homes and washing machines.

They are driving steel prices up because they are buying more things made of steel. They are in their years of plenty and they will pay for the steel. They are fair brothers who do not expect steel mills to forsake their profits. India's end users of steel hate corrosive economics.

(The author is a financial analyst. Feedback may be sent to indiagrow@sify.com)

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