May/June 1995
India is steadily opening its economy to the world market, a move that could boost its demand for imported scrap. What factors are driving this economic transformation, and what could it mean for international scrap traders?
By Kent Kiser
Kent Kiser is an associate editor for Scrap Processing and Recycling
India is experiencing a revolution—not a political revolution, but an economic one.
Since 1991, the Indian government has implemented a series of unprecedented free-market reforms that have begun to open up its historically closed economy and helped create an economic boom within the country.
Among other things, this revolution has breathed new life into India’s demand for many grades of imported scrap and promises to give the country an even stronger hunger for such raw materials in the future.
A Protectionist Past
India has been viewed for years as a sleeping giant—like China—in the burgeoning Asian region, a vast country with extraordinary potential. In the world hierarchy, India is certainly right up there, registering as the second-most populous nation (with around 900 million citizens), the most populous democracy, and the fifth-largest nation in terms of its economy, which had a gross domestic product estimated at $451 billion in 1994.
Prior to 1991, however, India’s potential in the world market was unrealized for one main reason: It had a stiffly protectionist economy that made it one of the world’s most closed and difficult business environments. The country’s heavily bureaucratic government limited international business through heavy trade restrictions including a complete ban on imported consumer goods, exorbitant import duties, burdensome import licenses, and a moratorium on foreign investment and foreign majority ownership of Indian enterprises--all of which shut out foreign influence and protected Indian companies, particularly government-owned entities, from external competition.
More specific to scrap, Indian trade policy has consistently prohibited imports of ferrous scrap longer than 39 inches, apparently due to fears that such scrap could be rerolled, reused, or used as a cover for smuggling in steel usables or products. That explains why India has traditionally imported shredded ferrous scrap rather than cut grades such as plate and structural.
Thus, though India has, at times, been a leading buyer of some U.S. scrap grades--primarily shredded and copper/brass--these kinds of repressive trade controls have undeniably limited its purchases over the years. In short, these controls have often made it too expensive and difficult for Indian brokers and consumers to import scrap, as they are the ones who must pay the duties and hassle with the red tape.
Aside from trade restrictions, U.S. scrap traders point out other problems that have made it difficult to sell to Indian buyers. The first has to do with India's port infrastructure, which one East Coast ferrous exporter calls "absolutely abominable," pointing to inadequate port capacities, outdated equipment, and low labor productivity. These problems can create delays in unloading scrap cargos, especially during monsoon season (which generally runs from early summer through early fall), and these delays, in turn, can create the additional problem of running up hefty--and often uncollectible--demurrage penalties.
A few U.S. scrap traders also point to instances when an Indian buyer has refused to open its letter of credit--honor the agreement--when scrap prices declined after its purchase, while others claim that disputes over scrap quality have been commonplace, often creating what one terms "huge downgrade problems."
Crisis and Change
Such trade problems may eventually be history, thanks to India's Herculean efforts to reform its economy. The impetus behind this transformation was India 's financial crisis in the early 1990s, brought on by the Gulf War and the demise of the Soviet Union--events that cut India off from major trading partners and financial support. The country's problems were intensified during this period by political strife, which culminated in the assassination of then-Prime Minister Rajiv Gandhi.
Clearly, the nation stood at a crossroads, with one way leading toward chaos and the other toward a new order aimed at fully integrating India into the global economy.
The new Indian leadership, headed by Prime Minister P.V. Narasimha Rao and Finance Minister Manmohan Singh of the Congress Party, took the latter road, announcing in July 1991 an economic "liberalization" program that has touched virtually every business sector in the country, including its scrap-consuming industries.
The objective of Rao's reforms was and is simple: to deregulate India's economy, moving it from bureaucratic control to free-market forces, and to open its markets to foreign investment. Among the changes, government ownership and protection of business enterprises is being progressively removed. Business sectors such as infrastructure development are being privatized to make them more efficient and competitive. Foreign investment is welcomed in virtually every sector of the economy except those of strategic concern such as defense and atomic energy. The rupee-- India 's currency--has become convertible against other currencies for trade transactions.
And--of most importance to U.S. scrap exporters--trade barriers are being dismantled. Indian scrap buyers, for instance, are no longer required to obtain import licenses to buy their raw materials. Also, the business of importing scrap has been privatized. A few years ago, all imported scrap was purchased by Metal Scrap Trade Corp. Ltd., a Calcutta-based government entity. Today, Indian scrap brokers and consumers can buy material by and for themselves. This is good news for U.S. traders, notes one, in that "now we can sell direct to Indian mills. The business is more open."
Equally important, India has been making massive reductions in its tariffs on imported scrap. Prior to the reforms, India's tariffs were among the highest in the world, with some scrap duties exceeding 100 percent of the value of the cargo. Today, the maximum basic tariff for virtually all imported products is 65 percent, and tariffs on most grades of imported scrap fall well below even that level.
The total tariff (including basic and countervailing duties) on ferrous scrap, for instance, recently declined to just under 21 percent, which one U.S. trader views as "very, very liberal" for India. Import duties on aluminum scrap, meanwhile, have been reduced from 50 to about 26 percent; nickel/stainless steel scrap from around 50 to 38 percent; and other nonferrous scrap—copper/brass, lead, and zinc--from around 72 to 55 percent. Tariffs on recovered paper, meanwhile, have been higher at around 98 percent, but there's a good chance these could come down to around 68 percent under India's new budget.
While these tariff reductions are certainly good news, the even-better news is that India "intends to further rationalize and lower tariffs over the next few years to bring them down to levels comparable with other developing countries," according to an Indian government report. "In a few more years, India's import tariffs will probably reach parity with the developed countries," predicts Andy Goenka, president of Steelbro International Inc. (Williston Park, N.Y.), a scrap exporting firm.
India’s Industrial Revolution
In addition to opening up India's economy to the world, Rao's liberalization policies have helped give India a dynamic, fast-growing economy that has boosted its demand for some grades of imported scrap (see table at right). "India has come back as an important customer," says an East Coast ferrous exporter, "and barring a severe political change, I think it'll remain that way."
India's industrial and manufacturing sectors have benefited not only from expanding export business, but also from increasing demand from the country's swelling middle class, which is estimated at around 300 million--larger than the entire U.S. population.
In particular, India is "coming out in a big way in the auto and housing industry," says Goenka, noting that this has created strong demand for raw materials from ancillary suppliers to these industries. "The demand for metal and metal products is now great in India , and it looks as if it will be even greater in the future," he asserts. India's manufacturing production, in fact, is expected to increase 15 percent annually in the next three years, according to the Center for Global Trade Development (Tempe, Ark).
One of India 's fast-growing industrial sectors is its now-deregulated steel industry, which has reportedly been shifting from many small mills to fewer, larger mills. This industry, which currently produces about 15 million metric tons annually, is expected to expand its output by 9 million metric tons in the next few years, thanks to a spate of expansions and startups under way, many of which are financed by foreign investors. As a result, "India is going to have a huge requirement for steel scrap," Goenka says.
How much of India 's steel scrap demand will be met by the United States? Certainly some, but India is usually able to import ferrous scrap cheaper from other regions, such as Europe and the Middle East. "The United States is last on the list because of the distance," says Yogi Shah, vice president of Exim Inc. (Plainfield, N.J.), an importer and exporter of nonferrous metals, scrap, and residues. "Freight is a killing factor in trade between India and the United States because the distance is so far."
India is also meeting more and more of its own steel feedstock needs, thanks to two developments: its increased production of steel scrap "substitutes" such as direct- reduced iron and sponge iron, and the generation of more obsolete scrap, through its massive shipbreaking industry, which is the largest in the world in terms of tonnage. Because of these factors, Shah asserts, "Indian demand for U.S. ferrous scrap may grow in the coming years, but it may never again reach the record levels achieved in the 1980s."
Similar to India's steel industry, its nonferrous sector is also growing quickly, primarily in the copper/brass niche, thanks in part to the country's expanding use of copper and brass in the areas of wiring, plumbing tubes and fittings, and artistic and decorative brassware.
India does not produce much copper itself, supplying only about 50,000 metric tons of its 200,000-metric-ton annual demand, with the remainder being imported, Goenka says. As the country's consumption of copper-based metals grows, therefore, so should its demand for copper and brass scrap. "We believe India will be in the market for copper scrap as strongly as China and Korea," Goenka states.
Currently, several projects are under way to help the country meet its future copper and brass needs. For instance, three Indian companies-- Indo Gulf, Sterlite India, and Swel India --plan to start units to produce copper cathode and rods from copper concentrate and, to a lesser extent, scrap.
Looking at other nonferrous metals, India is also expected to show stronger demand for zinc scrap in the future. One indicator of this is the country's zinc consumption, which is expected to grow at an annual rate of 5.5 percent through 1995 and 5 percent thereafter to reach about 259,000 metric tons per year by 2000, according to the Indian government's lead-zinc-cadmium working group. Considering that secondary zinc already accounts for 80 percent of India 's annual zinc con consumption, this growth is good news for zinc scrap traders.
Nickel and high-temperature metals such as cobalt, titanium, and tungsten are also expected to be big items because India does not currently produce any of these metals. " India is 100-percent dependent on imports for these metals, so its demand for them will certainly be more and more," Goenka says.
On the precious metals side, India 's racing economy and escalating per capita disposable income have made it a growing importer of such consumer-focused metals as silver, including secondary supplies. From virtually no imports of silver in 1983, India's import level skyrocketed to 11 3 million troy ounces in 1993, according to CPM Group (New York City), which notes, however, that this figure declined to around 86 million troy ounces in 1994 due to higher tariffs imposed by the government. Currently, demand by Indian silver fabricators has reportedly created a resurgence in illegal silver imports as well as a hunger for secondary silver in virtually any form and quality.
As for the recovered paper market, India has heretofore been a "replacement player" as opposed to a significant player among international buyers, says Steve Vento, president of the international division of William Goodman & Sons Inc (Sunrise, Fla.). Indian buyers have traditionally played the market in and out. They haven't been there every month like the Koreans." Still, he adds, India "can be a player”--and its presence in the market appears to be growing. For instance, the country's demand for all grades almost doubled from 1993 to 1994. Then again, asserts another paper analyst, " India isn't a large producer of paper and board, and it will only become one in the very long term."
Cross Your Fingers
Heartened by the success of its economic reforms thus far, the Indian government confidently believes that the country is now ready to become a significant participant in world trade.
Others assert that, despite its progress, India is still an exceedingly underdeveloped country with many problems that could limit its economic growth and, hence, its scrap demand.
To wit: Tariffs, though lower, are still high and some restrictions--notably the 39-inch steel scrap limitation--still exist. Government bureaucracy is still entrenched, particularly in many state governments. And the government still owns and controls a large portion of sectors critical to industry, such as the ports, phone system, and railroads. "There are still too many controls in the hands of government," says Shah. "When government comes into the picture, the efficiency is not there."
Further, India 's infrastructure is still woefully lacking, with costly effects on its industrial and manufacturing sectors. Acute energy shortages, for instance, hinder minimills, while poor port, rail, and road systems slow the unloading and delivery of needed raw materials to scrap consumers.
In the political arena--where India's economic policies are set--Rao and his ruling Congress Party could face serious opposition in the 1996 general election. In the recent interim elections, Congress Party candidates lost in the two heavy industrial states of Maharashtra and Gujarat . "That shows a little bit of resentment among the people about opening up the economy," Goenka says. “They're worried the government is selling the nation to foreign interests.”
There is also the chance--albeit unlikely--that trade in scrap recyclables between the United States and India could be disrupted by the Base1 Convention on the Control of Transboundry Movements of Hazardous Wastes and Their Disposal, which restricts the trade of scrap materials between developed and developing countries. At a United Nations meeting on the Base1 Convention in March, however, industrial representatives from around the world agreed that "there is important global trade of nonhazardous recyclables which should continue and be developed as an important source of materials for the economies of the developing countries." What this means is that the potential scrap trade problems under Base1 appear to be averted--at least for the moment.
While India is certainly experiencing economic growing pains, its problems shouldn't overshadow the fact that it is changing, making improvements, and becoming a potentially colossal consumer of imported scrap. India's imports of U.S. products--including scrap--are reportedly poised to increase to more than $10 billion in the next five years, which would make India the second-largest importer of U.S. goods, services, and capital in Asia, next only to Japan, according to the Center for Global Trade Development. "The country is slowly coming into the real world," says a US. Scrap exporter. "It's a huge country, it's growing all the time, so it'll have an insatiable appetite for scrap, like China. While India is more advanced than China in terms of scrap trade, it still has a long way to go."
Goenka concurs, asserting, "By 2010, India could go from being a developing country to a developed country. But, in the meantime, you have to keep your fingers crossed."
India is steadily opening its economy to the world market, a move that could boost its demand for imported scrap. What factors are driving this economic transformation, and what could it mean for international scrap traders?