Steel in rural India: Big market waiting to be tapped

INDIAN steel production grew 2.5 per cent in the first six months of this fiscal. Together with the surplus capacity, this makes for a mutually reinforcing cause-and-effect relationship, impacting the sector's performance. Though recently the demand for long products, traditionally used by the construction sector, has been on the rise, the prospect for flat products, linked to downstream industries, remains bleak. With the per capita consumption of steel in India almost static over the last few years at around 26 kg, one of the lowest in the world, demand growth is a matter of concern.
The Ninth Plan working group predicted a domestic demand of around 31 million tonnes by 2000-2001. The actual aggregate demand, however, has not exceeded 26 million tonnes till now. Unfortunately, however, the production capacity of the steel industry has exceeded the 30-million-tonne mark. This mismatch has affected the country's steel scenario.
Traditionally, steel demand has been linked to construction and infrastructure development. Over the last five years, two other segments — white goods and automobiles — have assumed importance. This segment-wise categorisation does not take into account the rural sector. And demand projections for general segments do not reflect the potential for increasing steel consumption in rural areas.
The rural sector, especially in such prosperous States as Gujarat, Maharashtra, Rajasthan and western UP, has built up strong institutional bases. Demand for steel in rural areas is likely to be quantitatively and qualitatively different from that in non-rural regions. Unfortunately, there has been no systematic market development strategy for this sector.
The rural demand for steel is heavily dependent on building up a strong distribution network, including retailers exclusively for rural areas. Steel marketing has been segment-oriented and bulk consumption-focussed, and the possibility for retail consumption is largely restricted to urban areas. This is on account of the nature of steel and its advantages in bulk handling — storing, loading, transportation and unloading. The Railways' freight policy of accepting orders in rake loads also shows a clear bias towards bulk handling of steel products. This is why the small and medium customers are made to rely solely on traders who account for about 20 per cent of total steel consumption in the country.
The dominance of the main producers — SAIL and Tata Steel — ended with the burgeoning demand for steel in 1992 and the emergence of a large number of private sector entrepreneurs whose products started becoming available in the market. The Table gives an idea of the split between the main producers and the private sector (generally referred to as secondary producers — the rolling mills, cold reducers, etc.).
The product profile of the secondary sector was mainly bars and rods used for construction and galvanised plain/corrugated (GP/GC) sheets, also used partly for construction/housing. These products have a demand in rural areas. But availability being lower than demand, the material was in short supply there.
The situation changed after decontrol of the steel industry. With fresh investments in the steel sector, availability soon overtook demand. However, the rural sector continued to be plagued with problems of availability due to reasons relating to ease of access. Small quantities in 5-8 tonne lots can be transported to rural areas by road, but the lack of proper road access in most such areas imposes fresh difficulties. As a result, rural markets for steel are clustered at railheads or close to the nearest roadhead.
A recent Institute of Rural Management (IRMA) study makes an interesting observation on the extent of rural dependence on steel markets in a city or town. For instance, in Maharashtra, as much as 45 per cent of the rural demand is met from the taluka market. The figures for Gujarat and Rajasthan are 36 per cent and 50 per cent, respectively. In spite of the poorly developed distribution network, merely 50-65 per cent of materials are procured in the rural sector through other channels — either informal (the local blacksmith) or through individual consumer or retailer's initiative. This is a good marketing opportunity that could be tapped and nurtured with imaginative handling.
Another interesting finding is the traders' product profile. It has been observed that more than 50 per cent of the retailers deal with GP/GC steel as it is easier to sell these products in comparatively smaller lots, making it amenable to retail distribution.
A study conducted by ORG-MARG on behalf of a JPC has found that the extent of steel penetration in rural households is extremely low. The Steel Penetration Index (SPI PC, arrived at by steel/PC of ownership x 100) for certain categories — say, door/window frames and roof support frames in housing — was as low as 16 and 23, respectively. The main use of steel in rural areas is GC sheets for roofing and GP for household and agricultural implement storage.
The wholesaler-retailer linkage is important but arrangements for storage are also important. Since producers have greater flexibility, they bear the maximum burden of inventory, and they usually do. Somewhere down the line, between the wholesalers and retailers, this mismatch requires to be sorted out. The suggested arrangement can be somewhat on the lines suggested in the Figure.
The network gives an example of a three-tier chain below the producer. This is on account of the extremely low volumes traded by most of them. The holding of stock, as the Figure shows, would be in proportion to the volume handled.
As it is not possible to extend the network to cover a large number of rural markets, initially the approach could be restricted to the relatively prosperous rural States. Simultaneously, the scheme can be extended to one district in each of the prosperous rural belts of western UP, Bengal, Punjab and Haryana.
Once the identified popular steel products are accepted in the market, the product base will have to be widened. The utility mode for the rural market should be extended to cover a wider and broad-based product-mix, including finished steel. Certain retail outlets should be identified to stock finished products, such as steel doors, window frames, furniture made locally, buckets, certain kitchen appliances made of stainless steel, and related products.
This may require facilities for local fabrication, for which necessary technological assistance through technical advice may be provided. The training of local people for skill development could also be organised.
Product diversification is accepted as one of the standard methods of attracting customers to the retail centre. An imaginative list of items, including such non-conventional devices as solar cookers, kitchen and domestic appliances, gas cookers and other conventional and non-conventional items, could be prepared and made available to select retailers for exhibition.
The producers will need to have a more direct and proactive role in building up a strong dealership network. At present, because of the marked preference for bulk handling, most of the producers do not have a strong dealership chain. Only a few of them have taken the step of appointing distributors, who are only the first link in the chain.
Steel producers are yet to tap the full potential of the rural market, mainly because of their mindset about the image of a rural area. But things are changing, and fast, in most rural regions. More and more tractors are being used, replacing bullock carts.
The idea is not to think of the rural market in its stereotyped form but to take cognisance of the changes in demand patterns, in the prosperous pockets, to begin with. The producers need not to be daunted by the scale. The phased approach will help to gradually build up demand and introduce new options in steel products. Following this approach, an additional demand of an estimated one million tonnes could be generated in 2-3 years.