A Treatise on the level of Disruptive Innovation in the Indian Iron & Steel value chain
- Shantanu Rai
“Disruptive Innovation” – this term is regarded as one of the top business ideas of the 21st century. It refers to an innovation that creates a new market and value network and eventually disrupts an existing market and value network, displacing established market-leading firms, products, and alliances.
There are several examples of disruptions across various sectors and in the context of Metals & Mining/ Iron & Steel sector, the best example is that of NUCOR, which introduced the concept of scrap based mini-steel mills that disrupted the long products steel market and captured away significant market share from conventional integrated producers such as US Steel and Bethlehem Steel.
These mini-mills were primarily introduced to operate on melting scrap in electric furnaces in order to produce liquid steel and have the following key benefits:
1) Lesser requirement of plant & machinery: The process is void of units such as Sinter Plant, Coke Ovens, Blast Furnace etc. needed in a conventional oxygen based integrated steel plant. The process was initially designed to melt scrap for producing liquid steel but as the technology matured and in order to absorb price fluctuations such as higher scrap prices and lower iron ore prices, producers switched to using both scrap & DRI (Directly Reduced Iron) as feed to the electric furnaces. Both Scrap & DRI can be procured from outside. However, in order to avoid supply chain disruptions, enhance the process techno-economics, and absorb price fluctuations, certain companies such as NUCOR have chosen to integrate vertically by setting up its own scrap recycling and DRI production units. Still the requirement of plant & machinery remains considerably less when compared with conventional oxygen-based units.
2) Higher energy efficiency and lower carbon footprint: Specific energy consumption of a purely scrap based steelmaking unit is ~ 9.5 Giga-Joules (GJ)/ Ton of Cast Steel (TCS), 15.9 GJ/TCS in case of gas-based DRI (80-90%) + scrap (10-20%) based steelmaking, 16.4 GJ/TCS in case of conventional oxygen-based steelmaking. This shows that energy consumption is lower by 58% in case of scrap-based steelmaking, 10 % in case of gas-based DRI (80-90%) + scrap (10-20%) based steelmaking when compared with conventional oxygen-based steelmaking. Accordingly, the specific CO2 & GHG emissions also come down. It is estimated that energy costs contribute to 20-40% of the OPEX of a steel plant, so prima -facie it might appear that OPEX would also follow a similar trend but it is difficult to say anything conclusive in this regard due to the complex interplay of several entwined factors such as higher scrap and lower iron ore prices, cost of the other input materials such as Coking Coal, Fluxes etc., whether a conventional producer has access to captive mines or buys from outside market, energy costs, logistics network and cost on a case to case basis
3) Better ability to absorb supply chain shocks: Scrap/Scrap+DRI based steelmaking units are better places to absorb supply chain shocks when compared to integrated oxygen-based units due to the inherent nature of the processes which enable easy switch-on/switch-off for electric processes.
Now, in this section, we will analyze the level of disruption in the Indian Iron & Steel value chain. In FY 19, India produced 106.56 MTPA (Million Tonnes Per Annum) of liquid steel, of which 47 % was produced through the conventional oxygen route and 53 % through the electric route. Of the 56.38 MTPA of liquid steel produced through electric route, 27.70 MTPA was produced through Electric Arc Furnaces (EAFs of which 25.22 MTPA came from incumbent majors such as JSW, Essar, JSPL, Bhushan etc. and the rest 2.48 MTPA from minor producers) and 28.69 MTPA through Induction Furnaces (IFs).
Now coming to the core question, what is the level of disruption in the Iron & Steel value chain. The answer is - it is very high in case of certain producers such as JSW, and Essar, who have leveraged process innovations to realize higher economies of scale & scope that has enabled cost leadership. However, it is low to moderate for the overall Indian Iron & Steel sector. Some of the process tools adopted by these players that enable high level disruption inter alia include:
- JSW Steel produces ~ 16.7 MTPA of liquid steel, of which 10 MTPA is produced through the conventional oxygen route and 6.7 MTPA through the hybrid route. JSW is one of the few early adopters of diversified and hybrid steel making practices such as Blast Furnace & COREX hot metal + gas based DRI + Scrap charging in EAFs/CONARC steelmaking furnaces, high use of pellets in Iron making processes has enabled the company to utilize low grade and ultra-fine iron ore which aids in long term raw material security, use of COREX and Coke Oven off gas for DRI production has enabled the company, achieve higher productivity of blast furnace & DRI iron making units , lower coke rate, better utilization of off gases, lower specific energy consumption etc. JSW also practices significant level of in-house R&D, Total Quality Management & Six-Sigma practices across the value chain enabling continual process improvement and development of advance steel grades for high end application. JSW Steel has also won the Deming prize for excellence in Total Quality Management.
- Essar Steel produces ~ 6.8 MTPA of liquid steel trough the hybrid route. Akin to JSW, it is also one of the early adopters of diversified and hybrid steel making practices such as Blast Furnace & COREX hot metal + natural gas based DRI + Scrap charging in EAFs/CONARC steelmaking furnaces, high use of pellets in Iron making processes has enabled the company to utilize low grade and ultra-fine iron ore which aids in long term raw material security, achieve higher productivity of blast furnace & DRI iron making units , lower coke rate, better utilization of off gases, lower specific energy consumption etc. Essar Steel also practices significant level of in-house R&D, Total Quality Management & Six-Sigma practices across the value chain enabling continual process improvement and development of advance steel grades for high end applications. Essar is credited with introducing the concept of developing as suited products and grades in directive collaboration with its consumers.
The aforementioned activities have enabled these companies to achieve higher man and plant productivity, long term safety and sustainability. Additionally, companies such as TATA Steel & JSW have been the torchbearers of branding/ MARCOM activities that has added the much-needed panache to the Iron & Steel industry.
The next big target for such companies should be to improve the Economic Value Added (EVA) number for their projects, further reduce their specific energy consumption and carbon footprint, develop safe steels at lower price points to increase the per capita steel consumption in the rural sector that is only 10 Kgs at present.
There is yet another example of disruption in the Indian context, but it has come at a high cost to the environment and safety and it may not be sustainable in the medium to long term going by the status quoish patterns. This example is the flourishing of non-coking coal-based sponge iron (DRI) units and Induction Furnaces. In FY 19 India produced around 26.10 MTPA non-coking coal-based sponge iron and 28.69 MTPA of liquid steel through IF route operating primarily on sponge iron charge with small amounts of ferrous and recycled scrap. This business model flourished by disrupting the weakness in the value chain in terms of scarcity of coking coal and Ferrous Scrap and turning into an opportunity by setting up of a large number of DRI production units, which could aptly utilize the abundant domestic Iron Ore and Non-Coking coal reserves and provide a suitable substitute for scrap as the primary metallic feed to IFs.
However, this is not sustainable in the medium to long term because of the following reasons: the issue of high CO2 emissions is more amplified in case of sponge iron-based steelmaking. For e.g. , while the total raw coal consumption ( both coking and non-coking PCI coal) for BF-BOF units is estimated at ~ 770 Kg/ Ton of Hot Metal in Indian conditions ,the total raw non coking coal consumption in case of non-coking coal based sponge iron units can be as high as 1500 Kgs/ Ton of DRI considering usage of non-coking coals beyond G6 grade and also the total waste generation ~ 1.2 tons per ton of Liq. Steel produced through coal based DRI is the highest among all process routes. Also, the power consumption of sponge iron-based IFs is also very high @ 700-800 KWH/ Ton of cast steel. Apart from the environment, the safety of the steels produced through sponge iron- IF route cannot be relied upon as the level of impurities such as phosphorous, sulfur etc. in the feed sponge iron is very high and IFs are garbage in -garbage out furnaces with only melting facilities sans any refining facility. Also, the fact that ~ only 3% of the 1100 operating IFs in the country are equipped with BIS certified testing facilities puts a big question mark on the safety of their steel products. Consider, if these products get mixed with prime construction steels for heavier infrastructural applications, it could result in a catastrophe.
To this end, National Steel Policy-2017 notes the following:
“Capacity additions through coal based routes will have far reaching implications for India in terms of environmental degradation and in the future significant efforts will be directed towards up-gradation of coal based DRI capacities in the MSME sector to gas based route”
“ensuring firm supply of natural gas is imperative to boost the confidence and investment in the gas based steelmaking technology”
Ergo, there is a lot of scope for new disruptions in the Iron & Steel value chain as well as phasing out/ pivoting of earlier disruptions. Going forward we should bet big on hybrid steelmaking processes/projects as explained earlier , producing more value added steels at competitive prices, reducing dependence on coking coal imports, increasing the share of gas based iron making processes, lowering the overall GHG and waste footprint of the sector, improving the overall sustainability of the sector, and creating enough opportunity for circular economy to flourish.
 Shantanu Rai is working as a Consultant - Minerals in NITI Aayog. He has close to a decade’s experience in business and technology advisory for the Iron & Steel Industry across Govt. & Pvt. Sector and International Think Tanks. He attended the flagship MBA program at the prestigious Indian School of Business (ISB) - Mohali campus and holds a B.Tech in Materials Engineering from the National Institute of Technology (NIT), Rourkela (Declared an institute of national importance by an act of the Parliament of India in 2007).
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