Tuesday, January 31, 2017

An Appetite for Steel

Recent newspaper headlines proclaimed that India is now poised to overtake Japan as the “second largest producer of steel in the world”. This sounds quite impressive - until you see the numbers in perspective. The largest producer of steel in the world - China - produces over 800 million metric tonnes (mmt) while India’s 'record production' was less the 90 mmt in 2015.

The current situation is like that of a huge kitchen that needs to keep itself busy. Excess production capacity is now at odds with low appetite. Over the past 40 years there has been a massive increase in global steel production - especially in China. A country that produced just 37 million metric tonnes (mmt) in 1980 produced more than 21 times that amount - 803 mmt in 2015!

Similarly, on a much more modest scale, India which had been producing 9.5 mmt in 1980 , increased its production to about 90 mmt in 2015.

China’s domestic appetite has been a bit satiated now, so now we are seeing a sharp increase in its steel exports. As with numerous other Chinese products its prices are super competitive, and this is triggering “anti-dumping” measures from other countries, including India. About two years ago, India’s DGFT set a Minimum Import Price (MIP) for 66 types of iron and steel products, while at the same time, imposed duties up to 20% on a number of steel products.

The main countries affected by these measures were China, South Korea and Japan, which accounted for 63.6% of total imported steel volume, and 54.6% in terms of value. As expected, Chinese imports are the largest at over 37%.

Yet, strangely, it is not China or South Korea, but Japan that is at the forefront of the campaign against the restrictions imposed by India. It has threatened to take India to WTO over the import restrictions, and various interpretations of the provisions of GATT 1994 and the Agreement on Safeguards.

What explains this unusual stance?

Some commentators claim that for Japan, India is  just the proxy country used to fight a larger war against MIPs and other border taxes. According to others, this is just a reflection of political clout wielded by steel exporters in Japan. Either way, one thing is clear - higher steel prices is not good news for downstream industries, or for the consumers who end up paying more for cars and cooking utensils.

Lobbies like the Indian Steel Association (ISA) and their counterparts in Japan will always try their best to influence governments for their own benefit. Ultimately, it is for the government to strike a balance between the long term costs and benefits of bowing to the pressure of industry lobbies. And that, unfortunately, is linked to election funding...



(26Jan17-BL) - http://www.thehindubusinessline.com/economy/policy/russia-says-steel-exports-to-india-dipped-by-a-third-due-to-curbs/article9503240.ece

(25Jan17, BT - India to be global no.2 steel producer by 2020) - http://www.businesstoday.in/current/corporate/india-closes-japan-second-largest-steel-producing-country/story/244963.html

Reuters (23Jan17) - http://www.reuters.com/article/us-japan-india-steel-idUSKBN1541DX

Forbes (23Jan17) - http://www.forbes.com/sites/timworstall/2017/01/23/japan-threatens-india-with-wto-action-over-steel-good-it-should-to-benefit-indians/#561e021a53ae

(22Jan17 - Taiwan) -- http://www.thehindubusinessline.com/economy/policy/taiwan-wto/article9496340.ece?ref=relatedNews


DGFT Notification on MIP (4Aug16) - http://dgft.gov.in/Exim/2000/NOT/NOT16/noti2016.pdf

(4Dec16, IE) - Indian Steel Association (ISA) for extension of MIP for 6 months - http://indianexpress.com/article/business/business-others/extend-mip-on-steel-products-for-six-months-indian-steel-authority-4409972/

(30Mar16 - VCCircle - Timeline on MIPs) - http://www.vccircle.com/news/engineering/2016/03/30/india-extends-safeguard-duty-steel-imports-till-march-2018l


* http://asia.nikkei.com/Business/Trends/Japanese-steelmakers-switching-to-lower-grade-raw-materials?page=2
- Japanese steelmakers (Nippon, Sumitomo) use better technology to lower costs. They process cheaper, low grade coke to better quality before replacing 50% of high-grade imported coke...this keeps their steel competitive in the world markets.

(2Dec2016) - http://www.infracircle.in/indias-coke-import-financial-year/
> India imported ~ 3 million tonnes of metallurgical coke in 2015-16 --- of which 2 million was from Chine alone!...Metallurgical coke, a key raw material for the steel sector, is used for smelting iron ore in the blast furnace. Around 0.7 tonne of coke is required to produce 1 tonne of steel and it constitutes 40-50% of the total cost of crude steel.
The government on 25 November imposed anti-dumping duty in the range of $16.29-$25.2 per tonne on imports of low ash metallurgical coke from countries such as China and Australia for a period of five years.

Thursday, January 12, 2017

Open Sesame

In an interview reported earlier this week, India's Minister for Commerce and Industry, Ms. Nirmala Sitharaman, requested Japan to take steps to increase Indian exports to Japan of sesame seeds, Surimi fish and generic drugs.

This was quite puzzling. Why were two specific items - "sesame seeds" and "Surimi fish" - mentioned in the same breath as Generic Drugs, which is a whole category in itself?

Perhaps it had something to do with the commercial value of the items being imported by Japan...

Sure enough, it turns out that Japan is one of the world’s largest importers of sesame seeds. It is mainly sourced from African countries. Nigeria is, by far, the biggest source, accounting for 28% all sesame seed imports valued at about JPY 11.4 billion (USD 96 million or INR 656 Crores in 2014). This means that Japan imports seeds worth about USD 343 million annually!

In recent years, India too has seen a sharp rise in sesame seed production. In 2014-15, over 0.43 million tonnes was produced, mainly in Gujarat and Uttar Pradesh. However India has not had much success in exporting the seeds to Japan. This is apparently because of high pesticide residue levels.

In other words, it is India that needs to take adequate steps to ensure that the sesame seeds it produces, is not only cost competitive, but also meets phytosanitary standards in the export markets.

The second item - Surimi fish - . I had heard of "Surmai" (Indo-Pacific Mackarel) but not this one.

It turns out that Surimi not a type of fish but something that Japan exports to other countries - especially USA. It is the term used for  "minced fish paste, made from a cheap fish in abundant supply, usually Alaskan pollock, frequently mixed with sugar and sorbitol, a sweetener. The paste is combined with other varieties of fish and fish flavorings, preservatives such as sodium tripolyphosphate and binders such as wheat flour or egg white, and then restructured and colored to look like higher- priced crab, scallops, shrimp or lobster." 

So, is this a case of a minister who was not properly briefed, or was it the IANS/Business Standard reporter who misquoted what has actually transpired?

Either way this is a fine example of the cross-talk, and communication gaps, not only within India, but also between the two countries.


* BS (2017) - http://www.business-standard.com/article/news-ians/india-japan-fta-implementation-needs-to-be-expedited-sitharaman-117011000351_1.html

* Surimi exports from Japan to USA - http://www.nytimes.com/1984/07/25/garden/surimi-what-kind-of-seafood-is-it.html?pagewanted=all
* (BS, 2014) - Sesame production in India - http://www.business-standard.com/article/markets/india-s-sesame-seed-output-to-rise-by-126-shefexil-114110200688_1.html

* BS (2016) - http://www.business-standard.com/article/news-ians/sitharaman-urges-firms-to-exploit-free-trade-accord-with-japan-116100600675_1.html

* CEPA - RIS Report 2016

* Mint (2014) - http://www.livemint.com/Politics/Nv3BR8VYZ9zLJwwGeFAlWJ/EU-team-to-inspect-sesameseedprocessing-units.html

* SHEFEXIL - http://www.shellacepc.com/
-  About Sesame seeds - http://www.shellacepc.com/products/sesame-seeds/

* IARI - All India Network Project on Pesticide Residues - http://www.iari.res.in/?option=com_content&view=article&id=185&Itemid=531

Tuesday, January 10, 2017

MPesa India: Wrong Time, Wrong Place?

According to a recent article, there are 271 different mobile money services offered in 93 countries worldwide. Among these, the most successful one is Kenya's M-Pesa.

Launched in 2007 by Vodafone for Safaricom and Vodacom, the largest mobile network operators in Kenya and Tanzania, M-Pesa has spread quickly, and by 2010 had become the most successful mobile-phone-based financial service in the developing world. By 2012, it had about 17 million M-Pesa accounts registered in Kenya alone.

M-Pesa's key advantage is that it does not need a 'smartphone'. Apart from being relatively expensive, smartphone tend to be battery guzzlers which need to be charged frequently, quite unlike the older mobiles which are cheap and far more durable.

In India, 61% of Indians own a basic mobile phone while only 17% of own a smartphone. Why, then, has M-Pesa not caught on in India?

Perhaps the answer to this question lies in a closer look at the Kenyan mPesa model.

The idea behind M-Pesa has its origins in 2002 when researchers found that the Kenyans had been using talk-time on pre-paid mobiles to make small payments across the country. People were purchasing everyday necessities - provisions and services - and paying for it by adding talk-time to the service provider's mobile phone. Thanks to code written by a student, this was expanded into a payment-transfer service.

Vodafone was the first to spot a big opportunity here and purchased the code. It then improved upon the model and created a wide network of agents across Kenya, selling this as a service. Within 10 years, M-Pesa transactions have grown so fast that they account for 20% of Kenya's gross domestic product.

Yet, when Vodafone tried to replicate the same M-Pesa model in neighboring Tanzania, it bombed. What was so different between Kenya and Tanzania?  An IFC report suggests the following reasons:

  • Demand - urban migrants sending money back to family is not as prevalent in Tanzania and since there is less crime and insecurity in Tanzania
  • Access to Financial Services - Only 9% of the population has access to formal financial services and 54% don’t use any form of financial services. When compared to Kenya, we see that 19% of the population there has access to formal financial services and only 38% don’t have access to any form of financial service
  • Strength of Economy and Banking System - Kenya also has a stronger economy, a higher GDP (USD 890 per capita in Kenya versus USD 520 in Tanzania). 1.38 bank branches per 100,000 inhabitants in Kenya versus 0.57 in Tanzania
  • Geography and distances - Tanzania is a large country with a dispersed population so quickly reaching dealers in rural areas was difficult
  • Competition - Tanzania as Zantel’s competing service - ZPesa -- Tanzania also faces competition from informal money transfer channels such as the use of airtime as a currency
  • Business Model -  Vodafone decided that the service would be offered to local subsidiaries on a license fee model instead of the shared revenue model that was agreed with Safaricom in Kenya. 
  • Population and Customer Base - Tanzania has a population of 40 million - dispersed across Vodacom’s market share in Tanzania (41%) is significantly less than Safaricom’s in Kenya (79%) which translates into a base of 13 million customers for Safaricom as opposed to only 5.9 million for Vodacom
  • Technology - M-Pesa is delivered in Tanzania using USSD which does not require any application to be stored on the SIM card. The user dials a short number to receive a set of menu options.
  • Laws & Regulations - no national id in Tanzania -- cumbersome Anti-Money Laundering procedures -- 
  • Lack of preparation - no market survey -- pilot test only covered one aspect: The main focus of the pilot was to test the USSD gateway since the USSD channel was not used in the Kenyan implementation. 

So the key factors that prevented this useful technology from crossing borders were - population dispersion, crime rates, financial literacy and mobile penetration.

In 2013, mPesa was launched by Vodafone India, in collaboration with ICICI Bank. From the look of it, this seems to be based on the menu-driven USSD model that was used in Tanzania, and not the faster, more efficient SIM-based model that was a huge success in Kenya. Over and above the challenges faced by Vodafone in Tanzania, the Indian market was already groaning under severe competition by the time Vodafone stepped in.

Perhaps the biggest advantage it still retains is the fact that unlike other leading e-wallet services like PayTM and Oxigen, M-Pesa users do not need to have a smartphone or 3G/4G internet connectivity, to use the service.

Howver, this advantage has also been diluted with the launch of the national Universal Payment Interface (UPI now renamed  BHIM). ICICI Bank too is offering this as a service independent of Vodafone.

So, is it just a matter of time before M-Pesa turns belly-up in India?


* mPesa India FAQs - https://www.mpesa.in/portal/customer/FAQ.jsp
* Smartphone penetration in India (2014-2019) - https://www.statista.com/statistics/257048/smartphone-user-penetration-in-india/
* mPesa launch in India - 2013 - http://gadgets.ndtv.com/telecom/news/vodafone-india-launches-m-pesa-mobile-wallet-with-icici-bank-355406
* IFC Case Study mPESA in Tanzania - http://www.ifc.org/wps/wcm/connect/3aa8588049586050a27ab719583b6d16/Tool%2B6.8.%2BCase%2BStudy%2B-%2BM-PESA%252C%2BTanzania.pdf?MOD=AJPERES
* Padmanabhan, Vishnu (2016) - http://www.livemint.com/Opinion/GOqw0yvSZqFbIB5Oxd1J2O/Transforming-the-digital-payment-infrastructure.html