India’s Industrial Output Faces The Heat

Rashtriya Ispat Nigam Ltd (RINL), better known as Vizag Steel, is hanging by a thread. It has been since 2016, when India’s only coastal steel plant and the pride of Andhra Pradesh began spiralling into losses. Iron ore prices had skyrocketed because of increased exports to China, and RINL, still smarting from the failed acquisition of Odisha Mining Corporation, had no captive mines. It still doesn’t. High procurement prices pushed it into debt, and the government wants to divest it.

Adding insult to injury is an ongoing workers’ strike at Adani-operated Gangavaram Port, which has become the proverbial death knell for RINL. Limestone and coking coal — critical raw materials for steelmaking — worth about Rs 650 crore that were headed to Vizag Steel have been stuck at the port since April. The plant has reserves for just a few days. Its hot metal output has tanked from 14,000 tonnes a day to just 5,600 tonnes.

If this sounds bad, and it is, things will get much worse due to climate change-induced weather disruptions.

The India Meteorological Department (IMD) recently issued severe heatwave warnings for east India. One of those regions was coastal Andhra Pradesh. In June last year, Visakhapatnam reeled from temperatures exceeding 43°C, the highest in the city in 60 years. The state is suffering bouts of delayed or unseasonal rains, wreaking havoc on agriculture and doubling as a looming spectre for industry.

Steelmaking is heat-intensive. Because furnace temperatures are around 1,000-1,100°C, adjacent shop floor areas can reach 40°C in winter months.

“So workers who operate in that area are used to it. But there could be labour strain in just travelling to the plant. Maybe [a further] 5-10% drop in productivity because of heat and health issues like dehydration,” says KVD Prasad. Prasad is a quality manager at RINL and joint secretary of the Steel Executives Federation Of India.

“And it’s not just heat. Sudden rains jam conveyor belts. Materials stored in open yards get damaged.”

Since Mother Nature has her mercurial moments, inclement weather isn’t foreign to businesses that factor in exigency costs for machinery repair or labour unavailability. But the frequency of these mercurial moments is increasing and clashing with India’s growth targets.

Ambition Versus Reality

The Centre wants to export $1 trillion worth of goods by 2030. To this end, the commerce ministry commissioned a study to assess infrastructure needs and identify industrial clusters critical to the mission. That’s due in August-September. Meanwhile, infrastructure itself is pivotal to India’s goal of becoming a $5 trillion economy in the near future. Under the National Infrastructure Pipeline, the Centre has planned investments worth around $1.4 trillion until 2025. That’s a whole lotta mining, steel, cement, and brick-making — all polluting industries where the largest players are already spending lakhs of crores on green transitions.

Climate change is chipping away at India’s potential to fully meet such targets. In 2022, India lost 8% of its GDP to climate change, according to a study by James Rising, an interdisciplinary modeller at the University of Delaware. A study by the Centre for Science and Environment revealed that India experienced extreme weather events nearly every day from January-September in 2023. The country’s industrial output declined in January and March this year, and according to a CRISIL report, the capital goods sector is badly hit by the Red Sea crisis. Micro, Small, and Medium Enterprises (MSMEs) are severely impacted. And they won’t have an immediate recourse yet: India may experience its biggest power deficit in 14 years this June, much of which has to do with literal scorched earth. Water scarcity has triggered the lowest hydropower output in nearly 40 years.

If the devil is in the details, we’ll have hell to pay. Steel has crucial forward linkages, meaning sectors that use it as an input suffer the domino effect if production is affected. Conversely, the automotive industry has deep backward linkages (where value addition comes from components suppliers), meaning a slowdown in this sector will have a domino effect on the value chain.

Disruptions in intra- and inter-industry linkages increase relative prices, C Veeramani tells The Core. Veeramani is Professor and Director at the Centre for Development Studies.

“When costs increase, you lose competitive advantage. Resources get reallocated, production patterns shift. Subsequently, trade patterns do too. This is when imports increase.” he explains.

That, by the way, is already happening. India is now a net importer of steel, and concerns are mounting about a flood of Vietnamese steel imports.

Twisted Metal

There are two scenarios in which India’s steel industry will bear the brunt of increased costs due to extreme or unpredictable weather, according to a metals analyst. He spoke to The Core on condition of anonymity since he’s not permitted to talk to the media.

High temperatures increase the likelihood of machinery breakdowns. Depending on the type of equipment and the company operating them, maintenance schedules range from every month to every season. Prep times of a day or two are factored in for adverse events such as cyclones, which mining and steel hubs in east India are vulnerable to.

Inclement weather will throw a spanner in these schedules. Hot steelmaking will continue, but processes such as agglomeration, which includes extrusion and pelletisation, will be affected. Plants will stop because of equipment malfunctions. Production will take a hit and costs will go up because maintenance will become more ad-hoc.

And considering that India is projected to suffer a significant power shortfall this year:

“Power is a major cost component for plants. Spot electricity prices are high in east India, and if things worsen, additional costs will be passed on to buyers. The big companies are paying through their noses for the green transition anyway,” the analyst reasons.

Scenario two involves labour.

Steel, like most extractive and forward linkage-sectors, is process intensive. In other words, the labour force works in 24x7 shifts.

There was a time when work hours in mining and metallurgy were restricted to 5am-11am and 4pm-11pm since processes were largely manual. With automation, managers can supervise from air-conditioned cabins and workers are present round the clock.

But with the mercury in the Bihar-Jharkhand-Chhattisgarh steel and mining belt crossing 45°C, labourers may increasingly desist from day shifts. Companies will then either have to increase the number of shifts (with fewer working hours) or increase the number of on-premise worker hostels to minimise travelling inconvenience for workers. Both are additional cost burdens.

Productivity Breaks Into A Sweat

In January this year, a study published in Global Change Biology estimated that labour productivity in countries like India would reduce by 40% by 2100. The research was focused on agricultural workers, but it wouldn’t be a stretch to partially draw the same conclusion for manual labour-driven MSMEs. The automotive sector is one such.

As mentioned above, this sector has deep backward linkages. Most are concentrated in Hosur, Tamil Nadu, whose proximity to Bengaluru also turned it into a cluster for electric vehicle (EV) and electronic components. Apart from Tata Electronics, TVS Motors, Ashok Leyland, and auto ancillary giant Rajsriya Automotive Industries, Hosur is a manufacturing hub for Ola Electric and Ampere.

Hosur, like Vishakhapatnam’s steel sector, is victim to non-climate related circumstances. After years of breakneck growth, India’s wholesale passenger vehicle sales declined by 22% year-on-year this April, according to the Society of Indian Automobile Manufacturers (SIAM). SIAM has forecast muted sales for FY25 too. The outlook for commercial vehicles and overall exports isn’t great either. As a result, local MSME units are grappling with a drop in order books.

Like east India, Karnataka and Tamil Nadu also received IMD heatwave alerts for April-May. Temperatures touched nearly 40°C in Hosur in late April, adding salt to MSMEs’ wounds.

“Nearly one lakh people work in 5,000 small and tiny units in Hosur. Businesses stretched thin will do the bare minimum for heat management on shop floors,” says Hosur Small and Tiny Industries Association (HOSTIA) President K Velmurugan. Ancillary processes such as powder coating, aluminium die casting, and plating are heat-intensive.

“If both the slowdown and the heat get worse, we may see migration of labour from auto-heavy fabrication and conventional engineering to the power sector,” he adds. The last time this happened in Hosur was in 2009, after the global financial crisis.

Potential labour migrations and declines in output because of extreme weather won’t be restricted to extractive and ancillary industries. The Core reached out to Bino Paul and Anish Sugathan, whose areas of specialisation include labour markets and sustainable development. Paul is a professor with the School of Management and Labour Studies, Tata Institute of Social Sciences. Sugathan is an associate professor with the Indian Institute of Management Ahmedabad.

According to Paul, food processing and hospitality are also vulnerable to labour disruptions since they are value creation industries that depend on migrants. Uttarakhand, one of India’s most climate-vulnerable states, is both a food processing hub and a major source of migrant labour to the food and beverage industry. Tourism and hospitality have a significant influx of workers from northeast India, a region witnessing increased frequency in extreme precipitation.

“Also, of India’s employed labour force of 52 crore, nearly half are engaged in nano enterprises. These include street vending units, where a person is both employer and employee. Day-to-day visitors will elude them in extreme weather, which will affect livelihoods and migration patterns,” he explains.

That aside, the Centre’s ‘Make in India’ campaign and the subsequent boom in manufacturing hubs has not birthed a parallel boom in sound semi-urban and urban planning. This is an important point because as Sugathan puts it, heat islands are concentrated near industrial townships. Such spaces have fewer climate resilient designs, such as adequate drainage and spaces between living quarters. Businesses employing labourers who live in such areas don’t consider standards of living in their mitigation policies.

This will come to bite. India is considering replacing the minimum wage with living wage by 2025. According to the International Labour Organization, a living wage is “the wage level… necessary to afford a decent standard of living for workers and their families, taking into account the country circumstances and calculated for the work performed during the normal hours of work.”

The operative term here is “standard of living”. In a warming world, workers (and their employers) will have no option but to spend on cooling solutions. And such solutions will be geography-specific. For instance, the knitwear and bicycle epicentre of Ludhiana relies on desert coolers in summers. But these coolers aren’t efficient in humid or tropical clusters in Tamil Nadu.

“MSMEs can’t afford air conditioners, so we may need a volume procurement mechanism, like we did with LED lights,” Sugathan says. “Otherwise businesses will deal with lost working hours or mounting healthcare expenses for workers. Trade-offs will become inevitable.”

At the time of writing this, Vizag Steel’s KVD Prasad messaged to say that he visited the plant after days of not doing so due to the heat.

Remember, Prasad is an executive. The workers protesting at Gangavaram Port, and those who don’t know whether they’ll get a paycheck from RINL, have no choice but to show up.

Someday, they too will make a trade-off.