Resolving the CRGO conundrum

Venugopal Pillai
,
Saturday, August 16, 2014, 16:40
Hrs [IST]

The willful use of inferior CRGO by Indian transformer manufacturers has always
been a contentious issue. The government has now strongly intervened by insisting
on usage of only BIS-certified material. Even the customs authorities have been
directed to ban the import of substandard CRGO. While there is nobility in the
intentions, enforcement of policies is never going to be easy, says Venugopal Pillai.

The Indian transformer industry is highly dichotomous. On the one hand, India has
proven its technical prowess by producing transformers of 1,200kV ratings, the
highest in the world so far, and that too using indigenous technology. On the other
hand, India faces the dubious distinction of its distribution transformers having a
shamefully high failure rate of 25-30 per cent, ironically enough, the highest in the
world. These two extremities are not coexisting
as a coincidence. The distribution transformer
segment is plagued by irregularities and
anarchy. Contributing to the pathetic state of the
industry is one key raw materialcold rolled
grain oriented steel, popularly known as CRGO.
The very mention of the term CRGO in Indias
transformer industry evokes a sense of
controversy and a feeling of discomfort. CRGO
has always had a difficult time and there
appears to be no early reversal of fortunes in
sight. CRGO steel is a highly specialized form of
steel that is not produced in India. The entire demand of some 2.5 lakh tonnes per
year is met through imports. CRGO is the heart of the transformer. The quality of the
transformer depends on the quantity and quality
of CRGO used therein. The cost of CRGO can
account for up to 35 per cent of the cost of the
equipment. CRGO can be of prime grade or
secondary grade. The latter refers to what is
recovered from scrapped transformers. In the
context of CRGO, the contentious issue has
always been the use of scrap (inferior) CRGO in
distribution transformers.

The reasons why scrap CRGO has found its way
into Indian distribution transformers is also very
interesting. Till the 1980s, India always used imported prime CRGO in the
manufacture of transformers. However, at that time, a precarious balance of
payment position and a weak rupee resulted in exorbitant landed prices of imported
CRGO. This is when domestic manufacturers resorted to using imported scrap
CRGO. Industry veterans recall that domestic producers also began to design their
transformers in a manner that suited the use of secondary CRGO. This was still
acceptable as secondary CRGO does not always mean it is unusable or inferior.

The problem began taking roots when India began to be flooded with cheap and
inferior imported CRGO. It became impossible for transformer manufacturers to
know the quality of the imported secondary CRGO. Inadvertently, therefore, scrap
CRGO began finding its way into distribution transformers even though the
manufacturer did not mean to. While this accident still represented a small
proportion of the damage, the real calamity was the willful use of scrap CRGO by
unscrupulous transformer manufacturers. This is when the CRGO issue assumed
menacing proportions prompting the government to intervene strongly.

In 2012, the steel ministry issued an order mandating that all CRGO steel used in the
country should have a certification from Bureau of Industrial Standards that it
conforms to IS3024 standards. This obviously meant that no scrap CRGO could be
imported into India. More significantly, it meant that all foreign mills supplying to India
should have their products certified from BIS. Foreign mills obviously did not
scamper to comply with this requirement. Though a significant market, India was not
the only destination for their products. In the initial months only a handful of CRGO
suppliers evinced interest in registering their products for BIS certification. To
accommodate more suppliers, the enforcement date of the order was revised on
several occasions. The latest notification called Steel and Steel Products (Quality
Control) Second (Amendment) Order, 2014 was issued on March 31, 2014. With
respect to domain-refined CRGO steel, the enforcement date is July 1, 2014. For
conventional CRGO steel, the enforcement date was specified as October 31, 2013.
[It must be appreciated that the order covers a number of steel products of which
only CRGO steel is germane to this discussion.] As of mid-July 2014, a total of 16
suppliers (companies or mills) were already registered with BIS for certification for
conventional grade as per IS3024, according to information provided by B. Lal,
Director-General, Indian Transformer Manufacturers Association.

Despite the steel quality control order being in force effective October 1, 2013 (for
conventional grade CRGO), there have been reports of scrap CRGO being imported
into the country or used by transformer manufacturers. In a very significant move,
the Central Board of Excise and Customs, on July 9, 2014, issued an instruction to
all excise and customs departments that import of substandard CRGO steel
strips/sheets should not be allowed. The instruction read: import of such items shall
be permitted only from manufacturers/exporters who have obtained BIS license for
use of standard marks and the product meets the prescribed quality
parameters/technical requirements of the relevant Indian Standards and also bears
the standard marks. In other words, import of second/defective/old and used CRGO
sheets, strips and coil in any shape and size is not permitted. This directive, if
implemented conscientiously by the customs and excise departments, can curb the
use of inferior CRGO, industry experts feel. Industry players also assert that there is
no shortage of prime CRGO material. Explaining the situation, a leading distribution
transformer manufacturer said that there is currently a small rise in prices but no
shortage of prime material. Currently, prices of BIScertified prime grade CRGO rule
at $1,700 to $2,000 per tonne, as against $1,500 per tonne a few months earlier.
However, this price increase does not reflect shortage in the Indian market but global
market conditions. It may be recalled that during 2007, there was a sudden spurt in
prices of prime grade CRGO that had touched even $5,000 per tonne. At that time,
ironically, the Indian transformer industry had not grumbled much as they could
always resort to importing of scrap CRGO. In fact, with use of scrap CRGO being the
norm for a large number of distribution transformer manufacturers, price changes in
prime grade CRGO did not cause even a whimper! Now, with only BIScertified
CRGO permitted, at least from a legal perspective, transformer manufacturers will
need to cope with price fluctuations in CRGO steel, inasmuch as they do for other
raw materials. Industry experts feel that suppliers of transformers are almost always
covered by price escalation clauses, especially when the buyer is a government
agency.

SHORTAGE

Fears of shortage of BIS-certified CRGO appear unrealistic as the supply position is
quite comfortable. It is estimated that India needs around 2.5 lakh tonnes of CRGO
per year. Although there is no domestic manufacturing capacity, imports can easily
fulfill the demand. Even assuming that the entire quantum of CRGO now has to be
BIS-certified, almost all global CRGO mills have registered their products. The global
CRGO manufacturing capacity is around 30 lakh tonnes per year. Indias demand,
which is less than 10 per cent of the worlds supply, could be easily met, experts say.
Before the Steel Quality Order came into force, an estimated 50-60 per cent of the
total CRGO used in the country was of sub-prime quality. This means that the
market for prime grade CRGO was just about 1 lakh tonnes per year. Due to this
limited market, foreign mills were not very keen to set up distribution channels in
India. However, now this is expected to change for the better. Demand of CRGO
steel will grow in the coming years in keeping with the growth in transformer
production. Secondly, since the entire quantum of CRGO used in India is expected
to be of prime quality, there is a formal and growing market for foreign suppliers. One
factor that can militate against availability of prime grade CRGO to Indian suppliers is
the price differential between Asian and European markets. The Asian market,
especially India, usually needs conventional grade CRGO. This type of CRGO
always commands a much lower price than domain-refined CRGO, which is CRGO
customized to suit a particular application. In developed markets like Europe, there is
always a preference for domain-refined CRGO, which is why suppliers prefer to
pursue European and other developed markets as opposed to Asian ones. It is learnt
that, at least for manufacturers that have relatively small manufacturing capacity, the
selling price of conventional grade CRGO in India is less than the production cost.
For instance, JFE Metals of Japan had supplied 19,000 tonnes of CRGO steel to
India in FY13. However, in the first ten months of FY14, supplies plummeted to just
2,000 tonnes. On the other hand, this might not be so for large-scale manufacturers
that can derive the benefits of economies of scale. For instance, Posco of Korea has
increased supply of CRGO steel to India to 55,000 tonnes this year from 35,000
tonnes last year, it is reliably learnt. Posco, incidentally, has been supplying BIS-
certified CRGO effective October 1, 2013the stipulated date of the quality control
order.

RISE IN PRICES

One transformer manufacturer, on conditions of anonymity, explained that there was
a fear of price rise of CRGO in the coming months. Since January 2013, prices have
already increased by around 30 per cent. This increase is not because of shortage
but because of cartelization of CRGO suppliers. Recalling the spurt in CRGO prices
in 2007, he explained that at that time India witnessed a sudden surge in demand for
distribution transformers. This in turn was due to speedy rolling out of projects under
the Centrally-sponsored village electrification programmes. The price rise in 2007
was very abnormal to the range of around 300 per cent. Conscientious transformer
manufacturers had no choice but to pay a higher purchasing price for CRGO. On the
other hand, those manufacturers deploying scrap CRGO were ironically oblivious to
the price rise.

A section of the industry feels that merely insisting on prime grade CRGO does not
solve the problem. There should be some control on pricing as well. Willful hikes in
CRGO prices by manufacturers should be checked. As indicated earlier, CRGO
accounts for 30-35 per cent of the total cost of the transformer. An abnormal
increase in CRGO could bring about an unnecessary hike in transformer prices. It is
also very interesting to observe that thanks to the steel quality control order, CRGO
has suddenly become a sellers market. CRGO suppliers are not interested in
marketing their products as they know buyers will come to them. Currently, though
16 suppliers have registered, only eight have got their products BIS-certified. There
is likely to be a demand-supply mismatch till supply of prime grade CRGO improves.
One cannot rule of the possibility of prices of CRGO firming up in the near future.

WHY THE USE OF SCRAP CRGO?

For years together, the Indian distribution transformer industry has been a victim of
willful use of scrap CRGO. The amount of CRGO used in a transformer depends on
its rating. On an average, CRGO could account for one-third of the cost of a
transformer. Further, the cost of scrap CRGO could be up to 50 per cent of the cost
of prime grade CRGO. Due to this, the willful use of scrap CRGO could bring down
the cost of a transformer very substantially, much to the advantage of the
unscrupulous manufacturer. The ugliest part of the story is that substandard
transformers are produced because there is a market for itironically, state power
utilities. State power utilities follow the archaic L1 procurement philosophy where
equipment is purchased from vendors that offer the lowest quote. In the L1 scheme,
there is no room to consider the quality aspect of the equipment. The supplier that
quotes the lowest is the deemed supplier, regardless of the quality of the equipment.
Indirectly, it is this skewed procurement policy that is in fact sustaining the market for
scrap CRGO and therefore substandard transformers.

Manufacturing of distribution transformers has become a free-for-all activity with
close to a thousand marginal units mushrooming all over the country. Conscientious
manufacturers are moving away from distribution transformers and focusing only on
power transformers where the market is more organized. In the case of distribution
transformers, it is well documented that in India a distribution transformer is often
sold at a price that is lower than the cost of the individual parts contained in it. Little
wonder that Indian distribution transformers have the highest failure rate in the world.
While the high failure rate is primarily due to inferior material employed, it is
exacerbated by adversities like overloading.

Some industry players, on conditions of anonymity, claim that there is a strong lobby
that is backing the use of scrap CRGO and is resisting every government move to
promote the use of prime grade and BIS-marked CRGO. Even the government order
of July 9 that bans the import of substandard CRGO has recently been challenged in
court by a section of transformer manufacturers, an
industry source said.

We rather need a transformer quality order
- Vishnu Agarwal, Managing Director, Technical
Associates Ltd
CRGO is an important and critical input in transformers. Unfortunately it is also an
input not manufactured in India and hence we are completely reliant on
international imports for the same. A view has been taken in some sections that low
grade of CRGO being imported into the country has been responsible for inferior
quality and frequent failures of transformers. This is not correct. While CRGO (and
its grade) may play a role in the energy efficiency of transformers, no transformer
analyst or engineer would be able to significantly link lower grade of CRGO with
failures in transformers. Moreover, the problem of failure of distribution
transformers cannot be solved through controls on import of CRGO steel. A more
rational view would be to have a transformer quality control order whereby the
quality of the end product is ensured. CRGO is one of the major raw materials used
in manufacture of transformers. There are other important inputs. It would be
meaningless to place statutory checks on each of these raw materials.
It is important that any raw material coming into the country should be of good
quality but in this case global steel mills that produce CRGO have standards which
are stricter compared to BIS standards. However, there is a problem in it being
made applicable selectively only for transformers to be used in the country. I am
not able to understand the reason why we need one set of standards for domestic
products and another set of standards for products exported out of the country. As
the provisions stand today, low grade CRGO is unacceptable in our country, but is
perfectly acceptable in goods being supplied overseas with the Made in India
label? The premise on which CRGO was included for mandatory compliance with
BIS standards was that low grades are resulting in higher failures of transformers.
For a moment, accepting this premise, it would infer that transformers exported
from our country shall fail within a short span as the CRGO used therein is not
subjected to any mandatory compliance with BIS standards.
Secondly, as far as we understand, this is also not required for transformers being
imported into the country. Why is it that domestic manufacturers should be
subjected to a stringent standard which is not applied for transformers imported
from overseas? Another problem that has arisen because of this is that an artificial
scarcity has been created with prices of CRGO going up. The new Government is
planning for major reforms in the distribution sector and power for every Indian.
Both scarcity of CRGO and higher prices being charged by international mills would
mean higher cost of transformers and resultantly greater financial burden on the
utilities and the Indian government. This could never have been the intention for
bringing in CRGO under mandatory BIS certification. It is heartening that a large
number of stakeholders, including officials in the government have started realizing
the futility of the 'Steel Control Order' as far as CRGO is concerned, especially
when the transformers have been brought under mandatory BIS certification. (As

DOMESTIC CRGO

One of the conundrums of the Indian electrical equipment industry is the persistent
inability to locally produce CRGO steel. India has been trying to produce CRGO steel
since 1950s. Not only is the achievement so far nil but even the progress has been
trifling. When one sees the inability to produce CRGO in light of the maturity of the
Indian steel industry, the paradox is very intriguing. The process of CRGO
manufacture is complex, involving some 19 steps from iron ore up to finished
product. However, it is not as much about the technical complexity as it is of
protected intellectual property. The select manufacturers of CRGO steel are
guarding the technology fiercely. Talking of Indias efforts, Tata Steel and National
Metallurgical Laboratory have come together for a pilot project to domestically
produce CRGO steel. Founded in 1946, NML is one of the 38 laboratories under the
Council of Scientific & Industrial Research (CSIR). The partnership is yet in its early
days. It is reliably learnt that the Tata Steel- NML pilot project will involve investment
of Rs.500 crore. The pilot project to be located at Jamshedpur in Jharkhand will
produce 3-5 tonnes of CRGO steel. It is noteworthy that Corus Steel, the European
steel giant that Tata Steel acquired in 2007 is amongst the global producers of
CRGO. In this reckoning, India does have access to the CRGO technology,
however vicariously. In 2011, public sector entities Steel Authority of India (SAIL),
Bharat Heavy Electricals and Rashtriya Ispat Nigam decided to set up a joint venture
to manufacture special-grade steel including CRGO and CRNGO. To be set up with
an investment of Rs.3,000 crore, this was expected to be India's first unit for
production of CRGO and CRNGO steel. The three companies were in talks with
global suppliers for transfer of technology.
However, this project has reportedly not make progress, much like SAILs
unsuccessful attempt at producing CRGO steel at its Bokaro plant in Jharkhand in
the early 1990s. JFE, a leading Japan-based global supplier of CRGO steel, in 2012
tied up with JSW Steel to produce special steel grades at the Indian companys
Vijaynagar steel complex in Karnataka. The new unit with an envisaged capacity of 6
lakh tpa when fully complete, will produce CRNO (cold rolled non-grain oriented)
steel followed by the more specialized CRGO steel. It is difficult to appreciate why
told to Venugopal Pillai)

India is taking so long to produce CRGO steel. Despite the fact that CRGO is a
complex process, some signs of progress should have manifested in the six decades
that efforts are underway. One must appreciate that even if technology is sourced
from foreign suppliers, it would at best relate to relatively lower grades of CRGO. For
the finer grades of CRGO, India must carry out indigenous research. It is learnt that
China, over the past five years, has been able to locally produce CRGO steel albeit
the elementary grades. Transformer manufacturers are not too sympathetic towards
Indias prolonged yet unsuccessful efforts in creating local manufacturing capabilities
of CRGO steel.

EPILOGUE

The willful use of scrap CRGO in distribution transformers has had menacing
implications on the power T&D sector. The steel quality control order is indeed a
welcome step as it seeks to weed out the use of inferior scrap CRGO from source.
However, there is much that the government would need to do to ensure that prime
grade CRGO is available to the Indian consumer at a fair price. So far, eight mills
have got their products BIS-certified. An equal number of mills have yet to get their
certification in place. It is only when more and more mills get their products certified
will supplies be in a comfortable position. At the moment, the supply of BIScertified
CRGO is limited and there is a likelihood of suppliers forming a cartel to increase
their prices. If the steel quality control order is implemented effectively, many
marginal transformer manufacturers that have thrived on the willful use of scrap
CRGO will either move up to join the formal class of manufacturers, or will simply
exit the business. Either way, it will help the power sector and the economy at large.
The government must move briskly in creating local manufacturing capacities for
CRGO.
The passage of over fifty years without success does not do justice to a country like
India whose steel industry is so highly matured. In some sense, the steel quality
control order should have come after domestic manufacturing capabilities were
established. The government would also need to establish testing facilities for
checking if imported CRGO conforms to BIS standards. As far as manufacturers of
power transformers are concerned, they would obviously go in for prime grade
CRGO as a matter of choiceregardless of the government regulations. The area of
concern is the sprawling class of distribution transformers that have made a
business out of intentional use of scrap CRGO. It is likely that some of these will
demonstrate the same spirit and find innovate ways to circumvent the mandatory
requirement of prime grade CRGO. There are also some anomalies in the Steel
Quality Control Order that need to be looked into. Firstly, there is no check on the
quality of CRGO used in imported transformers. Secondly, even during export of
transformers, there is no clarity on whether BIS certification on CRGO would be
insisted upon. The government has shown seriousness in cracking down on willful
use of scrap CRGO. It is only hoped the noble move will eventually meet its desired
objective.