Saturday, April 27, 2013

When demand isn't part of the problem

A series of supply side issues have gripped Indian steel in recent times and can prove to be serious dampeners for growth. As they navigate through these challenges, Indian steel players must also invest in value addition

No one can doubt that the Indian demand story in terms of steel remains as compelling as ever, even if the economy faces rough weather. However, over the past year, it is clear that most leading Indian steel makers are facing problems in terms of profitability, even though the reasons may differ.

Tata Steel posted a net profit of Rs.53.9 billion, a drop of 39.97% yoy, and its rank dropped to 10 from 9 last year on the B&E Power 100 list. The company continues to be plagued by problems in Europe. As per estimates from the World Steel Association, steel demand is expected to drop by 1% yoy in 2012. SAIL saw a revenue growth by 12.6% to Rs.147.85 billion, but PAT fell by 27.8% to Rs.35.43 billion. The company attributes this to the input price increase of around Rs.40 billion (coking coal in particular) and the loss on forex fluctuations that swiped off around Rs.9 billion (its rank on the Power 100 went down to 24 from 16 last year). JSW Steel saw PAT drop by 19% yoy to Rs.16.26 billion for FY 2011-12; and its rank dropped to 48 from 41 the previous year. It faced the brunt of higher iron ore costs when its captive mine in Karnataka was shut down and it had to procure ore through an ill managed e-auction and also from other states. This led to an increase in cost of production by 8.6% yoy to Rs.34,168/tonne for the quarter ending March 2012 (Angel Broking). Jindal Steel & Power Ltd. (JSPL) fared somewhat better with a net profit of Rs.21.1 billion, a growth of 2.25% yoy; its rank improving to 38 in the B&E Power 100 from 40 last year. However, the company faces challenges in terms of approvals for projects, and is on the verge of scrapping its $2.1 billion project in Bolivia. The benchmark BSE Metal Index has lost about 30% value on a year-to-date basis compared to a 9.5% loss by the BSE Sensex.

The demand side remains promising, as pointed out earlier. The Ministry of Steel pegs the growth in the demand for Indian steel for FY 2012-13 at around 8% yoy as compared to 5.5% yoy in FY 2011-12. However, there are pressing supply issues. Due to lagging production and zooming domestic demand, India became a net importer of steel in FY 2007-08 and in FY 2011-12, our steel imports were pegged at around 6 million tonne. If industry estimates are to be believed, the production shortfall by 2020, if not addressed, will force India to import 50 million tonnes of steel every year.

The first and foremost challenge is raw materials. Navneet Agarwal, CEO, Action Ispat laments, “The last financial

year was very tough for us as far as the quality and quantity of raw material was concerned; as both are highly inconsistent.” While our coking coal imports for FY 2014-15 are pegged at 43 million tonne compared to 30 million tonne in 2011, we are currently exporting around 60 million tonne of iron ore due to insufficient production facilities within India and higher prices of iron ore in the international market. In the same vein, India has the world’s fifth largest coal reserves, but Coal India’s monopoly has been hugely detrimental to development of coal fields. Out of 216 coal blocks allocated by the government to private players (total potential of around 200 million tonnes per annum or mtpa), only 28 blocks have commenced production so far with total capacity of 30 mtpa. Meanwhile, coal imports touched a record $17.5 billion in the last fiscal, growing by 80.3% yoy.


Source : IIPM Editorial, 2013.
An Initiative of IIPM, Malay Chaudhuri
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