Steel companies return to CDR problem list

Scarcity of iron ore and high prices of coking coal are forcing steel makers, especially smaller ones, into debt restructuring.

Data from the Corporate Debt Restructuring (CDR) forum reveals that as on September 30, the share of iron and steel in the aggregate debt restructured by this process was the highest, at 30.9 per cent, with 28 cases. In contrast, although the number of companies in the textiles sector was the highest at 55, the share of overall debt was much below, at 8.8 per cent.

The power sector, which has been under stress for some time, accounted for 3.2 per cent of the debt restructured under CDR, with seven cases.

While the demand for steel has slumped worldwide, largely due to the euro crisis, Karnataka and Orissa have clamped on iron ore mining. In addition, coking coal prices shot up 30 per cent between 2010 and 2011.

In 2001-2002, the steel sector had gone through a turbulent time, with as much as 15 per cent of banks and financial institutions' non-performing assets coming from this sector, according to an old Crisil report. The CDR had inherited a huge chunk of restructured loans at the time of its formation. Sources said the iron and steel sector was making a comeback in the CDR cell, due to unavailability or high prices of raw materials.

Bankers say in recent months, several small steel producers have sought debt restructuring due to impaired cash flows and they were reluctant to sanction fresh loans to the sector. “We have seen some addition in NPAs in sectors like iron and steel and allied activities. We are watching this industry cautiously. We are selective in taking additional exposure,” said Bhaskar Sen, chairman and managing director, United Bank of India.

“There has been stress in the sector. Several small accounts are likely to be restructured,” said J P Dua, chairman and managing director, Allahabad Bank.

“We are not giving loans to any mega project, including steel,” said Hemant Kanoria, chairman and managing director, Srei Infrastructure Finance.

Prior to the economic crisis of 2008, several steel makers had taken huge debt exposure, due to good demand. In addition, the cost of raw materials had shot up in recent months due to the clamp on iron ore mining in several states. Together with this, the import bill had inflated due to a depreciating rupee. Demand erosion for steel firms serving long products due to the economic slowdown has added to the woes of smaller manufacturers.

“Prior to the economic crisis, the steel sector witnessed good growth. Many companies had thought demand was good and their debt had gone up. Now, raw material prices have gone up and the working capital requirement of steel companies have also gone up, putting pressure on margins. Higher interest rates have also affected the margins of steel producers,” said Jayant Roy, senior vice president, Icra.