Surplus capacity triggers competition among steel makers

P K Singh could not have ascended the office of chairman of Steel Authority of India (SAIL) at a more inopportune time for the industry and his own organisation than in December 2015. Low steel prices, as a result of dismal global demand growth globally, were not leaving any margins for producers. No wonder, then, that SAIL ended 2015-16 with a loss for the first time in many years. SAIL also slipped badly, much to the concern of the government which owns 75 per cent of the company, in executing the massive Rs 72,000-crore modernisation and expansion programme (MEP) launched in 2007-08.

Completion of the programme without further time slippages is critical. As Singh says: "SAIL is exposed to growing competition on quality and price points from imports as well as from domestic steelmakers." He has, therefore, rightly taken upon himself the task of completing the remaining portions of MEP in the quickest possible time.

The Bhilai Steel Plant (BSP) has all through been the flagship unit of SAIL contributing maximum to its revenue and profits. Last year, when other SAIL mills at Bokaro, Durgapur, Rourkela and Burnpur reported losses, BSP managed to keep its head above water, albeit with a modest profit. In a market showing signs of improvement, thanks principally to trade actions such as minimum import price, safeguard duty and finally anti-dumping imposts, BSP will be able to realise its full potential only when the universal rail mill, a new steel melting shop linked to a blast furnace with operating volume of 4,038 cubic metres are commissioned.

"In India, too, we have got a good amount of steel idle capacity. We are using around 90 million tonnes (mt) while capacity has climbed to 120 mt. No wonder, the local steel market is seeing growing competition among producers. The winners in a market like this will be the ones with high quality steel and capacity to satisfy buyers by making available steel products in specifications they want," says Singh.

The working of 2015-16 shows SAIL had a ratio of 25:75 between semi-finished (semis) and finished steel in its saleable steel output. But, to the extent semis are sold, the company will not be realising the full value that the steel production chain is supposed to give. This happens when there is mismatch between upstream and downstream facilities. The share of finished steel in saleable steel will continue to rise as MEP nears completion with incremental rolling capacity. A question being asked is whether SAIL would have done better had it undertaken MEP plantwise and in phases, instead of attempting the present gigantic programme that also includes mines expansion - all in one go. Singh would not give a direct answer, but nevertheless says: "Whatever it is, MEP implementation is proving to be a rich learning experience." To maintain its market leadership, the company is targeting a hot metal capacity of 50 mt by 2025 against 23.46 mt hopefully to be realised next year.

The experience gained in the current round of MEP will come in handy when SAIL takes the next major leap in capacity growth. In the country's ambitious steel expansion target of 300 mt by 2025, SAIL capacity will count for much. SAIL making a loss and, therefore, skipping dividend disappointed shareholders. But, Singh expressing confidence that the "worst is behind us" and there will be "a turnaround this fiscal as most of the enablers are in place" comes as comforting news.

SAIL was able to pare variable production cost by 10 per cent in the final quarter of 2015-16 over the first quarter as the new units resulting from MEP gave higher output while production was rationalised at cost intensive points. Much will be achieved if Singh's target of growing production and sale by 20 per cent in the current year comes through. Not only for SAIL but for the Indian steel industry to become profitable on a sustainable basis, it is essential that New Delhi is not found wanting in taking trade action against 'predatory' export moves principally by China.

That India with expected five per cent annual growth in steel use remains the "brightest centre globally will be the reason why China, which will have exportable surplus of over 100 mt will target this country for disposal of some of that". China is making the right kind of noise about phasing out surplus capacity. But, delivery so far hasn't matched words.
HARD TIMES

• Low steel prices, as a result of dismal global demand growth globally, were not leaving any margins for producers
   
• SAIL ended 2015-16 with a loss for the first time in many years
   
• The Bhilai Steel Plant (BSP) has all through been the flagship unit of SAIL contributing maximum to its revenue and profits
  

 

Last year, when other SAIL mills at Bokaro, Durgapur, Rourkela and Burnpur reported losses, BSP managed to earn profit