The worst may happen in 2009, fears steel industry

Rising raw material prices and persistent slump in demand have brought the worst fears of the domestic steel industry to the fore. Unless there is some price correction in raw materials and substantial government intervention, 2009 could see the worst phase of the sector, they say.

According to industry estimates, global steel production declined by 1.28 per cent in 2008 to 1,327 million tonnes (MT). The slump in demand due to the slowdown in the automobile and construction sectors forced many players to hugely cut production, with some steel giants even cutting down output by 30-40 per cent, said Shoeb Ahmed, director (commercial), Steel Authority of India (SAIL). In December alone, production was only 84.4 MT, when it should have been 105 MT.

“I don’t see things improving any time soon this financial year. 2009-10 will be a disastrous year. Things will start improving only by the last quarter of 2010-11. There is a serious need for substantial government intervention in the sector,” said Ahmed at an interactive seminar organised by the Indian Chamber of Commerce.

However, he also said that now was the time for steel majors to focus on expansion, be it greenfield or brownfield, churn out productivity from every possible level and improve on value addition.

SAIL’s current expansion plans to increase its additional capacity by another 10 MT is on track.

“SAIL is focussing on utilising the reserves allotted to it. Our raw material department is actively developing those reserves. Besides, we are also actively looking at purchase of coal mines abroad and have identified some to help source material,” said Ahmed.

At present, SAIL is the largest public-sector steel maker with an annual production of close to 15 MT.

The country’s total steel production, which is pegged at close to 54-55 MT is expected to touch 80-85 MT by 2011-2012.

But, to meet this target, there are a number of hurdles to be cleared, such as rising raw material costs, lack of demand, increasing per capita consumption and massive projects to boost steel production.

In terms of consumption, the per capita consumption of steel in India is pegged at 44 kg per person compared to 200 kg per person globally.

Demand needs to be spearheaded by increased government expenditure on infrastructure, said Ahmed.

One of the major hurdles for domestic steel companies is rising raw material prices, especially coking coal prices. This has severely hurt the profit margins of those firms, which are heavily dependant on imported coal.

Almost 80 per cent of SAIL’s coking coal requirement is imported, the remaining 20 per cent is met by Coal India.

Fall in steel demand and prices of finished steel coupled with rising cost of raw materials pulled down the net profit of SAIL by 56 per cent to Rs 843 crore during the third quarter of the current financial year compared with Rs 1,934.66 crore in the same quarter last financial year.

Coking coal prices would have to be renegotiated, traders say. “Prices have not yet been settled. We are expecting prices to settle at the previous year’s level, which was around $96-98 a tonne,” said Visambhar Saran, chairman, Visa Steel.

Coking coal prices came down from a high of $300 to $150, almost a 50 per cent drop. We expect a 65 per cent drop, he said.

According to reports, a high-powered committee in Delhi, on behalf of SAIL and RINL, is renegotiating coking coal import prices with Australian suppliers and insisting on cutback in prices.