Cracks In The Steel Frame

Domestic demand also remains sluggish across the industry and will continue to remain so till the economy shakes off the recessionary hangover and projects in the power and roads sectors gather momentum. According to BZW, competition in the hot rolled coils segment is expected to intensify as nearly five million tonnes of capacity is expected to be added in the next three years. This includes Ispat Industries' three million tonnes per annum HR coils plant and the Jindals' HR coils project, which is expected to be commissioned next year. Tisco is also implementing a one-million-tonne expansion. Morgan Stanley estimates that supply will outstrip demand in this segment by 20 per cent over the next few years.

 

The list of the industry's concerns does not end there. At a time when demand is sluggish, players have also had to contend with higher interest rates. The result: crippling interest burdens as inventories pile up. Says Prabhat Awasthi, an analyst at SSKI who tracks this sector closely, Take Steel Authority of India (SAIL), for example. Prices of steel have been down but it has produced more and sold less and so its interest costs have been very high. According to him, SAIL's inventory had increased from 1.2 million tonnes in fiscal 1995-96 to 1.8 million tonnes in 1996-97. Moreover, SAIL's production has gone up, which has not helped the PSU steel major. In the first half of the last fiscal, it produced almost a million tonnes more than in the corresponding period of the previous year.

And though none of the majors has posted results for 1996-97, they are unlikely to be anything but poor. High interest and depreciation charges will hit bottom lines as most of the plants are new.

The export imperative

With domestic demand down and the Indian market unable to absorb the production, steel makers have been looking at overseas markets to sell their excess output. Essar claims it has emerged as the largest exporter of flat products with total exports of 2.3 lakh tonnes of HR coils to the US, UK, Germany, Japan, China and West Asia. Mukesh Gupta of Lloyds Steel says his company too has been exporting about 20 per cent of its production to Southeast Asian countries. The upcoming Ispat Industries' project is committed to exporting 50 per cent of its annual production of three million tonnes. To this end, the company has a tie-up with Mitsui and Itochu of Japan. Each of these buyers will lift half a million tonnes a year. Exports are being seen not only as a means to diversify the customer base but also to avoid a glut in the local market, which pulls down prices.

The four major steel makers