Fis Slam Lid On Integrated Steel Unit Funding

Financial institutions have taken an 'in principle' decision to refrain from funding any new integrated steel projects (ISPs). Although the decision on the freeze on financing of ISPs is for a short-term period, sources indicated that it may continue for a longer period.

The decision follows a recent review of the steel sector by the FIs, which revealed a serious mismatch between supply and the demand position in the domestic market. Supplies exceeded demand in several categories of steel products. This would make any greenfield project in this sector unviable from a short to medium term point of view.

The immediate victims of the FI's decision would be Gopalpur project of the Tata Iron and Steel Company (Tisco) and the Nagarjuna Groups's proposed plant at Mangalore. In both the cases, the FIs are understood to have refused funding of the projects.

 

According to FI sources, although the Industrial Development Bank of India (IDBI) has turned down the proposal for financing Tisco's Gopalpur plant citing problems related to land acquisition and rehabilitation, the decision is in conformity with its changed view on financing of steel projects.

In the case of the Nagarjuna Group's proposal for the setting up a steel project in Mangalore, the FIs are understood to have refused financing . The Nagarjuna proposal was for a 1.7 million tonne integrated steel project at an estimated cost of Rs 3,600 crore. Besides the Tisco and Nagarjuna proposals, Larsen & Tuobro, the Mukund Group and Lanco Steel were also planning to set up mega steel projects.

While the L&T proposal was for a three million tonne integrated steel project at Gopalpur, Lanco had proposed the setting up of a 3.4 lakh tonne per annum unit for manufacturing long products at an estimated cost of Rs 800 crore at Chittoor in Andhra Pradesh.

The Mukund Group is also preparing to set up two greenfield steel projects -- a 1.85 million capacity project for manufacturing HR coils at an estimated cost of Rs 4,762 crore at Vijayanagar and another small project (3.4 lakh tonne capacity) at Raichur in Karnataka. All these proposals are currently in cold storage due to adverse market conditions and the FIs' refusal to extend finances for any more projects in the steel sector.

According to sources, the FIs, however, would continue to finance ongoing projects in the steel sector, despite the massive cost overruns of the projects and bleak prospects at least in the short-to-medium term period. Ispat group's Neelanchal project, Jindal Vijayanagar and the Mid East Steel project of the Mesco group are among the ISPs which are, at present, under various stages of implementation.

Despite a marginal increase in sales of steel products in the domestic market, the steel majors are not expected to make much of an improvement in their profit margins due to their inability to effect any hike in the prices of various steel products.

This is due to the fact that international prices of various steel products are ruling at rock bottom levels, following the recession in Japan and southeast Asia.

On the exports front, however, things have started looking up for finished products. Exports have risen in the first quarter to 4.5 lakh tonne as against 3.5 lakh tonne in the corresponding period last fiscal. Export of semi-finished products, however, registered a decline during this period, plunging to a meagre.35 lakh tonne from 1.5 lakh tonne during April-June last year.