Raw material prices, primarily coking coal, continues to be high and the steel prices are not supporting the cost rise. Vishal Agarwal, MD of Visa Steel, a part of the Rs 5,000-crore VISA Group, tells Shubhashish the next six months will spell trouble if costs don't come down or steel prices don’t move up. He also spoke about the road ahead for his company and its partnership with China’s Baosteel. Edited excerpts:
The steel sector isn’t looking too good. Do you see more pain in the current and the coming quarters?
The first quarter was fine but the second quarter will be tough since the coking coal prices have not fallen as much as required to sustain the current steel prices. Prices of prime hard coking coal has fallen to $302 and semi-hard to $245. The current situation of high coking coal prices and weak steel prices is not sustainable. I expect coal prices to fall over the coming quarters and steel prices to recover from October 2011 onwards.
According to a report by the joint plant committee, steel demand grew by just 1.5 per cent in the first quarter. This paints a very dismal picture.
The figures are quite surprising. However, I won't take numbers for just one quarter. Perhaps an annualised number will give a better picture because there are seasonal impacts, base effects, etc. I think, the growth rate will be better on an annual basis and a reasonable rate of growth on the demand side will continue.
India is still a very investment-driven economy. So, if capital markets are not good and corporate India is not able to raise money, then somewhere it affects the growth momentum. Over and above, the interest rates are high, which impacts consumption and the capex decisions.
Do you think the effects will have a hangover on the third quarter as well?
It is a bit early to talk about the third quarter. If coking coal prices drop significantly, the third quarter for the industry will be okay. If the prices remain high, then steel prices will need to go up to protect margins for the steel industry. Our sense is that from the second half of this year, as the interest rates and inflation peak and start to come down, the outlook will be better. The impact of closure of iron ore mines in Bellary, which has led to a shortage of supply, will also impact the prices.
Your expansion in the steel business was completed recently. What’s the road ahead?
We have recently completed our 0.5 million TPA capacity which will make us a sizeable player in the Special Steel industry even globally. We will scale up in Orissa eventually to 1 million TPA. We are also producing Ferro Chrome and have a 50,000 TPA capacity. We are expanding it by another 100,000 TPA through a joint venture with Baosteel of China. Eventually the plan is to take the ferro chrome capacity to 200,000 TPA. Captive power of 375 Mw required for a 1-million TPA special steel and 200,000 TPA of ferro chrome will also be generated by us.
What is the investment required for this expansion?
Of the total capex of Rs 4,500 crore, we have already spent Rs 2,000 crore for the existing capacities. We want to consolidate a bit and may review the expansion plans for the balance capex in the later half of the year. We have just completed the capex and we want the returns to start coming in.
What role will Baosteel play in the expansion?
Baosteel will remain a joint venture partner for the ferro chrome business. We are looking at other opportunities with Baosteel, but will start work once we have completed the ferro chrome project. I think, from both sides, this is a very important project and we want to get this completed first and then we will see what else we can do together.