Silicon steel prices trip power reforms

A tussle between power utilities such as state electricity boards (SEBs) and transformer manufacturers such as Bharat Heavy Electricals, Crompton Greaves, ABB, Emco, Alstom and Telec are delaying reforms and development works in power sector in Maharashtra, Chhattisgarh, Uttar Pradesh, West Bengal, Karnataka and Tamil Nadu.

The transformer prices have gone up by about 40 per cent last year following an increase in silicon steel prices (main ingredient) which is fully imported.

The power utilities, however, are not willing to pay increased prices. Some companies have altogether stopped supply of transformers to the power utilities while others are locked in prolonged negotiations leading to delays.

"The power projects in various states, including the Accelerated Power Development and Reform Programme (APDRP) in Maharashtra, have been delayed. The power utilities have to realise that the transformer prices have gone up as a result of unprecedented increase in silicon steel prices. Besides, the prices of mild steel, copper, and transformer oil prices have also inched up," said Rajesh Jain, a former president of Indian Electrical and Electronics Manufacturers Association (IEEMA).

The price of a 160 MvA transformer has gone up to Rs 3.3 crore as against Rs 2.5 crore a year ago. The price of a 63 KvA transformer has increased to Rs 60,000 per unit, a 50 per cent increase over Rs 40,000, a year back.

Silicone steel, an important raw material for transformers, accounts for nearly 40 per cent of the total cost of raw material. Prices of silicon steel have trebled in the last one year to $3,600 per metric tonne in June from $1,200 a year ago.

"The hike in silicon steel price is a result of cartelisation from about 10 silicon steel makers based in Europe, China, Japan and Korea. A cut in supply by these players have also helped raise the silicon steel prices," said Sunil More, secretary general, IEEMA.

German company Thyssenkrupp and British Steel are some of the major manufacturers of silicon steel.

The Chinese manufacturers have signed agreements to procure silicon steel prices at $4,000 per tonne in 2006. There is a likelihood that silicon steel prices could go well past $4,000 per tonne next year due to a lack of supply from the steel makers, he added.

Out of the total transformer purchase agreements with power utilities, 50 per cent are firm agreements with no clause for price variation (by Chhattisgarh and Karnataka electricity boards).

Thirty per cent agreements have clauses allowing a 20 per cent variation in prices (Andhra Pradesh and Tamil Nadu state electricity boards and NTPC) while the rest 20 per cent agreements have a flexible price variation clause (Maharashtra State Electricity Board).

Even with this clause, MSEB is not accepting the price increase, said sources.

Indian power industry is growing at 15 per cent annually. The transformer industry, with an annual capacity of 80,000 MvA, is growing at 22 per cent.

Global steel makers (including Indian) do not venture into silicon steel making on account of high input costs and lesser returns.

"It takes an investment of over Rs 300 crore for setting up a silicon steel plant," said sources.