Vedanta's steel business back on growth turf after Covid-19 speed breaker

The group's ESL Steel is looking to hit the ground with its plan of doubling capacity towards the end of the fourth quarter

Vedanta-owned ESL Steel is looking to hit the ground with its plan of doubling capacity towards the end of the fourth quarter after hitting a speed breaker due to the Covid-19 pandemic.

“Covid pushed us away by one year. The way everything is going, towards the end of fourth quarter should be a good time to start,” said Pankaj Malhan, chief executive officer, ESL Steel Limited. The approvals are in the last stages.

In 2018, Vedanta forayed into the steel business through the acquisition of ESL Steel Limited (then Electrosteel Steels). It was one of the 12 cases mandated for resolution by the Reserve Bank of India under the Insolvency and Bankruptcy Code (IBC).

ESL, which is into long products, has a capacity of 2.2 million tonnes. When the acquisition happened, what was commissioned was 1.2 million tonnes, which was ramped up to 1.5 million tonnes.

Then last year, ESL engaged M N Dastur for the expansion plan, but it was put on the backburner because of the pandemic. “We were going strong with our expansion plans. But Covid first hit China and then in our own country, which put brakes on the plan,” Malhan explained.

The plan in the works now is to take the capacity from 1.5 million tonnes to 3 million tonnes. Though the investment is still being worked out, a first cut estimate would be Rs 3,000 crore.

This, however, is the first phase; in the next phase, the capacity would be increased from 3 million tonnes to six million tonnes. “Once we start this phase, we will get back to the drawing board for the second phase of expansion,” said Malhan.

The steel industry is currently in an upcycle with prices at multi-year high. However, the spreads vary widely between players that have captive raw material and those without, largely because of elevated iron ore prices.

“The way iron ore prices have moved up in the eastern part of the country, it’s almost more than 120 per cent over the past 4-5 months,” Malhan pointed out.

The industry is faced with a shortage of ore after the mine auction in Odisha, which in turn, has pushed up prices. Out of 19 mines that were auctioned in February and March, only five are functional, as bids at huge premiums have rendered them unviable. Vedanta, too, had participated in the auctions, but steered clear of bidding aggressively.

So, on the one hand there is an issue with availability and on the other, high prices.

Within the Vedanta group, there are iron ore mines in Karnataka that are active and working, but Malhan explained that transporting ore to the ESL plant in Jharkhand would not be feasible from a cost perspective.

“The biggest challenge for players who are buying raw material from open sources is to have margin protection. So our focus is on efficiencies because that is the only lever that we have. Even with the current level of prices, there is huge pressure for margin protection,” Malhan said.

Steel prices have had a good run in the last few months with domestic demand showing a recovery. A seasonal uptick in demand for long products with post-monsoon construction activity is also expected.

Malhan said, Q2 was good as margins improved by 115 per cent basis points over Q1. “We are looking forward to a healthy Q3 also,” he added.

ESL had turned PAT positive within the first eight months of acquisition. Malhan said, “We continue to be a PAT positive company and are operating at full capacity.”

ESL STEEL OPERATIONS AT A GLANCE

Capacity: 2.2 million

Currently operating at 1.5 million tonnes

Plan is to increase capacity from 1.5 million tonnes to 3 million tonnes