Fund crunch tests mettle of steel industry

Make in India push has done little for the sector. Bellwether projects have been plagued in the face of cheap imports & lack of captive raw material linkages

The government might have stepped up efforts to bail out steel projects stuck due to paucity of funds, but as it emerges, high cost of funds is just a fraction of the problem plaguing the sector.

More than 37 steel projects worth Rs 3,00,000 crore are stalled at the moment, according to government data. The memoranda of understanding (MoU) for the mineral-rich states of Jharkhand, Odisha and Chhattisgarh started pouring in from 2005. Some of the biggest projects involve major players such as Tata Steel, Bhushan Steel, and JSW Steel. Foreign players like Posco and ArcelorMittal too signed in.

But few projects have taken off since. Tata Steel's greenfield or new projects in Jharkhand and Chhattisgarh are yet to take shape; Bhushan Steel is grappling with a colossal debt, and JSW Steel is re-calibrating its Jharkhand and Bengal projects.

Recent reports suggest Posco could finally pack its bags after a frustrating decade-long wait, in the wake of a change in law that makes auction of mines mandatory. The rules of the game changed after the new mineral auction policy, according to the Mines and Minerals (Development and Regulations) Amendment Act, 2015.

"Almost 90 per cent of the steel companies planned to set up plants thinking that the state governments will award them captive mines. Now, they will have to bid for the mines. Therefore, the project's viability has to be re-checked," an Odisha-based steel producer said.

ArcelorMittal is making progress in its Karnataka and Jharkhand projects, but the pace is slower than expected, the company recently told Business Standard.

While land and lack of captive raw material linkages have been the major contributors to the stalling of these projects, the question looming large is whether it makes sense for the companies to revive these projects at this point in time.

The government's Make in India push has done little for the sector. The capacity utilisation in the 100 million tonne-domestic steel industry is at around 80 per cent, a tad higher than the 75 per cent level that has been the operating level for the past four to five years; cheap imports flooding the market have only added to the woes. Total flat steel imports in 2014-15 increased 41 per cent to 4.5 million tonnes and in the first quarter of the current financial year, it's already up 57 per cent to 1.55 million tonnes.

"The stalled projects have specific reasons, but two general issues dominate. One is low demand visibility along with some over-capacity, not just in India but across much of the globe. As a result, companies are delaying progressing their investments," Kameswara Rao, leader (energy, utilities and mining), PriceWaterhouseCoopers, said.

To set up a plant having capacity of one million tonne, the cost is Rs 7,000 crore. Add to it, the interest cost, and it goes up to Rs 11,000 crore. The earnings before interest, taxes, depreciation and amortisation (EBIDTA) on the other hand, would be just about half. "At this rate, no one is willing to make fresh investment," a steel producer confided.

According to the Reserve Bank of India (RBI), five out of the top 10 private steel producing companies are under severe stress on account of delayed implementation of their projects due to land acquisition and environmental clearances, among other factors. In its Financial Stability Report released on June 25, the RBI has detailed other factors as well: Inadequate capital investment, shortage of iron ore, low-paced mechanisation of mines, lower level of capacity utilisation of coal washeries, dependence on imported coking coal (the quality of most of the domestic coking coal is not considered good for steel production), and volatility in the currency market.

RBI, which has already warned of a possible spike in non-performing assets (NPAs) in the steel sector, listed high port duty, lower import duty on stainless steel (dumping from China and Brazil), deceleration in domestic demand, deceleration in exports due to subdued demand coupled with depressed pricing in the global market and levy of an anti-dumping duty of 50-55 per cent by the US on Indian SAW pipes as some other factors dragging the sector.

"Assuming the land wrangle is resolved, what could bring back some certainty into the sector is smooth iron ore supply and a halt in dumping from the Free Trade Agreement (FTA) countries," JSW Steel director-commercial and marketing, Jayant Acharya, explained.

Steel producers claim FTA countries account for around 50 per cent of imports. On an average, the imported flat steel products is Rs 3,000 a tonne, less than the ruling domestic price.

What could further compound problems is that an additional six million tonne capacity has been commissioned by Steel Authority of India this year adding to the existing glut.