The post-budget euphoria among steel majors following the 13 per cent increase in import tariffs could prove to be premature as the budget incentives run the risk of being neutralised by overcapacities, particularly in the cold-rolling (CR) segment which has a yawning demand capacity gap of about 40 per cent.
Mumbai-based Essar Steel and Steel Authority of India (SAIL), which are the largest players in this segment with a combined capacity of 2.7 million tonne, would be the hardest hit as excess capacities threaten to become a bigger problem by the end of the year.
According to steel ministry officials, "The additional five per cent import duty on CR steel has only restored the duty differential between the product and its prime input, hot-rolled (HR) coils, which had disappeared in the last budget." However, despite the five per cent special import duty and the additional five per cent duty on CR steel, imports will continue to have a cost advantage over domestic steel prices, they said.
Also Read
This is particularly true in the case of HR coils which is the primary input for the CR steel making process. While the eight per cent special import duty will stem cheap imports to some extent, HR imports will still be cheaper than domestic steel by about Rs 3,000 per tonne, sources said.
The total domestic CR capacity is 5.1 million tonne with Essar and SAIL accounting for 2.7 million tonne, while the balance is with secondary producers like Jindal Vijayanagar Steel Plant, Bhusan Steel, Ispat Industries and Tata SSL. In 1997-98 the domestic demand for CR steel stood at only 3.1 million tonne. To counter the demand-capacity gap, last year Essar Steel exported around 0.35 million tonne of CR steel, while SAIL was able to export about 0.2 million tonne.
"Overcapacities will continue to be a problem for domestic producers as long as they remain incompetent to cater to special demands in the CR segment. The CR market is ruled by stringent order specifications because the end-use is very specialised. For instance, Maruti Udyog alone imports 64,000 tonne of CR steel because the technology for making automobile body sheets is inadequate here." ministry officials said.
Meanwhile, SAIL is already working on a price revision of its products, particularly in CR and HR products, to take advantage of the import duty reliefs.
According to a SAIL spokesperson, "Overcapacity is not the cause for concern because there is a significant gap between installed capacities and actual production."
However, ministry sources point out that because of the sluggish demand in the domestic market all CR units have been producing at only 60 per cent of their installed capacities.
SAIL also plans to hike its CR production by higher utilisation of its Rourkela and Bokaro plants. Ongoing modernisation at the plants will take SAIL's CR production capacity to 1.4 million tonne. Fortunately Tata Steel will not be hit by the present depression as its CR mill in Jamshedpur will not be commissioned before 2000.