Business Standard

'Global factors will govern steel prices'

Q&A: V S Jain

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Santanu ChoudhuryBhupesh Bhandari New Delhi
 
The last few months have been a roller-coaster ride for the public-sector Steel Authority of India Ltd (Sail), India's largest steel producer. First came the hard lobbying by downstream steel companies against rising hot-rolled (HR) steel prices.
 
Next came the government's directive to go slow on exports in order to improve local availability of the metal. Then, effective March 1, Sail, along with other HR steel producers, announced it will hold its prices until June.
 
More recently, Sail had to cut down production as coking coal ran into short supply. On his part, Sail Chairman V S Jain is confident that none of this will dent the company's growth. In an hour-long interview, Jain discussed his plans with Business Standard.
Excerpts:
 
How will you describe 2003-04, considering it was one of the most eventful years in the steel industry with price hikes, freeze on exports and now, production getting hit because of coal shortage?
 
It was indeed an exciting year. But let's handle the issues keeping in mind the final objective of a corporate entity "" to ensure that its commercial interests remain intact. When steel prices were going up, we consciously decided to explore other routes and see if there were any substitutes for coal, which was in shortage due to flooding of mines in Australia.
 
We identified coal tar as a substitute for coal. A tonne of coal tar is equal to 1.4 to 1.5 tonnes of coal. We started working towards using coal tar on an experimental basis. The experiment is on at the Bhilai steel plant and the results are good. We are also working on petroleum products as a substitute.
 
The results will be there to see in the next three quarters. From a long-term perspective, the coal shortage has been a blessing in disguise. As a policy requirement, we tie up 100 per cent of our coal supplies with the suppliers for a year.
 
But we are receiving less quantity due to force majeure being enforced by the Australian suppliers who supplied nearly 98 per cent of our coal requirements.
 
So, we have to take a commercial view of how much to buy from the spot, look for alternatives and coal substitutes. We are now scouting for alternative suppliers in Russia, Poland, Ukraine and the US. Hopefully, something better will emerge. I think the force majeure will be done away with by June; the first shipments should resume from July.
 
Do you have plans to acquire strategic stakes in some of the mining companies to ensure stability in supplies?
 
When we had problems with coal supplies, we talked to one or two players for buying equity stake. But it is only an in-principle approach. We have not yet decided on how much and from where to buy. It could be new mines that are yet to be developed.
 
Will you go ahead with your expansion plans before that happens?
 
We have developed a corporate plan to hike the capacity from the present 12 to 13 million tonnes to 20 million tonnes by 2011-12, and the board approved it on April 28. Also, most of the new production will be finished steel.
 
At present, 18 per cent of our production is semi-finished steel. We want to bring it down to 7 to 8 per cent by 2011-12. There will be a greater thrust on quality and reducing dependence on coal.
 
The total capital expenditure for this purpose will be assessed later. The techno-economic factors affecting us, managing the inputs from the mining side and how to lower the cost of production will all be decided by a working group at a later stage.
 
Will the entire capacity expansion be through brownfield expansions?
 
For the next two years, the bottleneck on the existing capacities of Bhilai, Rourkela, Durgapur and Bokaro can be removed and there can be more production at low investment. After that, we can create more greenfield capacities at these facilities.
 
Is the Indian Steel Alliance (ISA) a cartel as many people say?
 
The ISA has been in existence for the past four years. If it were a cartel, why did one see prices tumbling in the past few years? Although some hiked prices in January and February this year, we didn't. The five members (Sail, Tata Steel, Essar Steel, Jindal Vijaynagar Steel Ltd and Ispat Industries) are all business rivals. We never discuss price; only policy issues.
 
We believe in the stability of prices and not in the high degree of volatility. After the price hikes in January and February, we thought some stability in prices was warranted in the case of flat products, since five major producers control 90 per cent of the market. This is not the case with long products where there are so many players. We can't do anything there.
 
The government had asked you to go slow on exports. Isn't that hurting your commercial interests?
 
Exports is a strategic decision. But there should be continuity. Our priority is the domestic market where the demand is buoyant. However, we have to keep in mind our commercial interests too. Thus, if exports generate more money, some quantities will be exported.
 
While on exports, there is a perception that the Chinese economy is overheating.
 
The Chinese economy is definitely overheated. The government has taken some steps to control lending to companies and we think some correction will happen. It's like this: China's steel production capacity has increased to 220 million tonnes from 140 to 150 million tonnes two years ago. It makes sense to have new capacities if the Chinese economy grows.
 
Keeping in mind the new capacities Sail is planning, what are your latest plans on reducing the workforce?
 
We have retrenched 5,500 people during 2003-04, including 2,000 through the voluntary retirement scheme (VRS). Manpower rationalisation will take place in two ways "" introduction of VRS and putting a stop to new recruitment. We will take more young managers but not as many as will leave through VRS or retirement. We will also try to maximise production from the existing workforce.
 
How much has the revival in the steel sector impacted Indian Iron and Steel Company (IISCO)?
 
It is doing well and we hope that it will be revived soon since there has been a consistent improvement. I think that in the next 12 to 18 months, the bleeding will stop and IISCO will start making profits.
 
Various steel companies have taken advantage of the higher prices last year to reduce their debt. What about Sail?
 
We have reduced our debt by Rs 4,500 crore during 2003-04. This was done by bringing down the rate of interest by 1.3 per cent to 8.2 per cent. We also swapped our debt with different instruments. This has brought down our debt-equity ratio to 2.4:1 as on December 31, 2003, from 6.5:1 in April 1, 2003. Internally, we have taken a decision to work on a 1:1 debt:equity ratio.
 
What is your view of the steel sector at present?
 
I am bullish on the steel sector, particularly in India. I believe that the demand for steel will increase and that's why we are increasing the capacity. However, the prices will be governed by global factors. The steel industry will be buoyant in terms of growth. Also, we are not losing sight of our commercial interest "" we identify the opportunities as well as the threat.

 
 

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First Published: May 07 2004 | 12:00 AM IST

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