Defying the gloomy trend in the metal sector, Steel Authority of India (SAIL) posted an 18 per cent growth in net profit in the second quarter of 2008-09 to Rs 2,009.6 crore. This has come as a pleasant surprise since SAIL, like its peers, could not take advantage of the global high prices for steel because of the government inspired “voluntary price discipline.”
In this year’s first half, when SAIL managed to lift net profit to 3,845 crore from Rs 3,225 crore in the corresponding period last year, our mills, nudged by the government, had occasions to sell steel at discounts ranging from Rs 10,000 to Rs 15,000 a tonne on international prices.
This happened at a time when globally, iron ore contract prices rose 71 per cent to 93 per cent and coking coal, on which we are highly import-dependent, became three times more expensive.
The government kept a strict vigil on steel prices as these have an important bearing on inflation. But then, how did SAIL manage to earn profits of this order when the steel market started coming under an oppressive burden of anxiety in August in the wake of fears of a global recession?
SAIL Chairman Sushil Roongta has now given warnings of further “price correction” in the coming days. Due to the growing emphasis on the production of value-added and special steel and also significant volume sales to “projects of national importance”, SAIL is managing to fare better than others in the present difficult times.
Globally, prices of the benchmark steel product HR coil are ruling close to $750 a tonne from over $1,000 earlier this year. Long-product prices are also easing. To compound worries for steel-makers here and abroad, big users such as builders, car manufacturers and equipment-makers are buying less as demand for their products is waning and they are not getting sufficient accommodation from banks.
The fall in demand has forced ArcelorMittal to cut production in its highly export-oriented units in Kazakhstan and Ukraine by over 20 per cent. Corus, owned by Tata Steel, has responded to the steel meltdown by pruning production.
China, which raised steel capacity by 70 million tonnes to 558 million tonnes by 2007, has now to cope with too much capacity and too little demand.
According to Baosteel chief Xu Lejiang, there will be contraction in Chinese steel production. But the downturn will make it easier for the Chinese authorities to phase out polluting and high-cost steel capacity of 80 million tonnes in the coming months. Here in India, we have instances of Essar and Ispat introducing production cuts by as much as 30 per cent.
Some may like to pass off production cuts as a result of preponement of plant maintenance. The fact remains that by producing the same volume of steel as before in a falling market, the industry will be inviting more trouble. But as of now, SAIL and Tata Steel do not have any production trimming plans. But how long that resolve will hold good is to be seen.
The good result in the first half has not, however, been able to save the day for SAIL in the stock market. SAIL, which had seen a 52-week high of Rs 293 this year, on Friday, was trading at Rs 85. The other bellwether group Tata Steel was down from the 52-week high of Rs 970 to Rs 210. No company, however strong it may be, is spared in this market mayhem.
Market haemorrhage should not, however, distract attention from the fact that in spite of a volume producer of steel, SAIL raised output of value added steel by 25 per cent to 3.7 million tonnes in 2007-08.
To this extent, it moved away from the steel commodity business. Now in the second quarter of this year, value-added production was further raised by 30 per cent. Generally, the impact of recession on value-added products is less than commodity steel.
What will also help SAIL to negotiate the market turbulence is the constant endeavour it makes to bring down the coke rate — during 2007-08, it was down to 533 kg/thm — and improve energy efficiency.
We understand that in the second quarter of this year, the company did bring about further improvement in techno-economic parameters such as reducing coke rate by 3 per cent and 7 per cent in energy use.
Understandably, cost cutting is of paramount importance as SAIL found its raw material bills inflated by Rs 2,362 crore in the last quarter. In times of recession, steel consumers will not only try to beat down prices to the lowest but they will also be demanding clean steel.
One will suspect that in anticipation of more difficult times, Roongta is laying considerable emphasis on modernising all five integrated plants in tandem with their hot metal capacity expansion to 26.2 million tonnes by 2011 from 14.6 million tonnes now.
As Roongta says, he is targeting 100 per cent production of crude steel through continuous casting route and converting all saleable steel into finished steel.
