With both Ispat Industries and Jindal Vijaynagar plants expected to start commerical production this fiscal, the market is likely to witness a glut in the hot-rolled coil segment.

If both these units attain full capacities this fiscal, then the demand growth rate for HR coils should be 60 per cent in 1999-2000 and 37.5 per cent in 2000-2001. This seems unattainable if past figures are an indication.

In 1997-98, the demand for HR coil was pegged at 5.3 per cent and 8.6 per cent in 1997-98 and 1998-99. And if one factors the production of other upcoming steel plants such as Malavika Steel in longs, Bellary in flats, then demand-supply equilibrium goes totally awry.

The glut in the supply of HR will also have a cascading effect on the industry as a whole leading to prices dipping drastically pushing margins under pressure.

Thescenario for pig iron makers is no different. With neglible exports currently from an average monthly exports of 65,000 tonnes have hit the mini-blast furance units very hard. If Malavika Steel, Goa Carbon has to run at full capacity then the demand growth for pig iron should be around 38 per cent.

According to a study by the IDBI, the elasticity co-efficient of steel is 1.27 times GDP growth. So for an average 38 per cent growth in steel consumption we need a GDP growth rate of 30 per cent. And this is definetely not possible.

One can question the basis of co-relation between GDP and steel consumption as the share of services in GDP is rising. Still the important thing to remember is that construction accounts for a third of the total offtake of steel products with automobiles accounting for a small portion.

The outlook seems grim given the fact that vehicles roll out this fiscal will be less as also construction activities on a low key.

Going by the figures provided by the JPC, the last three yearshave shown a stagnant growth rate in the steel sector. The consumption of steel has remained more or less flat at 24 million tonnes. But individual sectors of various categories have been showing steady growth. For instance, in 1997-98, structurals showed a growth rate of 10.4 per cent over that of 1996-97, while in the flat sector HR coils showed a growth rate of 5.3 per cent over the same period.

Tinplate segment registered the maximum growth at 18 per cent while pig iron, electrical sheets, and pipes recorded negative growth offsettubg positive growths in flats and longs products.

The moot point is which companies will survive? Efficient one, of course. Tisco has added two million tonnes of capacity in HR. With its fixed cost being very low, it is most likely that the company would face little pressure to survive the difficult times of excess capacity. Further, there is a distinct possibility of Telco picking up Tisco HR-CR for the production of its automobiles.

For secondary integrated producersthis would be a trying time. The competitive strength is based on nearness to markets and lower cost of production because of use of latest technology.

Jindal Vijaynagar and Bellary claim that they would be able to capture the entire southern market. Essar and Ispat claim that their cost would be quite low in the western region because of freight and technology advantage.

But as pointed by financial institutions, the project feasibility of the new steel projects was based on a certain price of steel and certain component of interest and depreciation cost.

The price of steel has fallen while the cost of capital for these companies have risen and so has capital expenditure. Interest and depreciation works out to 30 per cent of selling price. For some players this may rise to 50 per cent if the adverse supply-demand picture depresses the steel prices by 10-15 per cent.

The fight for market share may see companies selling at variable cost in a effort to earn contributions which can meet the fixed chargesover a longer period of time. The only problem is whether the FIs or banks would be willing to extend a second bail out package in near future because the demand for steel has not picked up.

Possibly, the only option for less efficient players in overall cost structures is to drastically reduce the fixed cost by converting debt into equity. This would bring down the finance charge and help the company face the supply-demand mismatch scenario, through lower costs.

One thing that is definite reality is FIs pushing out some of the promoters out of the managment role and instead appointing professional managers.