Steel companies to demarcate markets to counter slowdown

Suresh Nair

Mumbai, Nov 4: To tackle the downturn, steel companies like Tata Steel, Ispat Industries and Jindal Iron and Steel Company (Jisco) are working towards geographically demarcating markets where each one will operate exclusively -- without competing with each other -- so as to cut down on freight, which forms a major part of the cost. This move has been mooted for the first time in an cut-throat market like steel.

The trend has been seen to be more popular among manufacturers who have developed downstream capacities away from the upstream manufacturing facilities.

For example, Jisco which is the largest cold-roller and manufacturer of galvanised and corrugated steel had not long ago bought hot-rolled (HR) steel coils from Ispat Industries, which is based at Dolvi in Maharashtra. In this deal, Jisco saved around Rs 750 per tonne on the freight. The freight for per tonne of HR coil to be transported from Jindal Vijayanagar Steel (JVSL), at Bellary in Karnataka, to Jisco’s plant plant at Vashind and Trapur is Rs 950 and Rs 975, respectively.

On the other hand, the freight cost incurred by Jisco if the HR coil is bought from Ispat Industries’ Dolvi is only Rs 200 -- a clear saving of Rs 750 per tonne for Jisco.

Tata Steel, which is the largest private sector integrated steel manufacturer having downstream interests in Tata SSL based in Tarapore, is also said to be toying with the idea of allowing Ispat Industries to supply steel to Tata SSL’s unit at Tarapore.

Tata SSL otherwise buys its requirements from Tata Steel, which is based at Jamshedpur, thus incurring a freight of Rs 1,500, even as Ispat can supply the same material by incurring a freight of only Rs 200.

The trend towards aligning interests to avoid encroaching upon the other’s market is very surprising at a time when steel manufacturers are into cut-throat competition and are selling their products at very slim margins, even to locations which are far-flung, while incurring very high cost of freight.

An industry official said that while manufacturers agree in principle to sell its product within its geographical reach, there are other factors which impair such kind of deals like, quality, credit and comfort level of the buyer with the seller, and vice-versa.

Tata Steel may now supply steel to Ispat’s cold rolling plant at Kalmeshwar in Nagpur, which otherwise is supplied by Ispat from Dolvi by incurring a higher freight cost. Similarly, Ispat’s cold-rolled plant can save Rs 700 per tonne by sourcing its HR requirements from Tisco at Jamshedpur.

Industry observers say that buying from the nearest manufacturer saves not only on freight cost but also time and working capital. This, in turn, adds to the margins thus giving upstream and downstream manufacturers a better Net Sales Realisation (NSR).

However, this might not always be feasible, sceptics pointed out. Citing the example of JVSL, an industry observer said, "Jisco is promoter of JVSL which was set up to meet the HR requirement of the parent company, which is the largest consumer of HR in the country, and sources most of its HR requirements from JVSL, which will always give the parent company a longer credit period."

Jisco consumes 55,000 tonne of HR every month, and is the largest customer for JVSL, and if Jisco starts buying HR from Ispat or Essar, the very purpose of setting up JVSL will be defeated, he opined.
Jisco incurs a freight cost of Rs 950 per tonne on every tonne of steel for its Vashind plant, while for its Tarapore plant the freight from Bellary is Rs 975.