Essar Steel, one among the top-four integrated steel makers in the country, has been unable to ramp up the capacity of its ambitious 10 million tonne per annum (mtpa) steel plant beyond 50%. This is largely due to the delay in the commissioning of the slurry pipeline in Paradip and Vizag, which could have transported large quantities of iron ore to the respective ports for being shipped to the Hazira port.
While the company maintains that the two pipelines could be ready by December, the slower ramp up is hurting its cash flows while opening up a market of opportunity for companies such as JSW Steel, Tata Steel and SAIL, besides other small players.
According to sources, Essar Steel currently has a debt of R22,000-25,000 crore and is paying an interest of up to R900 crore annually. FE had reported in August that the company has been able to secure R6,000 crore of lending from a consortium of banks, who already had an exposure of R30,000 crore in the company.
While the banks increased the exposure to prevent the company from entering the corporate debt restructuring scheme, the loan increased the company?s interest outgo yet again which is being hurt by a slower ramp up of its operations at Hazira.
However, company officials say this has led the company to be innovative and produce more value-added products, which fetch higher margins. Essar has the operational fungibility to produce 300 varieties of products, said a company official.
The company completed the construction of the Hazira steel plant in 2011, but due to paucity of iron ore, has not been able to run the plant at optimum capacity.
Essar requires 15 million tonne of iron ore to run its 10 mtpa steel plant but currently has access to just 7.5 mt of iron ore coming from Paradip and Vizag, which are first transported through rail wagons, converted into pellets at its beneficiation plants located in the respective cities and then shipped to Hazira, said an industry source.
Both Paradip and Vizag have a beneficiation and pelletisation capacity of 20 mtpa.
However, due to inability of the rail wagons to transport such huge quantities of ore from the mines to the plants, Essar Steel is forced to operate at lesser capacity.
?The slurry pipeline in both the port cities will help the company transport over 15 million tonnes of ore to the ports. The pipelines are expected to be ready by December this year,? said the industry source.
When contacted, Essar spokesperson admitted that the plant was currently operating at a rate of 5 mtpa but did not share other details.
In fact, a low output from Essar?s plant is acting as a blessing in disguise for the steel sector in the country helping maintain the demand-supply gap at a healthy ratio ? a veiled benefit for the other three steel makers such as SAIL, Tata Steel and JSW Steel.
According to experts in Joint Plant Committee, the steel market in the country went into a state of subdued demand from mid-2010 when the growth rate in demand fell from around 10% in 2008-09 to 3.5% currently as on September end.
In fact, all through the last fiscal, steelmakers were forced to offer discounts, do value-adds or scout for the export market to push their products. It was much later in September 2013, when the companies managed to hike the prices by R1,000-1,500 per tonne as imports were getting expensive due to a fall in the rupee.
?If Essar had also operated at 100% capacity, the market would have had an additional five million tonnes of capacity to deal with, leading to a serious pressure on the prices,? said an analyst from a domestic brokerage.
According to official figures, the current Indian steel production stands at 75 mtpa and the consumption too stands at the same level.
With Essar full capacity coming in, India would have been in an over-capacity situation, he said.
