India?s largest steel manufacturer, Steel Authority of India Ltd (SAIL), is aggressively adding capacity to meet the rising demand for steel, as the government focuses on infrastructure development to drive economic growth. The company is preparing to hit the capital market with a follow-on public offer to finance its capacity expansion and modernisation plans. SAIL chairman CS Verma shared with FE?s Kakoly Chatterjee his company?s business plans and the challenges in input costs and product pricing. Excerpts:
Is SAIL?s FPO plan going according to schedule, in January next year?
We expect the SAIL FPO to be issued early December 2010. In case we miss this deadline, we can expect it to happen only in late January, since markets would be closed for winter break and Christmas. We are in the process of engaging a BRLM (book running lead manager). After the appointment of
BRLM, a legal counsel will be appointed for due diligence and preparation of draft red herring prospectus.
How are you planning to utilise the funds?
The funds raised through FPO will be utilised for meeting a part of the expenditure for SAIL?s ongoing modernisation and expansion plans.
What is the present status of the proposed SAIL-Posco JV?
The detailed project report for the proposed JV is currently under finalisation. The JV is envisaged for setting up a 1.5-million-tonne greenfield steel plant, using iron ore fines for steel making. The total cost of the project will be determined after the DPR is finalised. Once the DPR is approved by the boards of SAIL and Posco, we will enter into the JV and other related agreements. The JV agreement will address the issues relating to equity pattern and other key matters.
Are you looking at any other strategic alliance now?
SAIL has signed an MoU with Kobe Steel Ltd of Japan for exploring the technical and economic feasibility of its ITmK3 technology for producing premium-grade iron in the form of nuggets. A feasibility study for setting up a 0.5 MT plant for making iron nuggets with this technology at our plant location in Durgapur, West Bengal, is underway. We have also initiated dialogues on technology intervention in steel and related areas with other leading steel producers. Another focus area is formation of strategic alliances for acquisition of coal assets.
After the acquisition of Chiria mines last year, do you have plans for acquiring more mines? Any foreign mine takeover on the anvil?
SAIL has been meeting its iron ore requirements from its captive mines. Post-modernisation and expansion, the iron ore requirement is estimated to go up to about 43 million tonnes. To meet the enhanced requirement of iron ore for existing and future expansion plans, SAIL has planned to develop new mines such as Chiria and Rowghat and expand its existing mines with state-of-the-art technology. Besides augmenting production from the existing mines, SAIL is vigorously pursuing the state government of Jharkhand for an early renewal of leases of Chiria and Gua mines. The Chhattisgarh government is being approached for a speedy development of the Rowghat mine. In order to meet the requirement of other raw materials like coking coal, low-silica limestone and dolomite, the company is striving for input assets acquisition on its own and through its JV companies, as input security in the value chain is a must in the company?s quest for continued success.
SAIL has recently signed an agreement with RITES, a railway PSU. What is the scope of the agreement?
This joint project between SAIL and RITES for setting up a wagon manufacturing factory at Kulti near Asansol in the Barddhaman district of West Bengal is a significant step towards fulfilling the government?s vision of setting up such state-of-the-art units through both JV and PPP routes, as announced during Budget 2010. The scope of the JV includes rehabilitation of wagons for SAIL, Indian Railways and other domestic customers along with rehabilitation of industrial locomotives for the domestic market.
Initially, the unit will produce 250 wagons (BOXN type, including specialised high-end wagons) per annum, which shall be ramped up to 1,200 wagons annually over a period of two-to-three years. Rehabilitation of 300 wagons can also be carried out.
Commissioning of the first phase is planned within 14 months from the date of formation of the JV company. SAIL is looking for raw material assets abroad, and logistics support would be provided by RITES.
When do you see steel prices picking up momentum?
During the first half of this year, the demand for steel has grown at around 10% in India. The dip in steel prices had taken place not due to a falling demand level but because of large-scale imports from the first quarter of FY11. Prices had gone down by about Rs 6,000-7,000 from the peak level of April 2010 both in the cases of flat as well as long products. There has been a slight recovery in September 2010. In fact, the world average export price of HR coil at the end of September 2010 was around $20 higher vis-?-vis August 2010, but still $100 lower than the price in April 2010. The growing demand from steel consuming sectors such as auto, other manufacturing industries, infrastructure as well as construction and the firming up of global steel prices are the factors accounting for the modest rise and price stability in India. Indian steel companies are looking to consolidate from this level.
Have input costs gone up significantly in the last two years? What are you doing to keep it down?
The rising cost of inputs, particularly of raw materials, has been a major cause of concern in recent years. For instance, the cost of coal alone, which constitutes 65% to 70% of total raw material costs, has increased on an average by nearly 34% from 2007-08. With few indigenous sources of the required quality and quantity of coking coal, SAIL has to depend on imports of higher volumes every year. Prices of imported coking coal have been volatile in recent times, putting pressure on the margins. Though some improvement is expected in coming quarters, it is likely that price fluctuations will continue. To offset the rise in the cost of inputs, which also includes manpower, fuel, power, minerals, etc., we have laid a thrust on improving productivity and efficiency across the organisation, encompassing people as well as production facilities and processes.
During the last couple of years, SAIL has implemented wide ranging cost control measures to reduce the effect of rising input costs. In 2009-10, savings of over Rs 1,000 crore were achieved through cost efficiency and administrative measures. Improvement in operational efficiencies led to the achievement of best-ever major techno economic parameters like coke rate, energy consumption and blast furnace productivity, and this contributed substantially to cost savings. The thrust on production above the rated capacity, increasing production through the energy efficient continuous casting route, higher production of value-added items, better waste management, improved logistics control, etc., in addition to sales network widening, have helped richly in controlling costs.
