By March, Essar Steel will hike capacity at its Hazira plant by four fold to 8 million tonne (mt). That would boost the firm?s revenues and operating profits, which stood at $5 billion and $791 million, respectively, in FY09. The Ruia-owned firm,through its agreements with four private miners in Orissa, has ensured adequate supplies of iron ore.
Malay Mukherjee, CEO of Essar Steel, tells FE?s Smita Joshi Saha and Shobhana Subramanian that quarterly iron ore contracts could hurt steelmakers. Excerpts:
Essar is adding a lot of capacity?.
At Hazira, we are expanding capacity from 4.5 million tonne (mt) to 8 mt by March and soon after, it will be raised to 10 mt. Our 6 mt pellet plant in Orissa will be ready by March 2011. In Minnesota, we have about 1.3 mt of reserves and we?ve started work on the first phase of the 4.1 mt pelletisation plant. And we have applied for a higher limit to 6.5mt. As for the Algoma plant in Canada, it?s producing 3 mt currently but we could increase production to 4 mt as and when the market looks up.
How much have you spent so far?
The capacity extension from 4 mt to 10mt has cost us $750 million and this includes pelletising in India. We actually managed to save about $250 per tonne by picking up some part of the equipment from Hanbo when it went bankrupt. Also, it?s a brownfield and not a greenfield project, so we saved some money there and our expertise helped us keep costs in check.
Are you looking at a greenfield project, perhaps in Karnataka, since you have signed an MoU with the government there?
We are caught in a chicken and egg situation. I worry that are we moving from Jharkhand to Orissa and then Karnataka where the same problems may play out. The short point is that India needs steel. And while we?re not asking that exports of iron ore be stopped, we do believe that domestic producers need to be given priority and that a level-playing field needs to be created. For instance, why can?t we have the same tendering process for operating the mines like we have for natural gas? The government can decide on an operator for the mine,who would not be the owner of the product but who will get a return on the capital employed. And the iron ore can be distributed on the basis of the capacity of each plant and the government can fix the price. This would do is supply for steel makers and create a level-playing field.
There was some talk that Essar Steel would be looking to raise about $1 billion?
We have been looking to raise money to be able to replace some of our high-cost debt. But the markets haven?t really been favourable and right now we?re not in the market because money is expensive. The idea is to bring down the cost of funds, so we?ll wait for the right time.
What is the strategy behind acquiring a processing capacity in the UK and that too such a small facility?
The idea is to access the technology and transfer it back to India. Ten million tonnes is a lot of steel and more importantly, our customers in India are increasingly demanding better quality of steel. The automotive sector, for instance,wants top grade steel. We have collaboration with Kobe Steel which helps to make higher grades of steel, but we also needed to get into servicing this. So this was an ideal way to get the expertise. And we could not have found a more opportune time with UK in this state.
Shall we see more inorganic expansion in Essar Steel in the future?
We would definitely like to become more global than what we are now, especially in terms of getting steel across to customers. The West Asia and Africa are our natural markets where we would definitely look at having more service centres so that we could access more customers.
Are iron ore quarterly contracts hurting users?
Quarterly pricing of iron ore contracts hurts steelmakers because it brings in a lot of uncertainty and volatility and impacts our customers. Having been in this profession for 40 years now, I believe there will be a change in the quarterly pricing scenario, this cannot last long. The fact is that iron ore producers are linking their prices to spot prices where, of the roughly 700 million of sea-borne trade which takes place, only 3-4% is accounted for by the spot segment. So, prices are being benchmarked to just 3-4% of the business. We see iron ore price at sub-$100 per tonne by April next year, there has to be a correction.
On what basis are you arriving at that number?
First, China is expanding iron ore production. Right now they import ore because their reserves comprise grade ore. But if ore prices move up beyond $100, they will go back to using their own ore. And the Chinese move the market. Also, big steelmakers around the world are investing in iron ore, so they will be adding another 60-70 mt of capacity and this would dampen prices. And finally the iron ore producers have also started realising that they may have overplayed their card.