The news that the capital cost for the new IISCO plant of SAIL can rise from the estimated Rs 9,600 crore to a high of Rs 14,000 crore if the lowest bids are to be considered should be a matter of serious concern for the steel industry in India.
High capital costs can make any of the projects financially unviable. The specific case is an example of high cost of equipment and technology and severe shortage of quality manpower and civil work contractors today. The steel technology and equipment providers and large contracting firms have no time to spare with their order book already full for several years.
If capital costs for others too rise in the same proportion, the steel industry will have to mobilise resources at a much larger scale and one wonders if the domestic capital market and the banks are prepared for it, assuming that most of the projects are to be through. Given the fact that their own funds will remain limited, at least will not rise beyond what has been provisioned for, the steel industry will have to borrow more.
This will significantly raise the debt-equity ratios, something that the banks will not be willing to consider so easily. The project costs will rise further with higher costs of capital.
Given the extraordinary financial health of the industry currently and the general perception that the market for steel globally and especially in India, will remain strong, the steel industry may get priority over other industries or investment options. Even the global funds may line up behind Indian steel projects. But, proper due diligence may not throw up very attractive scenarios for each and every project that has been conceived till date. Only a few will pass the test.
There are other matters of concern. At one level this situation reflects poor timing of the projects. India?s steel capacity expansions should have been planned much earlier. All the large projects will invariably experience cost and time overrun. The industry need not worry so much if the steel market remains strong by the time they are out with their production. But, if their entry happens to coincide with the cyclical downturn in the industry then many of them will face disasters.
One may recall what happened to the industry in India in the late nineties and in the early years of this decade. The industry lost money and the investors their confidence in the steel industry, as they were forced to sign losing deals to save several steel-makers from total collapse. Today one does not really expect an Asian crisis or any such similar disaster to surface. The global economy is more stable than it used to be in the nineties. Lessons have been learnt.
However, it does not guarantee that a steel crisis cannot recur even if it is for a shorter spell. Possibilities can include a slowdown in investment in China. Also, a burst of new capacity can be expected worldwide by 2012.
?The author is an independent steel strategy analyst