Indian steel makers, faced with acute fall in demand, exacerbated by construction slowdown, are looking to sell special products for oil and gas exploration companies and ship builders, two sectors that attract investments.
Steel Authority of India (SAIL), India?s largest steel maker owned by the government, will invest more than 10% of the total R62,000-crore capital expenditure on new value-added products. ?We are investing R7,039 crore towards product mix improvement out of our total investment of R62,000 crore for modernisation and expansion,? SAIL chairman CS Verma said in an email response. ?On completion of the current phase of modernisation, share of value-added products is likely to increase to around 50% of our total production from 39% now.?
Consultants say changing product mix will help insulate companies against weak demand in traditional segments. ?Steel makers need to continue to enhance and tweak their product mix,? said Anjani Agrawal, partner and national leader – metals and mining with consultant Ernst & Young India. ?Most major players have the scale to produce value-added products and technology tie-ups with international companies will help them in doing so.?
Consumption pattern is changing with a growing economy, Verma of SAIL said, adding that shipping, railways and oil & gas are seeing higher demand. The government says fresh investments will be made in oil and gas exploration, which analysts say is an opportunity for steel makers.
High prices of crude oil and new demand from emerging economies have made oil exploration and production attractive.
?India expects to invest $75 billion in its oil and gas sector from April 2012 to March 2017,? minister of state for petroleum and natural gas, RPN Singh told Indian law makers in Parliament on November 29.
?As auto and construction sectors face a slowdown, sectors like oil & gas offer opportunities,? Ernst & Young?s Agrawal said.
Ruia-owned Essar Steel has invested R2,000 crore to set up a 1.5 million tonne mill in Hazira that can make very thin plates used on offshore platforms, shipbuilding, boilers and wind mills. The mill can now supply to exploration companies under the American Petroleum Institute norms for deep-sea platform products. In May, it supplied steel to Indian Navy, the first in India.
?With our wide flat steel product mix that caters to diverse end-user segments, our sales have grown 40% for April-August period this financial year over a year ago,? Vikram Amin, executive director, strategy & business development, Essar Steel told The Financial Express.
Demand for steel for shipbuilders will rise as shippers replace old fuel guzzlers with new ships. Global capacities are set to rise 25%, Gurpreet Chhatwal, director at credit rating agency Crisil Ratings said in a report released on November 29.
Indian steel makers are investing abroad to make new products as demand shifts from one segment to another. Tata Steel Europe, formerly Corus, is investing $10.4 million in Britain to hike product output by 30% to sell it to plane makers as demand surged driven by orders from South East Asian passenger carriers. Analysts say Tata Steel could draw more lessons from Europe for India. ?Tata Steel, in India, has not yet been able to tap into the technological advancement of Corus,? said a consultant at a global consulting and audit firm.
?However, they have done well to realise that value-added products are the way forward, which is reflected in the restructuring of its European arm,? the consultant said. He cannot be quoted as he not authorised to talk to the media.
Value-added steel offer better margins for producers, say analysts. ?Not everyone makes value-added steel products, so when supply is low, pricing power for makers of such products increases,? said Prasad Baji, senior vice president Edelweiss Financial Services, a broker.
?Every steel player is looking to go beyond the traditional product line,? said Ernst & Young?s Agrawal.