?Steel prices to look up in January?

SK Roongta is chairman, Steel Authority of India Ltd (Sail), India?s largest steelmaker whose disinvestment is high on the government?s immediate agenda. Under Roongta?s leadership, the PSU has weathered the global economic storm. (Sail was the most profitable steel company in the world in the first half of this fiscal, which saw most global majors hit by a demand crunch). A marketing professional for most part of his career at the PSU, Roongta also headed other strategic functions like HR and business planning. In an interview with FE?s Rishi Raj and KG Narendranath, he talked about the company?s ambitious expansion plans, raw material management and the global market trends. Excerpts:

Are the steel prices finally beginning to look up?

The decline in prices began in September 2008 and got accentuated further following the global meltdown, which slowed demand from the main consumers. Steel prices today rule at 60% of the peak level in June-July 2008. Long product prices are particularly depressed. We see prices recovering in January. The overall demand for steel in 2010 is expected to be back at the 2006-07 level, in that sense, the recovery would be faster than expected as earlier it was seen only by 2011-12.

Consumers often allege that Indian steel producers keep their prices below import prices despite their enormous cost advantage.

The prices are determined in response to the market realities. So long as ?higher prices? don?t adversely affect demand there is no reason to cut prices. This is not to say that we keep prices artificially high and cause a cost-pull inflation.

How do you see your third quarter results? The second quarter saw profitability and revenue declining.

It would not be right to compare the second quarter earnings with that of the same period a year ago when the market was booming whereas now there?s kind of a slump. The third quarter results are expected to be better since at this time last year the base was very low. But, on the whole, we have managed inventory, manpower and resources optimally and our profit margins in the first six months were the highest in the global steel industry.

Sail is high on the list of PSUs for disinvestment and you are expected to hit the market soon. Which factors would drive investor interest?

We are the leading player in a market (the Indian steel market) that is growing exponentially. There are very few markets in the world where steel demand is growing and India is one of them. We?ve a large and entrenched customer base. Our captive raw material base is very robust and we are bound to retain that advantage in the post-expansion phase too. Thanks to the ongoing modernisation programme, our energy consumption levels have come down. Our fixed cost component per tonne of steel has come down sharply. We are increasingly shifting our product base to finished and value-added steel, to boost earnings. Manpower productivity has also gone up significantly. So, there is every reason for the investor to pick up our shares.

What?s the progress regarding Sail?s expansion plans? Are you on target or are there any slippages?

There are two parts to our expansion plans?brownfield and greenfield. As far as brownfield projects are concerned, we are moving as per schedule. There are delays with regard to our greenfield expansion plans, which are basically due to problems relating to land acquisition. The steel markets were booming a year and a half ago so we had planned to advance the completion of the projects but now we would stick to the original target year of 2012. Once we complete the expansion projects, our steel-making capacity would be around 23 million tonnes (MT).

Are your expansion plans in line with the government?s targets set in the National Steel Policy?

The National Steel Policy had set a target of total steel production of around 124 mt by 2012, but I don?t think we would be able to reach that figure as most of the greenfield projects, which were planned, have not been commissioned. Many projects are running behind schedule.

What?s the scenario on the raw material side? There?s much volatility in prices, which creates pressures on the company?s margins.

We have captive iron ore and coal mines to meet our needs; so compared to those players who do not have such facilities, we are less exposed to market volatility. As for iron ore, we have 100% captive base and so, the big spurt in global prices of ore over the last three-four years, have in a way strengthened our relative competitive ability.

However, we need more captive bases as we expand. On the iron ore front, we are developing Rowghat mines for our Bhilai Steel Plant. In the eastern part, we have got renewal for lease for Chiria mines in Jharkhand and we have been given an assurance that the state government will renew another 1,000 mt lease shortly. On the coking coal front, captive capacities meet just 6-7% of our needs currently whereas our target is to have a 50% captive base.

What is the most relevant measure the government can take to give a boost to steel demand?

In terms of policy support, if the government is able to create a mechanism for faster implementation of infrastructure projects, that would indeed stand the steel industry in good stead. Formulation of pragmatic policies for land acquisition and rehabilitation should be expedited and, if required, statutory changes should be brought about. As for iron ore and coal mine allocation, clear-cut policies are required, even while giving liberal compensation to the displaced.

I feel that the government should go for a phased withdrawal of the fiscal stimuli rather than doing it in one stroke, especially with regard to the excise duty, which was slashed from 14% to 8%.

Do you think the domestic steel industry is sufficiently exposed to competition? Should anything more be done on this front?

The domestic steel industry is quite competitive, is sufficiently exposed to competition and we do not favour any protective measure from the government. However, there should be a robust mechanism for ant-dumping and safeguard measures to check dumping and unfair competition from abroad. Indian steel industry is not easily amenable to imports; our port capacities should expand before we can import long steel products in significant quantities.

Now that the global economy is showing signs of recovery, what feedback do you get from China, the most ravenous consumer of steel?

Despite the global economic crisis, China continues to lead the pack of major steel-consuming countries. More than 40% of the global consumption growth in 2009 would come from China. While there has been an 8-9% global contraction in steel production in 2009, China?s production must have grown 18-20%. Of course, the economic crisis did bring down the global steel production substantially, but in China?s case, the problem was less intense and lasted for just 5-6 months.

Is Sail looking at acquisition of steel companies overseas?

The demand for steel is growing in India rather than in overseas market. In this scenario if we go for overseas acquisition we would need to import that steel back into the country. Now there are problems here as our port capacities are not adequate to handle large imports. Therefore we would prefer to use our resources domestically to acquire companies and expand capacities rather than going abroad.