Excess capacity is a perennial risk facing the industry. As industrial growth in India has plummeted from 15.5% in 2007-08 to 0.1% in the first 5 months of the current fiscal, the issue of excess capacity in critical segments in the face of continual subdued demand has attained significance. Further, the economy is in need of investment and industrial investment is mostly meant eith-er to create additional capacity or for technological upgradation in specific segments. Thus the present capacity which is already deemed as excess may not warrant fresh creation of capacity immediately and this may lead to deferment of new investment. As a result, investment-linked growth will suffer.
This particular hypothesis can be validated in long products in the steel industry. The current market share of small and medium rerollers in long products (bars and structural) may be put at 76% against an approximate level of consumption of around 34 million tonne (mt) and the balance 24% is contributed by steel majors. There is no apparent reason for the small and medium rero-llers to generate fresh capacity in long, except undertaking upgradation of existing facilities as current capacity utilisation by them does not exceed 70%. There is a perceptible preference for the reinforcement bars and light structurals produced by these rerollers based on the induction furnace route from retail and rural sectors on account of easy availability, sales on credit and lower prices. Steel majors in the last few years have also penetrated retail and rural sectors through a network of distributors and district dealers, but the presence of rerollers in this segment remains dominant.
Only a few years back the major component of fresh capacity creation by steel majors used to be in the flat categories as the differentials in realisation and scope of state-of-the-art-technology was higher in favour of flats and the predominance of rerollers in long categories was a dampener to major steel producers to augment capacities in non-flat categories. Things have changed now. The mandatory quality control order issued by the ministry of steel for rebar and structurals has made users (house builders, construction agencies, local government authorities) more aware of using better quality steel and the penetration by steel majors in this segment by ensuring availability through a wide networking of new players in the supply chain has resulted in better availability of good quality steel even at a higher price. SAIL has added nearly 2.5 million fresh capacity in long at Burnpur. Tata is enhancing capacity in its new Bar & Rod mill. RINL will shortly complete 6.3 mt capacity expansion. JSPL at Raigarh and Angul, JSW at Bellary are all enhancing long capacity that was either created by themselves or via joint ventures, the last being tried by Essar steel. The target segments will continue to be infrastructure projects, real estate as well as rural and retail sectors. The delay in infrastructure building will therefore create excess availability in the last two sectors. A well-knit supply chain netwo-rk with adequate promotional efforts by major steel producers will be needed to make an effective impact in these two sectors. Retail supply, as has been proved in all other fast moving consumer goods sectors, requires quick flexibility suiting local tradition and culture, and constant monitoring. These must be adopted as a major element of the marketing goal and not to be left as a residual activity to supplement the mainstream strategies.