We are optimistic of demand picking up in coming months

Written by Prashant Mukherjee | Subhash Narayan | Updated: Aug 1 2013, 01:38am hrs
Steel Authority of India (Sail) has been going through a rough patch in recent years because of factors like oversupply and weak demand in the domestic market. A depreciating rupee has added to its woes, making it more difficult for the PSU to maintain its bottom lines. But Sail remains optimistic that the governments ambitious infrastructure spending programme, $1 trillion during the current Plan (2012-2017), will boost steel demand, helping the company fight the slowdown. Sail chairman CS Verma talks to FEs Prashant Mukherjee and Subhash Narayan about the companys business plans. Excerpts:

Given the current sluggish scenario of the steel sector, are you planning to offer discounts to your customers to clear inventory Or do you have a plan to cut down production

Domestic steel prices are a function of domestic demand trends, global steel prices, currency valuation, etc. along with the price trends of major steel-making raw materials like coking coal and iron ore. Current prices of steel remain under pressure due to the overcapacity scenario globally. We are likely to see some upward correction owing to higher import parity prices resulting from rupee depreciation. However, with the various initiatives being taken to boost investment in the infrastructure sector, we are optimistic of demand picking up in India in the months to come.

We do not have any plan to cut production as we normally tie up the bulk of our production with customers. Most of our customers are with us for a long time and we give them the best services. In fact, with new production facilities expected to start at Burnpur and Rourkela, we should be able to enhance our production significantly towards the end of the fiscal.

We are holding the average inventory level for this time of the year, when the seasonal demand for steel slows down during the monsoons. Moreover, we have a vast distribution network comprising 67 warehouses spread across the country and around 3,000 dealers. We need to maintain proper stock levels for servicing such a vast marketing network.

Sail has been facing the double whammy of high input costs and low demand for finished steel products in recent years. Cheaper imports are also pressuring your margins. Do you have any strategy in place to deal with this uncomfortable situation

The steel industry has been operating in a challenging environment, given the almost flat growth rate of steel consumption in India in the April-June13 quarter. We have, therefore, initiated steps to maximise revenues and control internal costs by measures such as generation of additional income from waste management, improvement in techno-economic parameters, identification and sale of idle assets and sale of non-moving and obsolete stores & spares. On the operational front, other steps being taken to control costs include a change in coal blend, reduction in the number of service contracts and a reduction in administrative costs.

The global output has remained high, while real demand has not seen a commensurate increase, on account of which finished steel prices continue to be under pressure. In India, too, real demand has been stagnant. However, with government initiatives under way to boost spends, with a 12th Plan outlay of $1 trillion for infrastructureequivalent to 10% of GDPwe are optimistic of demand picking up again. In view of the global scenario, the demand improvement might be slower in the beginning, and pick up later. As I have said earlier, the long-term growth story of India is still intact and it is expected that the steel industry here would be one of the major drivers of growth.

The rupee has been depreciating over last few months. Can you quantify its impact on revenue realisation

The rupee has depreciated nearly 13% compared to the start of this fiscal year. At Sail, about 75% of our coal requirement is fulfilled through imports, with about 10-11 million tonnes of coal imports every year. As per a rough estimate, a 1-rupee depreciation hurts us by about R150 crore on an annualised basis. The upside though is that coal import prices have come down substantially. The prices had reached a peak level of $300 per tonne, but are now in the range of $130-140 per tonne.

When is the wage negotiation expected in the current year and what per centage increase can one expect in the numbers

Wage revisions are due for the non-executive staff with effect from January 2012 and wage negotiations with the union are already on. We have had multiple rounds of discussions. It wont be prudent to comment on the numbers at this stage, though provisions have been kept in our accounts assuming a wage hike of up to 15%.

How is Sails capacity expansion programme progressing

Sail is in the process of implementing a modernisation and expansion plan valued at about R72,000 crore across the value chain. While R39,131 crore is being spent on expanding capacity, R7,039 crore is earmarked for value-addition and product-mix improvement, R3,509 crore on technological upgrade and modernisation, R12,191 crore on sustenance, including debottlenecking, AMR & environment and R10,264 crore on augmenting raw material from existing mines and development of new mines.

In 2013-14, two large size blast furnaces will be commissioned. One of these furnaces of 4,060 cubic metres is likely to be commissioned shortly at our Rourkela Steel Plant (RSP). This will become the largest operating blast furnace in India and will enhance our capacity by about 2.5 million tonnes. Second blast furnace of a similar capacity, i.e. 4,060 cubic metres is getting commissioned by December 2013 at our Iisco Steel Plant (ISP) in Burnpur. During Q1FY14, new projects worth around R2700 crore have commenced production, significant among them being the new 7-metre-tall battery complex along with coke dry cooling plant and the 2500-mm wide slab caster, both at RSP.

In 2012-13, projects worth R5,500 crore were commissioned at capex of R9,731 crore.