Mr. R C Nandrajog is Vice President Finance at Tata Steel, where he has served for nearly 37 years. Mr. Nandrajog has been with Tisco since 1966, where he joined as a graduate trainee. Mr. Nandrajog’s interests include photography and golf. He is also a visiting professor at XLRI.
In an interview with Equitymaster, Mr. Nandrajog shared his views on the steel sector and Tisco’s strategies in general.
EQTM : What is your view of the current upturn in the steel industry? How different is this cycle from the previous ones, say in the mid nineties and the one before that?
Mr. Nandrajog: I think the commodities as a whole are having an upturn and steel being a commodity, which we (Tisco) don’t like to call it, is part of it. Only 1-2 years back, steel prices were around US$ 200-210. Today, the international price of steel, steel means Hot Rolled Coils (HRC), is in excess of US$ 400. So that’s the swing. And if you have seen the gentleman (Jim Rogers) recently, at CNBC’s Power Breakfast, according to him, commodities can generally go up by something like 100%-500%. So, having said that, I don’t think that there is much upside for steel prices anymore, maybe US$ 20-30, it has gone upto US$ 450-480 at one point of time.
But there is a difference now. Last time the prices went up it was not because of the input prices also going up. This time the iron ore prices have gone up by almost more than 100%, coke prices have gone up more than 100%, freights are phenomenally higher. So, therefore, the input prices are higher and unless and until you have control over them or you are very efficient, the steel plants will not be making very thumping profits.
EQTM : What is your view on steel prices? Do you think the current rise is sustainable and why?
Mr. Nandrajog: Though steel prices have gone up but simultaneously input prices have also gone up. Will it come down? I do not know. Visibility in steel is 3 months or maybe 6 months, beyond that everybody guesses. Steel has seen very violent fluctuations in the past and I have got 38 years of experience in steel, so I will not make any judgment calls. But my view is that this time steel is going to sustain over a cycle - taking ups and downs together, steel will be around US$ 300-330. That means that though the prices may go below these levels, but on an average they will remain like this, which is good news.
EQTM : For how long do you see the prices of raw materials continuing to strengthen? How does it impact the steel sector?
Mr. Nandrajog: How long will raw material prices continue to remain firm is anybody’s guess, as right now steel is in great demand therefore the raw material costs are very very high. China is importing 30-35 million tonnes of steel every year. Till that continues, I think that prices will continue to remain firm. And the estimate is that at least for 2004, IISI has said that China will be consuming 290 m tonnes of steel. So, they should be consuming or at least importing 30-35 m tonnes of steel. Hence, for 2004, it seems that prices will remain firm. But that is linked with consumption of steel. When the demand supply dynamics changes, the prices will start moving down. How much down will again depend on the inputs. The raw material costs and raw material suppliers are highly consolidated. So, they would put lot of pressure so that raw material prices do not come down, whether iron ore or coal. Therefore, that is the reason why I am saying that steel prices will remain on an average at about US$ 300-330. Not like the earlier cycles when prices went very low and sometimes even below US$ 200, so the average was US$ 230-250.
EQTM : How is the industry managing the resistance from the steel-user industries e.g. auto? Do you see raw material prices affecting margins in this scenario?
Mr. Nandrajog: Actually the auto industry and others, probably, do not have a reason to crib. For steel industry, the raw material prices have gone up by 100% or more. For an automobile, which weighs about 1,000-1,200 kgs, only 50% is steel and the rest is tyres, etc. So if we take all the 500-600 kgs to be of the top quality, the price of steel, which used to be at around Rs 30,000-31,000 per tonne (top quality) and which is now Rs 35,000-36,000 per tonne, so a Rs 5,000 per tonne increase would mean a Rs 2,500 increase for half-a-tonne (500 kgs). Thus, Rs 2,500 is the increase of steel prices in an automobile, which costs in the range of Rs 7-10 lakhs. So, if they (auto players) increase just 1% prices, which actually they were talking about increasing by about 3%, thus on 8 lakhs (3% increase) is Rs 24,000 whereas the input prices have gone up by only Rs 2,500. So it’s more of a show and justification of increasing prices whereas in the case of steel, most of the input costs are raw materials only, as conversion costs are very low.
EQTM : Kindly throw some light on the current demand-supply scenario in the global and the domestic industry? What kind of growth rates do you see for the global and domestic steel industry over the next 3-5 years?
Mr. Nandrajog: I think the growth in the world markets is about 3%-4% and the domestic market growth is approximately 7%. In India at least, this growth will remain for sometime because we are right now becoming the sourcing hub for auto components, monsoons have been good so the consumption of steel has been good in the country, white goods are doing well, infrastructure spending - last year was the first year in which the government of India spent lot of money on infrastructure. Lot of money means vis-à-vis 0% of GDP to maybe 5% of GDP and steel and cement have gained because of that. The good thing is that the government is making correct noises at least. They want ports, roads, bridges and power to come up, which means they will be spending a lot of money on infrastructure. If 5% (government spending) can bring this sort of a change and let us say they increase only to 10% of GDP, what will be the change? And they can do this in the sense that the revenue growth has taken place substantially - the revenue growth has been 23%. By spending 5% if the revenue growth has been 23%, what will happen if they spend 10% on infrastructure? The cascading effect is going to be very very phenomenal. And the intentions have been good, the government has been making right noises, if they implement it, even if 10% only, they have got 23% increase in revenues, so just spend 10% on infrastructure and everything will fall in place.
EQTM : So you see the global growth stabilising a bit while India would continue to grow at 6%-7%?
Mr. Nandrajog: You see USA, Europe and Japan are not going anywhere. So, what is left is only Asia. About Russia we don’t know much as it is too fragmented right now. Russian Army couldn’t contain Chechnya, which is 1.5 m people while the Russian armed forces are probably 3 times of them. Since 3 years they have been fighting and nothing has happened. So, they are too fragmented and there is no political will. I don’t think there is anything major happening in Russia. But we don’t know much. So, whatever action is happening is happening in Asia.
EQTM : With China’s steel production capacities growing at a faster rate than its growth in demand, what would be the impact on the steel industry and on Tisco in particular? Do you see China becoming a net exporter in the medium-term?
Mr. Nandrajog: I don’t think they will become an exporter because their cost of production will definitely be higher as they don’t have iron ore. And if you have to import iron ore to produce steel, you cannot be competitive with a country, which is having iron ore of their own. So that should not be treated as a threat because they are consuming lot of steel so they are putting a lot of capacities. Beyond that they are still importing. Half of the steel capacities in China are old and uneconomical and unviable. So, they are putting up new capacities and ultimately when they don’t need this, half of it will be shut down.
EQTM : What is the impact of steel imports on Indian steel prices? With the government committed at bringing down import duties, how do you see this impacting the domestic steel players?
Mr. Nandrajog: They (government) have already reduced 5% duty plus 4% SAD, the compounding effect of which is already 11% but the steel prices have still gone up in the domestic market, which is more due to the demand-supply dynamics and the cost of production. Now, if the cost of production has gone up, nobody will produce steel and give it at a discount. He might do this for 2-3 months but then he will shut down. Therefore, I don’t think that the prices are going to come down significantly so long as the demand is firm and the supply is not enough.
EQTM : What is the current difference between landed cost of steel and domestic steel prices?
Mr. Nandrajog: About Rs 1,500. The domestic prices are lower than the landed price of steel.
EQTM : Apart from China, which factors do you think would drive the growth of the industry in the medium term?
Mr. Nandrajog: We are growing at 7%. We (India) have been exporting 3 m tonnes of steel. This year we might be exporting 5 m tonnes and importing 1.5 m tonnes. So the net exports are about 3-3.5 m tonnes. With 7% increase, 2.5 m tonnes of steel in any case will be consumed within the country. In fact, next year we need to have some additional capacity to meet our domestic demand itself. And that is why we are setting up 1 m tonnes steel plant. And assuming that the consumption factor continues to grow at 7% or 6%, so you still need 2 m tonnes extra every year.
EQTM : What factors you think could impact the sector adversely? Could the slowing down of government expenditure have a negative effect?
Mr. Nandrajog: If infrastructure spending has resulted into more revenues for the government, better cascading effect, better standard of living and GDP growth at 8%, I do not see any logic (of the government) of not spending on infrastructure. It will be a very poor reflection of the ‘think tank’ if this expenditure (on infrastructure) is withdrawn for whatever reason. Probably, the lessons that China has shown with their 35% savings rate, most of which is going towards infrastructural development, that such a large economy has been clocking a phenomenal 9%-10% GDP growth. This is expected to continue as on the basis of the latest projections, their growth is going to be higher than us at a much higher base. So I don’t think there is any logic for not spending (on infrastructure) this money. But if…(government expenditure falters) then we have languished in the past and we will languish in the future.
EQTM : So government expenditure is necessary…
Mr. Nandrajog: If you look at the last 10 years, while some may be good years and some bad, the (average) GDP growth is around 6%, so consumption will be at 6% and this is without the feel-good factor and no infrastructure spending.
EQTM : Your comments on the current domestic capacity expansion?
Mr. Nandrajog: Tisco is likely to add only 1 m tonne and by 2007, we might have another 2.5 m tonnes. So, in 3-4 years, if we (Tisco) have 3 m tonnes extra, we still need another 3-4 m tonnes to meet the domestic requirements.
Mr. Nandrajog: It is always infrastructure and construction that consume the maximum steel. Auto is important but they do not consume very large quantities of steel. This is because let us assume that they (auto industry) make 700,000 cars with each car consuming on an average 0.5 tonne (500 kgs) (or even lesser in case of smaller cars like Maruti 800), which is 350,000 tonnes – less than half-a-million tonnes of steel. So, major is construction and infrastructure.
EQTM : How are Indian steel companies positioned compared to the global steel majors?
Mr. Nandrajog: I think India is the best place to produce steel. We have the world’s best iron-ore. We don’t have very good quality coal but we have coke, which can be washed and sweetened and we have limestone. These are the three major raw materials for steel. We also have cheap and trained labour. While the labour is not all that cheap now, but vis-à-vis the international standards, labour costs are much lower. So India is a better place to produce steel.
EQTM : In your view, what measures are required to be taken by the government and the industry in order to sustain and support the current growth in the industry?
Mr. Nandrajog: All the steps are to be taken by the government. Steel producers will definitely have to produce efficiently and they will have to make sure that the resources that we have are utilised very wisely. But the environment will have to be provided by the government. The red tapism and the bureaucracy will have to be cut. FDI, why doesn’t it come? Whatever money we are getting is all from remittances. This (FDI) is not coming because of red tapism. India has the best tourist spots in the world. India has the best cultural heritage. We have never been able to tap it because infrastructure is not there. Countries like Thailand, Malaysia and Singapore have grown on the back of tourism. We have far better places and a very wide canvas and we have not done anything about it. People are willing to set up industries but because of the amount of red tapism and the controls that we have, they are not interested in coming.
EQTM : How important a role does branding play in the steel industry, considering that it is a commodity? How much of Tisco’s topline is currently contributed by branded products and how is it likely to pan out over the next 3-5 years?
Mr. Nandrajog: I think that if soaps, which have 20 different varieties, can be branded then steel, which has 3,000 different varieties can be branded much better. 22% of our sales come from these, like Tisco Shaktee, Tiscon, Steelium and branded bearings. And we continue to focus on this, as we get approximately US$ 10-15 per tonne more on branded products.
EQTM : Please throw some light on Tisco’s export markets? Is Tisco exploring new export markets?
Mr. Nandrajog: It actually depends on the demand-supply factors. We have got more exports to Nepal and Bangladesh than China. But China is also quite important to us as 22% of our exports go to that country, 28% goes to Nepal and only 1% to USA.
EQTM : Give us some update on your titanium, ferrochrome and iron ore projects…
Mr. Nandrajog: Iron ore is actually very simple but the problem is that infrastructure is not there. If you want wagons, they are not there, if you want ships, they cannot come in and load at the ports because the draft is not there. So that is the big issue otherwise we are ready. In case of ferrochrome, the company formation is going to take place soon. The venture will start taking shape now. And titanium is too early, as we have already spent some Rs 150 m on some samples that we have taken and sent across for analysis.
EQTM : Do you think diversifying beyond steel is justified?
Mr. Nandrajog: When we went into chrome ore (production) 20-25 years back, it was just like this. We have to create certain opportunities and today ferrochrome is giving good returns. So titanium maybe still a better product. You have to always grow the business and diversify and Rs 150-200 m is not a very big expenditure for a company of Tata Steel’s size. However, it might come to zero or it might be big business line in future.
EQTM : A word on your favorite books and personalities that have influenced you the most…
Mr. Nandrajog: Recently I have read “The Knowing-Doing Gap”. It is a phenomenal book. There is also a book called “The Goal”. It is also a phenomenal book. Among the personalities, I am somehow getting convinced that Mr. Jaswant Singh is a great man. He doesn’t impress you when you see him, he doesn’t talk much like Mr. Yashwant Sinha used to speak. But whether it is the circumstances or what, but this fellow is delivering and that’s what you need. I never thought very highly of him when he took over as the Finance Minister but over a period of time I am really impressed with whatever he has been able to do. Despite giving so many sops, the economic situation is better, the revenue growth is there, no searches, no seizures. Of course, some little bit will be required but not like the earlier time when you switched on the TV and Mr. Yashwant Sinha was threatening some people and the industry. He (Mr. Jaswant Singh) is a cool guy and still getting things done.