Government steel companies on brink of bankruptcy - Views on News from Equitymaster

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Government steel companies on brink of bankruptcy

Apr 3, 2000

First it was the Steel Authority of India Limited (SAIL). Now there are reports that Rashtriya Ispat Nigam Limited’s (RINL) Vishakapatnam Steel Plant is one the verge of closure. The committee looking into the matter has recommended that the government sell-off a majority stake in RINL to save the unit from closure. The reports of yet another government steel unit fighting with bankruptcy comes at time when the private sector steel companies are witnessing an uptrend. The reasons are not far to seek.

The domestic steel markets have become intensively competitive over the years as Indian markets opened up. The last few years have been especially tough for the industry in view of a slowdown in global steel demand. This created a situation of excess capacity globally and as a consequence prices plummeted.

In such a scenario the key to survival was a cut in operating costs. The private sector steel companies were much better off as compared to public sector units. This is mainly due to the fact that the public sector units are burdened with high operating costs due to a large employee base and use of out dated technology. As a consequence they are unable to maintain margins in the event of a decline in prices. Similarly, when prices rise, the rise in margins is not commensurate.

The advent of the World Trade Organisation is a signal for increasing competition in the years to come as countries bring down trade barriers. In view of this, it makes sense for the government to give up participation in the industrial sector.

It is likely that the government may be tempted to prepare a rescue plan for RINL, as it has done so for Steel Authority of India. Such a move should be vehemently opposed, as it is unlikely that the long term prospects of the unit will alter dramatically. The preferred route should be disinvestment of government holding in favour of a private steel company.

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