“I am expecting the steel growth rate will come back to 9% after one year” - Views on News from Equitymaster

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  • Sep 21, 2001 - “I am expecting the steel growth rate will come back to 9% after one year”

“I am expecting the steel growth rate will come back to 9% after one year”

Sep 21, 2001

Mr. S. K. Gupta is a metallurgical engineer and has held several top positions in the Indian steel industry. He was on the board of India’s largest steel company, SAIL, and was also Professor and Head of Metallurgical Engineering, Indian Institute of Technology, Bombay. His rich experience includes a position of Chairman Task Force on ‘Steel Growth Plan till 2010’, Government of India. Apart from this, he has also published 65 research papers in India and abroad on technology & management. Currently, he is on the board of companies including IDBI, Hindustan Zinc, Malvika Steel and Encore Software. He is also the Executive Vice Chairman of Jindal Vijaynagar Steel.

In an interview with equitymaster.com, Mr. Gupta shared his views on the factors affecting the steel demand and future outlook for the sector.

EQTM: What were the strong points in favour of the steel sector pre-1990, which resulted in the steel sector accounting for a larger proportion of financial institution’s total loan portfolio?

Mr. Gupta: Steel industry in pre 1990s was under government control, particularly the intergraded steel sector. But in the early 1990’s, the sector was liberalized and was allowed enlisting by the private enterprises. So once the barrier had been opened up, there was some kind of euphoria. Entrepreneurs who either had strength or perceived strength or no strength at all came into the steel business. At that time steel market was also booming and people had faith in the sector. As a result of this too many companies were promoted. But practically all these companies didn’t have financial muscles to take the kind of projects what they perceived. Since promoters were not pumping the money through equity, the projects were getting delayed resulting in 30-40% delay related additional project cost.

Earlier all the financial institutions (FIs) believed that India has certain basic economic advantages to become a low cost steel producer in the world. Our raw materials cost and labour cost is one of the lowest (less than one tenth of the global labour cost). But we have forgotten that whichever country has the basic economic advantages may not be the most competitive country. This is because the productivity is low. Japan ruled the world steel industry for about 30-40 years. They have no economic advantage (raw material or labour cost). But their quality of technology absorption, management quality and the government support made them the global leaders in the steel industry. Another example, South Korea is still the lowest cost steel producer globally with no tangible economic advantage. So, this theory of economic advantage assumes that the productivity is also equivalent, which is infact a wrong assumption. India suffers from low productivity in many areas including financial. Interest rates are higher compared to other countries. Our specific investment is also very high. (Specific investment means per annual tonne of steel capacity creation.) Amount of investment needed is very high because of higher interest rates and because of the fact that most of the promoters did not bring corresponding equity. As a result, practically all steel projects are now running on close to 100% loan. Not only financial productivity but also management productivity (human resources, shareholders value etc.) is low excepting the Tatas. Technological productivity is, however, not poor for some of the steel companies. Some are good in upstream while some are good in downstream. But overall productivity in India as against the leading steel industries of the world is just around 50%. All the God given advantages are being lost because of poor productivity.

EQTM: Currently which factors do you think are adversely affecting the steel demand?

Mr. Gupta: Firstly, the US trade barriers are having negative impact on the Indian steel industry. We were already having negotiations with the US government for reducing the barriers imposed by them. In the present context of priority, I don’t think such issues could be of priority. Further, the kind of retaliation by the US, its location and its impact are totally unpredictable at this juncture. So we cannot say for sure how much time it would take for the revival of the Indian steel industry. Apart from this concern, some of the syndromes from which the sector is suffering are:

  • Till 1992-93, the global steel industry and the Indian steel industry had no co-relations. The industry was having the internal support. But today, with globalization impact, if the international steel prices go down by 10%, in India too the prices would reflect a similar trend.

  • The customers had no choice till 1992-93; they had to accept the available quality of steel at the price offered by the supplier. But now they have the choice and can demand the particular quality of steel at a competitive price. If I don’t match the price, I would loose the business.

  • India is a peculiar country where flat product demand has been more than the long product demand. This is totally irrational. This is because of the fact that if the per capita consumption of steel is below 100 kg per person per year, long product demand has to be much more than the flat product demand. Because, flat product largely caters to the affluent part of the society. On the other hand, long products cater to the infrastructure or relatively non-affluent part of the society. However, in our country flat product demand has been more than the long product demand. Because in India 80% of the steel is consumed by 10%-15% of people and rest of the people do not matter. There is no such country in the world. So since flat product demand was more in earlier years, everybody went into the production of the flat steel products. As a result of this, we are now getting a squeeze due to bunching. Today flat product capacity is around 2.5 m tonnes more than the flat product demand in the market. Overcapacity is the major problem, which the country is facing today.

  • Public has disowned the industry. None of the steel companies have taken care of shareholder’s value except the Tatas. Tisco is the only steel company, which is making profits today. Even Tisco is expected to make losses in the September quarter due to weak demand and squeeze in margins.

EQTM: Which factors will drive the growth in future? Do you see a near term pick up in the infrastructure activity?

Mr. Gupta: Steel demand in India is increasing, but at the slower rate. Growth rates are not as good as those recorded in the past. Between 1993-97, steel demand increased at higher rates of 9%-14%. But since last one and a half year, the rate of increase in the steel demand has come down to 3%-5%. Steel capacity has however increased faster than the demand. This, coupled with slow down in the demand, has created demand supply mismatch. But this doesn’t mean that the situation is going to remain the same. You just see, in the next two years we will have the opposite condition and demand would come back. At that time, if anyone wants to produce the steel, he will be able to produce only after four years (steel plant takes atleast four years to set up). This is the reason institutions are supporting some of the steel companies like Bellary Steel, Malvika Steel in anticipation of a rise in demand.

China this year produced 130 m tonnes of steel and imported 7 m tonnes of steel, taking total consumption to 137 m tonnes. On the other hand, India produced less than 30 m tonnes and has a net surplus of 1.5 m tonnes. Both the countries are developing countries and both of them have more or less equal population. But see the discrepancies, in India 30 m tonnes cannot be sold while China is consuming 130 m tonnes and imports the 7 m tonnes. Do you think India will remain like this forever? I am expecting the steel growth rate will come back to 9% after one year with a pick up in the infrastructure activity. Infrastructure investments have increased lately (last one year). But its impact is not yet very much visible.

EQTM: What measures is the government taking to support the steel industry (exports and imports)?

Mr. Gupta: There are four kinds of steel industry in the world.

One is in the developed societies where the market forces predominantly are in place. The government does not give additional support unless the industry is in the terribly bad shape (what happened in the US recently). Normally in a matured market economy the government is not required to extend any support to the industry.

In the second type of industry, which has emerged successful, government supports 5-6 top companies and nurtures them. This is the case for Korea and Japan. They use this industrial growth as leverage for developing the whole economy.

Third model, which India followed for 40 years, the centralized planning model or Soviet model and whosoever followed this made hardly any profits.

Fourth model is the one, which China followed. An improvised socialistic model. China started following this model 18 years back, supported by the government but determined by the market forces.

In India we have already given up the third model and cannot follow the fourth model like China because majority of the steel capacity is now in the private sector. We cannot go back. We don’t have a market economy like western countries where the government keeps distance from the industry. So the only model, which we can follow, is the Japanese and South Korean model. The government has to extend the umbrella support to some of the companies, which are relatively efficient. (Japan supported only 5 companies).

We have already lost export markets in the Western Europe. The government is taking some steps to open up the new markets but those are not adequate. But if we wish to see a revival in the industrial demand, the government should take proactive steps. Threat of import is not actual in terms of quantity but it gets reflected in price. If a customer can buy steel at US$ 180 per tonne, we have to match this price (the landed, duty paid cost). So, the industry suffers from low profitability. The threat of imports keeps everyone alert. One measure is to increase the import duty but again this is not conducive to the WTO.

EQTM: How’s are the Indian steel companies positioned compared to the global steel majors?

Mr. Gupta: A country like India cannot sustain more than 4-5 major steel companies (integrated and not the secondary, as their number is quite large). But in today’s situation consolidation is not viable. The merger between two weak companies is not possible. When the winners are separated from the losers, some healthy companies can take over the weak companies. Demand for quality and branded products competitively would automatically force the weak companies to close down. But in today’s market I don’t think there is any consolidation opportunity (as there are large number of unhealthy companies).

EQTM: What implications it will have for financial institutions lending to the steel sector?

Mr. Gupta: Many of the loans lent by FIs to this sector are classified as the non-performing assets. They might be able to make some recovery once there is a demand revival. Although, they may not be able to pay the principal amount immediately, interest payment will be made at least. When these institutions lent to the sector in early 1990s, steel prices were about US$ 330 per tonne and all their projections were based on this price. Today, steel prices are near US$ 190 per tonne. The situation has become so unpredictable today that you cannot even forecast one year down the line. Earlier when I was chairman of the National Steel Growth Plan in 1992, we used to make the projections for 20 years.

EQTM: Any personalities that have influenced you?

Mr. Gupta: Sir M. Visvesvaraya, who is considered as the father of engineering industry in India. He lived for 100 years. He has helped in the constructions of dams, bridges, and urban development throughout the country. He was very genuine and honest person besides being an outstanding professional.

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