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World's most profitable steel maker is Indian - Views on News from Equitymaster
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  • Oct 9, 2009

    World's most profitable steel maker is Indian

    It is now well known that India remained an oasis of calm amidst the unprecedented turbulence that hit the global financial system. It is also well known that when global giants in sectors such as auto and steel were struggling to keep their noses above water, their Indian counterparts were marching to a different beat. It is not a coincidence that most major auto players around the world are making a beeline to India.

    The Indian steel industry has also done far better than its global peers. As per a leading business daily, public sector steel giant, Steel Authority of India (SAIL) is the world's top profit making steel company in HCY09 ahead of names like ArcelorMittal, Posco, Bao Steel and Nippon. Of course, it helps that there is strong domestic demand. But in our opinion, one of the key reasons that SAIL is doing well is its much lower capacity. It terms of manufacturing capacity, it is only the world's 21st largest steel company. Little wonder then that it is going full throttle at a time when the capacity utilisation of the global giants is about 50% to 60%. A lower capacity means lower fixed costs. The company is now also an efficient player with favourable operational characteristics like energy consumption and blast furnace productivity. A rational manpower cost structure and a debt free balance sheet has also added to SAIL's profitability.

    While this is heartening news, it may be noted that SAIL is on a huge expansion drive currently. We hope it is able to retain some of its current operational and fiscal tidiness even when it is a much larger player.

    Little land for steel giants
    Speaking of the steel giants, many of them are keen to get into India. After all, besides being the world's second fastest growing economy, India is blessed with the raw materials that go into steel production. But they are finding the going rather difficult mainly due to land acquisition problems. Recently L N Mittal expressed his concerns over the inordinate delay in land acquisition. Posco has been waiting for years now to kick start its project.

    While the steel ministry plans to boost India's steel capacity from the present 55 m tonnes to 124 m tonnes by next year, it has little control over land which is a state subject. It may be noted that most of the new projects are slated to come in the mineral rich belt of Jharkand, Orissa, Chhattisgarh and Bengal. These states also happen to have strong tribal bases and are facing difficulties in the form of political agitation and Naxalism.

    Clearly, a speedier process of acquiring land now holds the key to India's ambition of becoming a major steel producer. No doubt, land cannot be snatched and owners must receive proper compensation but one cannot ignore the economic and employment benefits that the steel industry will generate for some of India's poorest regions.



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