As the final quarter closes for FY16, the balance sheet of steel sector will probably show feeble figures. The figures for the first three quarters of the bygone financial year were also weak, breaking the backbone of Industrial Index. As reports say, nine of the top 20 steel companies have already had a default in one or more of their debt instruments. The figure may go as high as INR 1.6 trillion. The weakened liquidity has also wreaked havoc in terms of payment of interests to bank thereby freezing the investment in projects.
Concerns are much more speculative without the availability of secured domestic raw materials. Given the norms of the ongoing auction of the two prime raw materials needed for the sector – coal and iron ore, the projected growth of the steel sector is bound to slow down.
Hitting Rock Bottom
Various steel units and related downstream businesses have hit rock bottom as far as balance sheets of are concerned. The past year also witnessed many small players closing their shutters or reducing production to sustainable levels. The sector today is in a tight corner financially. The slip in global trade, combined with falling local demand, has exacerbated the situation. This has also affected
MSME in manufacturing sector. Also it is leading to a severe crisis in Indian labor market. Steel sector which employs around 6 million people had to undergo cost cutting by trimming manpower. This has created a gloomy employment by trimming manpower. This has created a gloomy employment sentiment is the steel producing states which are believed to be one of the prime takers of skilled and un-skilled forces.
The Make in India campaign, which is probably one of the best initiatives that Modi government has taken to transform India into a manufacturing hub and also create jobs, can only be successful with pro-active initiatives by Ministry of Steel. Steel sector must be in sync with government’s goal of promoting infrastructural growth. Steel being the basic infrastructural material, cannot be left alone. Steel is crucial for competitive manufacturing in sectors like automobile, defense, railways, power and oil & gas to name a few.
The various steel units in the country are operating at an efficiency of 70- 80%. With surging import from Japan and Korea, the concern is grave. In the first 10 months of FY16, India imported steel worth INR 360.73 billions!
Raw Material – Dealing with Auctions
The situation is more critical due to the ongoing auction process of coal and iron ore blocks. The coal block auction is intrinsically important for DRI manufacturers. Post third round of coal block auction, the small and medium scale DRI manufacturers are financially distressed. Creating a single category for steel, power & captive power plants for auction of single category for steel, power & captive power plants for auction of coal mines, the steel players own fewer blocks than ever. Government needs to understand that steel units, where power cost is 33% of the total production cost, cannot compete with aluminium units. As a result, steel plants, which earlier collectively owned 83% of the coal reserves in the 31 auctioned blocks, now hold just 32%. Prior to the auctions, the aluminium sector had 1% of the coal reserves; they now own 36%. Coal reserves with cement companies have doubled to 33% from 16% earlier. Huge investments were made by the steel units to develop various coal blocks which now are lying idle. Hence, for coal blocks auction, steel companies must be considered in a separate segment.
Similar is the case for iron ore. Presently, few states have begun the auction of iron ore blocks. Unlike coal, even individuals who qualify the criteria as specified in the tender document can also participate in the iron ore auction. Hence, it is essential that the learning obtained from coal blocks auction be implemented for iron ore blocks auction too. States should provide more number of iron ore blocks specifically categorized to iron & steel sector.
Measure & Re-Measures
Things are although improving, but at a snail’s pace. On one end, the government wants India to be the world’s second largest steel producer and reach a capacity of 300 million tonnes, while on the other implementation of policies to safeguard the domestic steel industry is slow. The industry has well in time alerted the concerned ministry of the danger to delay any safeguards measure which could drive the sector to sickness. The government has listened to the users problems and is taking certain pro- active steps. The safeguard duty of 20% on hot rolled flat products of non-alloy and other alloy steel for a period of 200 days added to the interim relief. The imposition of Minimum Import Price (MIP) has well held the increasing amount of import. Government’s think tank – the NITI Aayog has been asked to chalk out a plan and suggest how to increase the steel demand in the country. However, these are not enough to back the growth projection for the next fiscal. More efforts are needed to tackle the buckling steel industry. The heavy burden of loans is pinching the sector. Government should take steps for:
Assured allocations of mineral blocks for steel sector
For all fuel & non-fuel mineral auctions happening now and to happen in later phases, the government must specify a certain quantum of blocks exclusively for steel sector. Also no other sector should be merged along with steel. It should be understood that economics of various industries clubbed in non-regulated sectors are different, hence the fluctuations of bid value is bound to happen, where eventually steel units suffer the most.
Re-look the FTAs made with various countries
To broaden and deepen economic engagement and to have greater trade integration, India like other countries has trade agreement with various nations and their associations; for eg Regional Comprehensive Economic Partnership (RCEP). Recently India has accepted a ratchet clause which implies that any change in future domestic policies will automatically get committed under RCEP and a Most Favored Nation (MFN) clause where any future concession given to a trading partner under a bilateral treaty will automatically get extended to RCEP members as well. These multilateral trade agreements although facilitate economic growth, technical co- operations and intellectual property rights, however, production surplus of some materials in one country leads to manufacturing downfall for others. Steel being one of the materials needs a crucial introspection.
Incentivize the usage of clean technology in steel
As India committed in COP21 Paris summit to increase its green foot print, it is essential to incentivize green technology in all sectors. With solar energy getting increased attention, many people are failing to see the other areas where we can considerably reduce ozone emission. Steel industry being one such important sector. Process such as coal gasification, underground coal gasification, modern blast furnace applications which are clean and produce less SOx & NOx levels should be incentivized by tax reduction.
Develop financial instruments to reduce the financial burden
Like the recently applied 5/25 scheme to repay debt to a longer tenure more schemes like it should come from the finance ministry. Recently, few supportive proposals like banks taking certain equity as redeemable preferential shares and giving the companies sufficient time to redeem them. Also, efforts at bringing in financial investors who can hold some of the stakes for a period of time, and later divest them when the company comes back to health are few proposals which can provide cushioning to the ailing steel sector.
Solutions can be many but we need a holistic approach. No one should think that the steel sector earns huge profit. This is a capital intensive segment. Nearly 40% of the profit goes to the national exchequer and the balance is reinvested in the economy for fresh projects, which further creates national assets and jobs. Therefore, the nation’s plan to provide house, efficient connectivity and infrastructure to all citizens can be made a reality if steel industry in India received proper attention. The ‘Make in India’ initiative can only be successful if all speak in one voice and say “Yes to Steel”.
* The views expressed are author’s own and do not necessarily reflect the view of the company.
Source: Steel 360 Magazine (April 2016 Issue)