Tata Steel, Other Producers Need Policy Initiatives To Improve Margins

Faced with a bleak global scenario, Indian steelmakers are looking inwards to fuel their growth.

Already, last week, Tata Steel, one of India’s largest multi-national companies, had announced that it was now looking at its India operations to carry it through today’s “difficult times,” since its European operations had slowed down due to the economic downturn.

So, while Tata Steel goes about bolstering its India operations, another major player in the Indian market, Jindal Steel & Power Limited, has now put forth a few suggestions in the “overall interests of the Indian steel sector.”

While speaking to Platts, the company’s steel business deputy managing director and CEO spelled them out. Talking on the sidelines of a conference organized by the World Steel Association in New Delhi, V.R. Sharma said the Indian government should establish more steel parks, and provide land and raw materials in states that are rich in iron ore to support the sector.

Why? Because in his opinion, through consolidation and effective government intervention, India could add over 100 million metric tons a year of crude steelmaking capacity by 2020.

If that were to happen, then India would have at least 25 new large plants. These, however, would require about 100,000 acres, which only the government could acquire, not some private body or company, he added.

Sharma’s remarks coincided with an assessment report put out by analysis and ratings firm ICRA. In that report, ICRA expressed optimism for the domestic steel industry’s long-term demand outlook, but added that favorable policy initiatives to kick-start investments and a moderation in interest rates would remain critical factors in steel demand growth.

In a way, both ICRA and Jindal Steel’s CEO were speaking the same language. Both were trying to suggest methods to improve India’s steel sector.

Sharma said the government must stipulate a minimum capacity requirement before giving permission for new plants. According to Sharma, if someone puts up a 1-2 million-ton-per-year plant, it becomes sick from Day One because of the poor economies of scale. In his view, the minimum capacity should be fixed between 3 million and 6 million tons per year.

Consolidation, he felt, was the mantra.

Meanwhile, the ICRA report said the near-term margin outlook for Indian steel companies remained weak, even though the prices of raw materials had come down a little bit. As a result of the downward trend of steel prices, its imports had surged in the present year, exerting pressure on domestic steel prices. The latter may continue to remain in check in the short term, according to the report.

The ratings agency also said shortages of iron ore and a weak rupee offsetting the easing of international coking coal prices had kept the prices of raw material at relatively elevated levels, despite a fall in domestic iron ore prices in September and October 2012.

All this, said ICRA, made it believe that the margins of steel players were likely to remain under pressure for the near-term.

By Sohrab Darabshaw