Iron ore shortage and rising cost of production hit small steel companies
The Hindu Business Line reported that the economic slowdown has hit the small steel companies more than the established ones. Small and medium units, especially in iron ore-rich Karnataka are the worst hit.
The Karnataka Iron and Steel Manufacturers Association claims that almost half of the 60 sponge iron plants in the State have shut shop for want of iron ore. A few, such as Sathavahana Ispat, Kirloskar Ferrous, Kalyani Steels, Unimetal Ispat, Sandur Manganese and Iron Ore and Sandur Laminates, have suspended their operations partially.
Mr K R Shetty, Vice President, Vibhutigudda Mines said that about 50% of the small scale units, especially in the Bellary, Hospet and Sandur region are on the verge of closure due to iron ore shortage.
The Association has requested NMDC to earmark some quantity of iron ore that is e-auctioned for the small units as they create employment at the local level.
The mining operations in Karnataka resumed recently after an year long ban imposed by the Supreme Court.
Appreciating the transparent iron ore e auction, Mr Narendrakumar Baldota CMD of MSPL said that the steel and pellet plants with captive mines should be exempted from iron ore e auction and be allowed to use their own ore to feed to their plants.
Speaking at the recent Mining Engineers Association of India summit, he said that mining is no more an attractive business with the cost of production and royalty rates increasing tremendously in the last few years and 15% of the price dedicated for social activities.
While small companies are struggling to keep their head above water, the larger ones are busy re jigging debt to reworking product mix. JSW Steel, one of the largest steel plants in Karnataka, recently commissioned a 2 million tonne per annum beneficiation plant to enhance the quality of low grade iron ore being supplied at the e-auction conducted in Karnataka. The company has been operating its Vijayanagar unit at 80% utilization due to iron ore shortage.
Tata Steel saved INR 1,100 crore last fiscal by implementing cost saving measures and spotting improvement opportunity across the value chain.
Mr Nicolas J Sowar, Global Metal Sector Leader of Deloitte, feels companies should manage their balance sheet by reducing working capital besides improving efficiency to beat the slowdown blues.
He said that “You need to look at supply chain from the start to finish, logistics on maintaining the fixed assets, on how those are operating. Every employee has to understand the key matrix to achieving cost advantages.”
With steel imports turning costlier after the sharp depreciation of the rupee against dollar, JSW Steel targets to cater this burgeoning demand.
Mr Jayant Acharya, Director, Commercial and Marketing, JSW Steel said that though the conventional steel demand has slowed down, there is ample opportunity in the import replacement segment. He added that “We are targeting to produce high-grade steel that commands better margin.”
TATA Steel, which has been adding a million tonne capacity since last year, tweaked its marketing initiative to expand its market share in the automobile sector, which has been hit by poor demand. The company’s production capacity at Jamshedpur is expected to touch 9 million tonne this year going up to 10 million tonne next year.
Mr H M Nerurkar, MD of TATA Steel said in a recent interaction with this newspaper that “Despite slowdown in the automobile sector, our share in the automotive segment has actually gone up. In fact, it is being used in more and more new models that are being launched.”
Having done what it takes to maintain the market share, steel companies are tightening their cost of funds. Ruia owned Essar Steel, which is known for rolling out specialized steel from its Hazira plant in Gujarat, has raised USD 3 billion in the last 2 months to repay its high cost rupee debt.
The company expects to save INR 1,300 crore per annum by prepaying some of the rupee loan and extending the loan maturity period to 6.5 years from 3.5 years.
Mr Ashutosh Agarwala, CFO and Director, Essar Steel, which is a low cost steel producer in India said that “The expansion of the facilities at Hazira was undertaken when the rupee was trading at INR 40 a dollar and now the exchange rate has exceeded INR 60 a dollar.”
However, many small companies find it difficult to raise funds abroad. They embark on cost cutting mode by curbing travel expenses and postpone annual salary hike for employees, besides reducing capacity utilization.
Mr Basant Poddar, Vice President, Federation of Indian Mineral Industries and MD of MEL, Chitradurga said that about 30 to 50% of the steel mills in Karnataka have resorted to periodic shut down due to uncertainty of raw material supplies.
He added that “While 50% of the small and medium steel plants are on the verge of closure, many of them have reduced their workforce by half.”
The slowdown in demand has not deterred companies from raising prices. Essar Steel increased prices by INR 1,000 to 1,200 a tonne from August 1st while JSW Steel plans to follow suit.
Steel companies are dependent on imported coking coal to meet their fuel needs. The weak rupee has pushed by the import bills. Besides, the cost of domestic iron ore prices have gone up due to acute shortage in supply after ban on iron ore mining in Goa. BMM Ispat, for example, is expected to put up a coal gassifier to reduce coal consumption in the next 15 to 20 days.
Source – The Hindu Business Line