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Sunday, October 24, 2010

'China not a threat to Indian steel makers'

Global consumption of finished steel is expected to grow by 10.7% and 5.3% in 2011 and 2012. The country's largest steel producer, Steel Authority of India, is aggressively building up capacity to cash in on the opportunity. SAIL chairman CS Verma lists the challenges faced by the company in an interview withET . Excerpts:

The steel market in the country is looking up again and companies feel they have pricing power. Is the demand sustainable?

There has been about 10% growth in consumption of finished steel in India in the first half of 2010-11. This is among the highest in major steel-consuming countries. User industries such as machinery and equipment manufacturing and automobiles are showing strong growth. Demand from the construction sector is also rising, mainly due to a large number of infrastructure-related projects. Besides, growth is also expected in individual housing and small and medium commercial construction. Strong GDP growth, high savings and investment are spurring growth in the steel industry.

Does the demand justify big-ticket investment in capacity addition and new projects?

Crude steel production for the 66 countries reporting to the World Steel Association (WSA) was 113 million tonnes in August, 4.2% higher year-on-year. Present capacity utilisation is around 80%. De-stocking has also taken place. WSA, in its latest demand forecast, has projected a growth in consumption of finished steel by 10.7% and 5.3% in 2011 and 2012, respectively. While advanced economies are expected to grow 2.6% in 2010, emerging and developing economies are expected to grow at 6%. China, Brazil and India are the major drivers of growth in steel consumption.

How real is the threat of imports from China?

China's steel consumption is still growing in double digits. The Chinese government is also shutting down inefficient units to restrict steel production to what is required for domestic use and is discouraging exports. This, coupled with Chinese domestic prices, withdrawal of export rebates from certain select categories and India's domestic prices, the threat of cheap imports from China is only marginal. In fact, imports from China have fallen 40-45 % in the last five months. However, Indian steel will need to keep a close watch on developments in China.

What kind of fresh investment is the company looking at?

SAIL has set a target of expanding its hot metal production capacity to 23.46 million tonnes by 2012-13. All critical orders for achieving the target capacity have been placed.

The remaining orders are of short-term gestation nature which will be placed after detailed drawings for the equipment and facilities are available. SAIL also has in place an indication plan for expanding capacity to 60 million tonnes by 2020.

What about global footprint for SAIL? Is anything being planned?

Currently, our focus is on acquisition of coking coal and limestone mines abroad. We are open to opportunities in steel if they provide a strategic fit.

When is SAIL's follow-on equity offer expected? What is the delay in filing the draft red herring prospectus (DRHP)?

The SAIL FPO is likely to be issued in early December. In case we miss this deadline, we can only expect it to happen in late January, since markets would be closed for winter break and Christmas. We are in the process of engaging book running lead manager (BRLM). After appointment of BRLM, legal counsel will be appointed for due diligence and preparation of DRHP.

What about Posco-SAIL JV? Do you plan to extend the scope of the proposed JV to other place, apart from Bokaro?

The detailed project report (DPR) for the proposed SAIL-Posco JV is being finalised. The JV agreement would only be entered into after the DPR is approved by the boards of SAIL and Posco. Depending on the success of the envisaged JV plant at Bokaro, new initiatives at other locations can be considered.

What is your view on sharing of profit from mining operations, as proposed in draft Mining Bill?

SAIL is always committed for uplift of the people in the areas it operates and therefore, any proposal or scheme for improving the life of people, particularly the poor, is welcomed by the company. However, SAIL is basically a steel producing company and its profits are mainly through marketing of steel. Constitution of the company and its operations are such that it is not possible to workout profit or loss separately for the mines as the mining activity is not a separate segment of revenue or profit centre. Besides, the steel companies having captive mines are not allowed to sell ore in the open market. So, whatever modalities for compensation are finalised, these need to be practical and implementable. I believe that to ensure a smoother implementation of the provisions of the draft legislation, there is an immediate need for consensus building among stakeholders.

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