Over the last two
years, India has become a net Importer of Steel. As steel makers respond
with Brownfield and Greenfield capacity addition Plans and a Slew of
asset Acquisition Strategies, B&E analyses what These Players are
Exactly up Against!
According to a report by the Indian Chamber of Commerce and PwC, raw material cost is 70% of price for steel players without captive resources as opposed to 45% for players with captive resources. On the other hand, cost of mining has also gone up by around $10 per ton in 2009, as per ICC-PwC. Despite productivity enhancements through better mine design, cost cutting, et al, global mining companies saw revenues rise by around 23% and costs by 27%, leading to lower profits.
At the moment, Indian firms have two possible types of destinations to acquire iron ore – destinations like Australia with stability and world class systems and destinations like Africa, which suffer from issues like political instability, poverty, et al. Naturally, mining assets in places like Australia are expensive, therefore a cost benefit analysis needs to be done. The fact that more or less the same players are chasing the same assets is pushing up asset prices rather illogically. The way forward should involve mining and steel makers bidding together, as a consortium, so that they increase their financial muscle.
We should perhaps, in reality, be looking closer home for assets. The steel industry has been representing to the government that the companies setting up greenfield steel plants should be allocated iron ore mines – that’s an urgent point relevant to ponder. Indeed, the availability of quality iron ore in India (ranks 3rd after Australia & Brazil) is a key element of its attractiveness to global steel players.
The government has now proactively started increasing export duties on iron ore lumps and fines to make more raw material available to the domestic players. But more than raw material, the failing in India, as Prasoon Majumdar, Head, Global Strategy and Investment Consulting (GSIC), says is with respect to “setting up and implementing large steel projects; which of course, is also due to the constraints like land acquisition. Once those happen, Indian steel makers have the wherewithal to compete without captive mines.” Till the 2016-17 period, major steel makers are expected to absorb price increase into their steel prices; considering the projected surplus. The key, as Fitch Ratings accepts, is to see demand when the Government removes its stimulus.
The last, but not the least issue that steel companies are growingly, and rightly, worried about is the state of the very infrastructure (including power) that they are playing a major role in building. According to Rao of PricewaterhouseCoopers, “Infrastructure is indeed a key challenge and early actions are needed given the long lead time to develop needed facilities, and the multiple issues to be addressed viz. roads and rail, locos and rolling stock, ports, handling facilities.” One can imagine the scenario by considering how, for every tonne of steel being produced and going to the customer, 4-5 tonnes of raw material has to come from the back end.
As per the ICC-PwC report, achieving the targeted steel capacity implies generating additional annual cargo traffic of around 150 million tonnes by 2011-12 and around 320 million tonnes by 2019-20. Around 75% of raw materials and 25% of finished goods are transported by rail today. So they will have to take up most of the additional load. For the 11th plan, it means planning is required in several areas.
Firstly, we would need an additional 1800 electric and diesel locomotives each, besides the need to improve yard capacities for faster loading, multiple access lines to relieve congestion and availability of better unloading equipment & route management. The road network is important as well, since roads are heavily used by the smaller players. But the fact is that road infrastructure in resource rich states like Orissa is poor. Highways representing only 2% of the overall road network carry a whopping 40% of the load. Similarly, port traffic has also increased.
For Marmugao and Paradip, the iron ore traffic went up by a high 12% per annum over the past two years; in absolute terms, to over 48 million tonnes. If Indian companies are to develop surplus capacities for exports soon, this has to be addressed too. Iron ore handling capacity at all major ports is around 62.8 million tonnes per annum, but Indian iron ore exports are expected to cross that figure very soon.
As the Union Steel Minister projects, the Indian steel industry faces an extremely critical point in its history. If all stakeholders handle it well, the sector has the potential to act as a catalyst for other widespread and desirable changes in the Indian economy and to growth. Conversely, the costs of missing the bus will be too great to bear.
At the moment, Indian firms have two possible types of destinations to acquire iron ore – destinations like Australia with stability and world class systems and destinations like Africa, which suffer from issues like political instability, poverty, et al. Naturally, mining assets in places like Australia are expensive, therefore a cost benefit analysis needs to be done. The fact that more or less the same players are chasing the same assets is pushing up asset prices rather illogically. The way forward should involve mining and steel makers bidding together, as a consortium, so that they increase their financial muscle.
We should perhaps, in reality, be looking closer home for assets. The steel industry has been representing to the government that the companies setting up greenfield steel plants should be allocated iron ore mines – that’s an urgent point relevant to ponder. Indeed, the availability of quality iron ore in India (ranks 3rd after Australia & Brazil) is a key element of its attractiveness to global steel players.
The government has now proactively started increasing export duties on iron ore lumps and fines to make more raw material available to the domestic players. But more than raw material, the failing in India, as Prasoon Majumdar, Head, Global Strategy and Investment Consulting (GSIC), says is with respect to “setting up and implementing large steel projects; which of course, is also due to the constraints like land acquisition. Once those happen, Indian steel makers have the wherewithal to compete without captive mines.” Till the 2016-17 period, major steel makers are expected to absorb price increase into their steel prices; considering the projected surplus. The key, as Fitch Ratings accepts, is to see demand when the Government removes its stimulus.
The last, but not the least issue that steel companies are growingly, and rightly, worried about is the state of the very infrastructure (including power) that they are playing a major role in building. According to Rao of PricewaterhouseCoopers, “Infrastructure is indeed a key challenge and early actions are needed given the long lead time to develop needed facilities, and the multiple issues to be addressed viz. roads and rail, locos and rolling stock, ports, handling facilities.” One can imagine the scenario by considering how, for every tonne of steel being produced and going to the customer, 4-5 tonnes of raw material has to come from the back end.
As per the ICC-PwC report, achieving the targeted steel capacity implies generating additional annual cargo traffic of around 150 million tonnes by 2011-12 and around 320 million tonnes by 2019-20. Around 75% of raw materials and 25% of finished goods are transported by rail today. So they will have to take up most of the additional load. For the 11th plan, it means planning is required in several areas.
Firstly, we would need an additional 1800 electric and diesel locomotives each, besides the need to improve yard capacities for faster loading, multiple access lines to relieve congestion and availability of better unloading equipment & route management. The road network is important as well, since roads are heavily used by the smaller players. But the fact is that road infrastructure in resource rich states like Orissa is poor. Highways representing only 2% of the overall road network carry a whopping 40% of the load. Similarly, port traffic has also increased.
For Marmugao and Paradip, the iron ore traffic went up by a high 12% per annum over the past two years; in absolute terms, to over 48 million tonnes. If Indian companies are to develop surplus capacities for exports soon, this has to be addressed too. Iron ore handling capacity at all major ports is around 62.8 million tonnes per annum, but Indian iron ore exports are expected to cross that figure very soon.
As the Union Steel Minister projects, the Indian steel industry faces an extremely critical point in its history. If all stakeholders handle it well, the sector has the potential to act as a catalyst for other widespread and desirable changes in the Indian economy and to growth. Conversely, the costs of missing the bus will be too great to bear.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
