Financial Daily from THE HINDU group of publications
Monday, Oct 18, 2004

Cross Currency

Group Sites

Industry & Economy - Steel
Corporate - Interview

`Compete through brand-building'

Pratim Ranjan Bose

A SPECIALIST raw material sourcing agency, MetalJunction.Com Pvt Ltd is best suited to take a bird's-eye view of the emerging complexities in raw material sourcing. According to the company's Managing Director, Mr Viresh Oberoi, domestic steel companies should refrain from competing with each other on procuring raw material, especially in the case of imports.

While knowledge-based activities in the front and backends should be outsourced for greater operational efficiency and optimisation of costs, the steel companies should focus on brand-building not only to compete with each other but also to counter the competitive pressures from substitutes such as cement, aluminium and plastics, he told Business Line in an interview.

Till recently, raw material was the least highlighted issue both by steel makers and in the media, with traditional concepts of captive sourcing and/or long-term sourcing contracts in vogue. While captive mining continues to be the main sourcing activity for some fortunate companies such as Tata Steel and SAIL, for the rest a paradigm shift seems to have taken place in the entire sourcing concept. Can you give us a detailed outline of this shift in sourcing methodologies and dynamics for different kinds of steel raw materials, especially iron ore and metallurgical coal, and where it would follow?

The steel and upstream mining industry did not witness too much investment in the 80s and 90s right until 2002, with the exception of China. China's steel production in 2000 was 127.2 million tonnes and grew to 220 million tonnes in 2003. In 2004, China is producing at an average rate of 20 million tonnes a month, which would take its aggregate production to above 240 million tonnes this year.

Despite this, the country remains a net importer of steel even in 2004. Its apparent consumption in 2003 was 232 million tonnes (which means net imports of 12 million tonnes). In 2004, its apparent consumption is estimated to be 263 million tonnes, which will widen the demand-supply gap to about 20 million tonnes.

China's iron ore mining industry has not been able to keep pace with this growth, leading to higher iron ore prices. The global coking coal mining capacity has not grown either. With China restricting exports of met coal and coke, prices of this key raw material have also gone up dramatically.

In the wake of these developments, sourcing of raw materials such as coal, coke, iron ore and ferro alloys have become strategic in nature. Access to raw material through either captive or equity in raw material assets has become a critical issue to maintain supplies and hedge against supply disruption and volatility in prices.

The Japanese steel industry has had great foresight in this respect. They import their entire requirements of coal and iron ore. They do not have these resources in Japan. They still produce 110 million tonnes of steel every year. The Japanese for decades have been investing in coal, iron ore assets and logistical infrastructure.

Talking specifically about India the domestic steel companies should adopt a combination of roughly four strategies for sourcing raw material. These are spot purchases, long-term contracts (LTC), taking equity in raw material assets and captive sources.

With a sudden exposure to a raw material crisis condition, in a knee-jerk reaction, domestic steel makers will initially be seeking backward integration by buying mining assets or entering into strategic alliances. This is not sustainable in the long run as independent strategies and successful companies will have to employ a combination of spot, LTC, buying equity in mining assets and having captive sources as well.

The average periodicity of LTCs seems to be on a decline for sourcing iron ore coking coal and other raw materials, thereby exposing companies which do not have adequate captive source to a situation where the price of raw materials are subject to regular changes. Also, the companies may have to bear high hedging costs for forward contracts, adding to the total cost of sourcing raw material. What should be the right approach at this juncture?

The average contract time is on the decline. The sellers who have no obligations to their buyers will sell to such buyers only in the spot market. Most companies which used to bank on long-term contracts and used to procure these materials through the tender route have been exposed to these risks. There has been a complete change in the market dynamics and sourcing of these materials depends a lot on strategy, which is a mix of investing in raw materials asset and strengthening supplier relationships, among others.

Do you foresee an increasing importance of trading platforms such as yours in such a situation? Do you foresee growth of more such platforms globally? Do you think that steel makers will more and more outsource this part of the business primarily due to complexities involved and secondly because it does not fall on their core competence areas (i.e. steel making)? is not a pure trading platform. We are full-fledged sourcing specialists who have comprehensive understanding of the prevailing market dynamics and we advise our clients on strategy and thereafter implement it to ensure that our clients receive the best price without disruptions in supply.

We feel that steel companies cannot and should not invest in all knowledge verticals. They should instead outsource this to a specialist.

The Japanese, for instance, negotiate all their strategic raw materials together. All the steel companies negotiate as a single entity. They compete in the marketplace but find it advantageous to collaborate as well. This is a role that MetalJunction can play for the Indian steel industry.

Raw material exports is now a hot issue, as those having resources want to make money and those eho do not want the domestic demand to be catered to first. How do the WTO guidelines influence the whole issue and how is it expected to evolve in the future with reference to global experience?

The WTO encourages free trade and resists any governmental interference, especially in the movement of commodity resources.

However, countries do put restrictions on exports. China recently did it on met coke by licensing the exports. You have rightly mentioned that there is a debate for such a move in India on our iron ore exports.

How do you see the future steel industry in India and the forthcoming changes it is likely to adopt in so far as frontend (marketing) and backend (raw material) activities are concerned?

The steel industry in India has a competitive edge in terms of being a low-cost producer. However, these gains are frittered away by higher supply chain costs. Steel companies should come together and share a common infrastructure on the procurement and selling side.

While aggregation of demand for raw material procurement would help steelmakers to command the terms and conditions for the supplies and would lower costs, sharing a common supply chain would reduce costs on distribution of the final products.

The steel companies should look at competing with each other by creating stronger brands for their products and also look at competition at a higher level from substitutes such as cement, aluminium or plastics.

More Stories on : Steel | Interview | Minerals

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
`Weather still best guide to rural demand'

Errant lotteries put on notice in Kerala
Anti-dumping duty mid-term review
KMML refutes layoff reports
`Focus on commodity groups for Asean export target'
DePuy launches hip replacement device
India initiates moves for Asian crude price marker
Aiyar hits out at Karnataka, ONGC on SEZ pact
Shell may not supply LNG to Maharashtra
NTPC issue attracts $15b, 260 FIIs
APGenco technical directors
`Compete through brand-building'
Still going strong
European Commission to appeal against WTO sugar ruling
US move to clamp down on Chinese textile imports may benefit India
Textile trade team for US
Rs 5.65-cr subsidy for SSIs in Dakshina Kannada dist
Truck, bus tyre output slips in Aug
Grading maritime institutes — DG Shipping takes the plunge
Chidambaram for `healthy debate' on job reservation
Lok Satta to launch `Post Card to PM'
PM to inaugurate village resource centre today — ISRO-MSSRF project to provide satellite-based rural interface
Agenda for the week
In Hyderabad Today
FIEO wants move to tax profits on sale of DEPB licences scrapped
More members on TTD board

The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription
Group Sites: The Hindu | Business Line | Sportstar | Frontline | The Hindu eBooks | The Hindu Images | Home |

Copyright 2004, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line