Bank loan defaulters kick off steel price war

A pitched price war has started among steel manufacturers with companies that have defaulted on their bank loans dropping steel prices to gain market share amidst weak demand.

This has not only kicked off an uneven competition but is also threatening the survival of efficient steel producers.

Banks recently declared loans extended to large steel producers such as Essar Steel and Bhushan Steel as non-performing assets and are trying to find a suitor for them.

In the meanwhile, these companies do not incur any interest on their loans and have to just pay 10-15 per cent of their turnover to banks. Being loss-making units, these companies are neither required to pay statutory taxes nor provide for depreciation, leaving them with enough cushion to under-cut market prices, said an executive of a top steel company.

While the industry is fighting for MIP (minimum import price) and anti-dumping duty as protection against imports, some of the companies are selling steel much below MIP in India, he added.

Banks will only do good to themselves by finding an early solution to the bad loan accounts of steel companies, he said. While MIP of hot rolled (HR) coil is ₹35,000 a tonne, it is being sold at ₹25,000-26,000 a tonne in the domestic market.

Similarly, long product prices have dipped by ₹5,000-6,000 a tonne to ₹26,000, much below the pre-MIP level of ₹32,000.

“Knowingly or unknowingly, the loss-making companies are following the China model of undercutting prices within India. If this trend continues unchecked, more steel companies will start defaulting on their banks loans,” said another South-based steel company official.

The current trend has put pressure on companies such as Tata Steel, JSW Steel and SAIL, which have expanded their capacity and are incurring huge interest costs.

JSW Steel, which was the only company to announce June quarter results, reported a 9 per cent increase in finance cost at ₹863 crore (₹790 crore) and provided ₹743 crore (₹697 crore) for depreciation.

Nitin Johri, Whole-time Director (Finance) and CFO, Bhushan Steel, told BusinessLine that the blamegame has started in the industry and it is certainly not a happy situation to be in.

“It is a fact that companies with high inventory usually cut prices. We did not have any inventory pressure as our Odisha plant was shut in July for modernisation. We pay 15 per cent of our turnover to banks which have directed us to increase capacity from 60 per cent to 75 per cent,” he said.

In response to a BusinessLine questionnaire, an Essar Steel spokesperson said that it is selling its products at market price or above market price and paying an agreed percentage of revenues to banks towards debt servicing.

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