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The crying need is for a quick reduction in the finance costs that are eating away at the bottomlines of steel companies.

THE domestic steel sector has had another dose of good news with the possible finalisation of the second tranche of the industry's debt-restructuring package.

With the latest announcement, the Government has clearly signalled, and reiterated, its interest in accelerating the turnaround of the steel industry.

However, the low profile and cautious approach that the Government is adopting towards the restructuring is, according to the industry itself, deliberate. The Government is clearly faced with a dilemma in the restructuring process.

On the one hand, the steel industry is one of the country's largest employers and potential supplier to the Government's grandiose infrastructure plans and the industry sector, with the maximum amount of overdue debt (both domestic and overseas). It is desperately in need of a restructuring programme to tide over the ongoing crisis. The crying need is a quick reduction in the finance costs that are eating away at the companies' bottomline.

On the other hand, however, in working out the restructuring programme for the domestic steel industry, the Government is faced with the possibility of attracting the punitive actions of the US Government under its anti-dumping drive.

There is already a strong lobby building up in the US against continuing the exemptions currently enjoyed by the Indian steel industry while exporting to that country.

This explains the cautious approach of the Government in announcing a second round of restructuring for companies that have sunk deep into the quagmire of high debt (some of them with a gearing of about seven times their shareholder funds) and huge accumulated losses.

The new scheme unveiled by the Government is aimed at aiding the revival of another nine currently unviable, loss-making steel companies. Among the companies in the list are Mid East Steel, Malvika Steel, Bellary Steel, Southern Iron and Steel and Remi Metals. The Government had in February announced a debt-restructuring programme for Essar Steel, Ispat Industries and Jindal Vijayanagar Steel.

Another important reason to believe that the Government is guarded in its second round of restructuring is its choice of companies this time around.

This selection of companies that are expected to be offered sops — including a waiver of accumulated interest, lower interest rates on existing loans and a possible write-off of a portion of the capital — is indicative of the Government's interest in lifting the industry as a whole out of its problems.

But individual companies stand out and may find the going tough despite the debt restructuring programme.

Again, the promoters of these steel companies — the financial institutions that have lent over Rs 30,000 crore to these companies and the other stakeholders — have a clear window of opportunity this year.

Hot rolled coil prices have increased dramatically over the last year and are priced at about $320-350 per tonne from a low of about $180 in 2001.

Despite the US' actions and the global economic slowdown, demand for steel has been rising both in the domestic market and in countries in Europe, Asia and China.

Looking at it within a five-year time frame, the debt restructuring package could not have come at a more opportune time.

Finance charges are a critical ingredient in determining the profitability and competitiveness of steel companies.

So, the debt restructuring, coupled with the continuing firm international prices of steel, could help companies climb out of the red.

Going forward, however, with the finalisation of debt restructuring for 11 of the main domestic steel companies in the private sector, the Government needs to tread even more carefully.

It would be difficult to claim that every one of the nine companies that feature in the new, second tranche of debt restructuring is financially or otherwise deserving of the attempt to bail them out.

The choice will only get more difficult for the Government's restructuring programme.

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