The Hindu Business Line : Steel: Creating backward linkages

Galloping iron ore and coal prices have posed a potent threat to the margins of steel producers, especially with pressures mounting on them to hold their domestic price line. On an average, the proportion of raw material to net sales for major steel producers increased from 36.2 per cent to 39.4 per cent in 2007-08. As a proportion of total expenditure, raw material costs rose from 48.5 per cent to 53.7 per cent. The margins of SAIL, JSW Steel and Essar Steel declined as a result, but those of Tata Steel, Ispat Industries, Jindal Steel & Power witnessed an increase.

Iron ore prices have increased by about 85 per cent and coking coal prices by more than 200 per cent in the last year. With global iron ore mining companies such as Rio Tinto and BHP Billiton including price escalation clauses in their long-term negotiated contracts, further increases will be an ever-present threat.

Domestic steel companies tackled this through backward integration, better operating efficiencies and other strategic initiatives. SAIL, for instance, is readying a Rs15,000-crore backward integration plan to develop mines that will be specifically linked to each of its steel plants. The company has also reported higher operating efficiencies in the form of a 2 per cent reduction in its coke rate, 1 per cent reduction in fuel rate and 5 per cent cut in energy consumption for 2007-08.

Tata Steel, which sources almost its entire iron ore requirements captively is readying to step up its backward linkages to cater to its now expanded global footprint. A toehold in markets such as the UK, Vietnam and some Asian economies has also helped Tata Steel benefit from higher global prices for steel, enabling pass-through of costs, denied to purely Indian producers.

Widespread geographical diversification through acquisition of coal mines has also helped establish new linkages for sourcing of raw materials.

C. N. M. LAVANYA

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