‘New steel capacity will help balance the market'

In an interview to Business Line, SAIL chairman Mr C.S. Verma exuded confidence about a robust demand scenario for steel playing out in India, be it in the flat, long or value-added segment , but cautioned on volatile raw material prices and the difficulties of setting up new capacity.

How do you see demand and pricing power for steel panning out in 2011-12?

SAIL is operating at more than 100 per cent of its rated capacity. With the new facilities installed at Salem having commenced production and two new blast furnaces scheduled to be commissioned at Rourkela and IISCO steel plants by the end of this financial year, we will be operating with around 20 million tonnes (MT) of hot metal production capacity. This additional capacity, along with those of other steel producers, will help balance the present Indian steel market, which has been a net importer for many years now.

In 2010, steel consumption in India grew by 9.6 per cent. In 2011, I steel use is forecast to grow by 13.3 per cent to reach 68.7 m.t. In 2012, the growth rate is forecast to accelerate further to 14.3 per cent. Growing steel consumption indicates healthy economic growth. The major steel consuming segments showed robust growth during 2010-11 — auto (28 per cent), consumer durables (20.9 per cent), capital goods (9.3 per cent), power (5.6 per cent) and construction (8.1 per cent). The projected investment in infrastructure during the 11th Plan period is expected to be substantial.

Based on these parameters and the large potential for consumption in the rural sector, it is expected that demand for steel will continue to grow in traditional sectors. Requirement for specialised steel will increase substantially in hi-tech engineering industries such as power generation, petrochemicals, fertilisers, etc.

Pricing will depend upon demand-supply equilibrium, as prevailing from time to time, but prices are expected to move in a narrow band as compared to the previous year.

Are you considering price hikes and can consumer markets absorb these without affecting demand?

Global steel demand is estimated to have grown by 13.2 per cent during the calendar year 2010 to 1.28 billion tonnes. It is projected to grow by about 5.9 per cent to 1.36 billion tonnes in 2011. However, , global prices are not fully reflecting the increase in raw material prices as supply is rising faster. In 2010, global crude steel production grew at 15 per cent – 1.8 per cent higher than demand growth, making it difficult for steel producers to fully pass on the impact of cost increase to consumers. Global capacity utilisation in Q1 of 2011 is at approximately at 82 per cent, leaving significant room for supply-side adjustment to meet the growing demand in the future.

In the short- to medium-term, however, raw material suppliers will have to respond to the resistance the steel producers are facing in trying to improve price realisation , as the current price levels are not sustainable. In recent months, steel prices have moderated and are expected to be stable in the near future. We have continued with May prices this month.

One of SAIL's strengths has been its integrated structure. in steel-deficient market. Is the 15 mt/annum target by the end of this financial year achievable?

SAIL has been India's largest steel producer for over half a century. With the aim of raising our production levels in tune with the rising demand, we have undertaken massive modernisation and expansion (M&E) schemes. All major facilities under the expansion plan of Salem Steel Plant were completed on schedule in September '10 and are under stabilisation for regular production.

Among other major production facilities commissioned during FY '11 were blast furnace 2 and second ladle furnace at SMS-II at Bokaro Steel Plant, coke oven battery 10 at IISCO Steel Plant (ISP), and 750 tpd oxygen plant at Rourkela Steel Plant. At ISP in Burnpur, some of the major new facilities such as sinter plant, pig casting machine, main receiving station and oxygen plant are ready for commissioning, while facilities such as 7-metre-tall coke oven battery, 4060m3 blast furnace, BOF & continuous casting shop as well as rolling mills are nearing completion. By the end of this financial year, we will achieve inherent hot metal production capacity of 20 mt. Our capex plan for the current year is Rs 14,337 crore.

Indian steel production is set to take a massive leap over the next four years. Given the slow progress in infrastructure projects, will consumption growth fail to match capacity additions?

Given the fact that we have a huge infrastructure deficit in rail, road, ports, airport, power, etc., government efforts will get supplemented by private participation, as the overall growth of the economy will force infrastructure growth. Projected investment in infrastructure creation – in power, roads, telecommunication, railways, irrigation, water supply, ports, airports, etc. – during the 11{+t}{+h} Plan is $ 514 billion.

Around 125 mt of steel will be needed to achieve this targeted investment. Even if 75 per cent of these investments materialise, around 100 mt of steel would still be needed on an incremental basis for the creation of infrastructure. Hence, the potential for high steel consumption remains. There could be demand-supply mismatch in the short run; however, in the medium- to long-term, the prospects of the Indian steel industry are very good.

What are SAIL's plans to deal with the volatility in coking coal prices? Given that international miners are pushing for contracts of increasingly shorter duration, how can steel producers hedge against this volatility?

SAIL is working towards reducing its dependence on imported coking coal as well as developing security of coking coal supplies. For this, it has developed a three-pronged approach:

One-fourth of SAIL's coking coal requirement is already being met from indigenous sources, including Coal India and the company's own captive coal mines. While efforts are being made to increase production from the captive mines, SAIL is also in dialogue with CIL for increasing coking coal supplies . Further, SAIL is developing coal washing facilities to make use of unwashed coking coal available from CIL. SAIL has also acquired three indigenous coking coal blocks and mine development is in progress.

SAIL is aware that its growing requirement cannot be met from indigenous sources alone; hence, in addition, the company is looking at acquisition of coking coal mines abroad. International Coal Ventures Ltd, of which SAIL is a member, is in the process of discussions with asset owners in Australia, USA, Indonesia, Mozambique, Mongolia, etc., for this purpose.

We are also working on reducing specific coking coal consumption by adopting alternative and greener technologies other than coke ovens. SAIL is installing pulverised coal injection (PCI) technology, which uses non-coking coal, in all its blast furnaces. This will help to reduce consumption of metcoke in the blast furnaces, eventually leading to reduction in coking coal requirement. SAIL is also planning to use FINEX and other smelting and direct reduction technologies which use non-coking/inferior coking coals, gas or power for production of iron and steel.

How are your tie-ups with Nippon, POSCO and Kobe progressing? What kind of benefits do you expect from these ventures?

Discussions with these companies are at various stages. We expect that through these collaborations, we will be able to improve techno-economic parameters of our blast furnaces. We also expect to add additional steel making capacity based on new technologies which are less resource-intensive, more efficient, and more environment-friendly. In addition, production of auto-grade and electrical grade steel has also been planned through these collaborations.

The project report for a FINEX technology-based steel plant in joint venture with POSCO at Bokaro will be completed in about 2-3 months' time. Providing tangible benefits, the FINEX plant will replace the conventional coke oven-sintering-BF route of iron making. It is a technology which can utilise leaner iron ore and non-coking coal. Besides, it is more eco-friendly. As for the tie-up with Kobe Steel, a pre-feasibility study for the 0,5 mtpa ITmK3 technology-based plant has been completed.

What are the major challenges facing the Indian steel industry today?

With a CAGR of 10 per cent expected for steel consumption, finished steel demand will be around 100 million tonnes. To meet the emerging demand, all steel majors in India have plans to expand capacity. This is currently taking place primarily through brown-field expansion. However, looking at the overall requirement for steel, it will be important for greenfield capacities to emerge too. While brownfield expansion will continue unabated, there could be hiccups, delays and hold-ups in greenfield expansion projects in steel. Major issues exist in relation to land acquisition for setting up green-field capacities and pursuing environmental clearances for mining activities. These are, however, issues that are shared with other industries and we are hopeful of solutions emerging in the near future.

Security of input materials, technological upgradation and logistics support are the other major challenges.

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