`No scope for consolidation in steel sector' -- Dr S. K. Gupta, Executive Vice-Chairman and Mr J. K. Tandon, Joint Managing Director and CEO of Jindal Vijaynagar Steel

Krishnan Thiagarajan

Jindal Vijaynagar Steel (JVSL) is only one of three companies worldwide to commission a steel plant using the Corex technology of Voest Alpine, Austria. Not only has it commissioned the first 0.8-million-tonne Corex module successfully (with some hiccups), but has also operated the plant at optimum capacity utilisation levels for the past year or so. The second Corex module is expected to be commissioned by March 2001 and will help JVSL achieve a production capacity of 1.6 million tonnes per annum. Although the credit for the completion of the project goes to Dr S. K. Gupta, Executive Vice-Chairman, and Mr J. K. Tandon, Managing Director and CEO of JVSL and their team, it has nevertheless suffered huge time and cost overruns. Business Line spoke to both on the state and the direction of the steel industry, the prospects and problems of JVSL and the contours of the restructuring package currently under consideration by the financial institutions.

Excerpts from the interview:

How can the steel industry overcome the overcapacity problem, especially in the flat products segment? Is consolidation the only solution or is there another way to remove uneconomic capacities?

Dr S. K. Gupta (SKG): The overcapacity is because of `bunching' over a small period of time. Because (in India) we are at the lowest level of steel consumption, we have to grow at 7-9 per cent on an average for many years, unlike the West, which is growing at 1-2 per cent. Overcapacity in HR coils is 15-18 per cent. If we sustain the current growth rates for two years, the overcapacity will disappear. Building new capacity for integrated HR coils takes four-five years. So, the overcapacity syndrome is for a limited period. In an economically free society, those companies whose production costs are higher will be forced to either reduce or stop production altogether.

At the global level, consolidation appears to have come about in a voluntary fashion and the key driving force has been price stability. In India, however, the consolidation that would drive out uneconomic/unviable capacities has hardly begun. What would you attribute this trend to?

SKG: There is a saying that when two dinosaurs mate, a gazelle will not be born. All the companies in India (at least in the private sector) symptoms of varying degrees of the same problems. None of them can be perceived a predator, they can only be victims. It may be wrong to assume that by two dinosaurs joining together, there may be another strong dinosaur. I think, consolidation of weak partners only strengthens weaknesses. I do not think there is any scope for consolidation. The only exception is the Tata Iron and Steel Company. It is the only steel company with muscle. It is definitely a world class company and will be the only one which can play the consolidation game.

As late as early November, the US filed an application imposing anti-dumping duty on HR coils from eleven countries, including India. It has been made clear by the US administration, that mechanisms are currently in place to monitor import surges faster and take corrective action in the form of anti-dumping/countervailing duties. Do you think this will be a big threat to the country's exports?

Mr J. K. Tandon (JKT): There are nearly 300 engineers working in the Internal Trade Commission monitoring all commodities. And the lawyer lobby works closely with the Internal Trade Commission, Department of Commerce, High Commission and Trade Investigating Authority to handle only anti-dumping cases. This is an extremely strong lobby in the US and it gives the politicians there a lot of power.

I remember that Nucor (one of the most innovative mini-mills in the US), between 1992-96, was among the first companies to oppose anti-dumping. They said then that if the suppliers sitting 10,000 km away bought the material and sold it a cost lower than yours, there must be something wrong with you. Why argue for anti-dumping, when you should look into your own cost structure. However, Nucor was one of the first mini-mills to start the recent anti-dumping filings for HR coils in November. It is a complete reversal of stand.

The US Government is clearly pointing out that Government intervention (say, in SAIL) and export subsidies are two factors that have prompted them to impose anti-dumping duties on plates, wire rods or HR coils exported from India? Is this legitimate grounds for dispute and will exports be affected?

JKT: These anti-dumping filings on HR coils are not just against India, but against eleven countries. They have the same schedule they use for all commodities to start anti-dumping duty proceedings. But the saving grace is that the end-users are up against the manufacturers (in the US). The cold rollers and others there have a strong lobby and keep fighting the manufacturers because the tubemakers, cold rollers and auto component manufacturers want cheap steel.

SKG: The ultimate consumers of domestic appliances want the materials to be cheap. The US Government's compliant has been against export subsidies and government intervention. In the Indian context, the export subsidies are countervailed by the administered prices of inputs. Coal and freight are administered, most of the iron ore and other raw materials are in the government sector and the price, to some extent, is monopolised. So whatever the export subsidies, companies lose much more because of the administered input prices. Thus, we operate in conditions where the cost of power is not internationally competitive and railway freight is not competitive. So, by and large, the administered price of inputs compensates the export subsidy benefits that we get.

Given the sluggish demand in the domestic market, the slowdown in the export front and about 40 million tonnes of excess capacity from the Soviet Union, do you not think that all these factors are interwoven to depress sentiment for some time to come?

SKG: I agree that these factors are interwoven to depress sentiment and price in the industry. The actual imports from Russia and Ukraine are not large, but the threat of imports depresses prices. We feel the next year will be a tough one. There is no doubt about it. After a year, the domestic demand will increase by at least 8 per cent. We are staring at 18 per cent overcapacity. So the corresponding pressure will be reduced.

Post-US elections, we are not sure how long the US government will stand (pressure from) the consumers lobby. Consumers (in the US) would like to get their products at lower cost. And, some not-so-cost-competitive companies will have to stop production. In addition, there have been no investments in new steel capacities for the past two-three years. Perhaps, after three years, we could be a net importer of steel.

Do you think greenfield (new) capacities are still feasible in India? Or will it come only in the form of brownfield (existing) capacities? Have almost all the private sector groups lost their credibility to such an extent that equity financing, a viable route, cannot be tapped again?

SKG: Our plant (at JVSL) can add another 2.5 million tonnes of steel capacity at very low cost. Similar possibilities are there for Ispat. The Tatas cannot add any more capacities in Jamshedpur, but it can take over Vizag, adding another 5 million tonnes of capacity. The loss of credibility is well perceived and there is nothing to complain about. But as far as JVSL is concerned, the cost overrun is Rs 4,150-6,100 crore. Of the total investments, Rs 1,200 crore do not have corresponding assets because of delays by promoters, loans and other sources. This is what we are trying to correct through a restructuring package which is to be accepted by the financial institutions. If the restructuring package is accepted, the interest cost of Rs 628 crore a year will come down to Rs 428 crore. Now with 100 per cent capacity utilisation, we can match the cost overruns.

What do you think are the milestones in JVSL's progress towards being profitable?

SKG: The first milestone involves the clearance of the restructuring package. The second milestone is if we can manage the cost of production, as we are doing today, then by the third quarter of next year, we should be the most profitable steel company, after the Tatas. There are still some financial gaps, but I think those problems will eventually be solved.

Do you think that the imposition of the floor price by India was warranted, given the country's relative competitiveness in the world steel arena?

SKG: I think it (the floor price) is investment protection for the Rs 15,000-20,000 crore invested in the industry. It is only marginal protection and even this will go away. However, in the first six months this year, two companies increased exports by 300-400 per cent, somewhat like killing the goose which lays the golden eggs. It is hardly surprising it invited retaliatory action from the US. We, in the private sector, have been extremely shortsighted in our approach.

Given the high volatility in steel prices, what will be the basis for future plans?

Very simple. I should have lower cost than others. Whatever be the price, I will be better off. We will try to benchmark ourselves as the lowest in production cost, rather than hazard a guess on how steel prices will move. Cost and quality competitiveness will be our focus.