Short on longs

Reshma Krishnan

THE potential for growth in the long products sector is good. India is a developing country clamouring for infrastructure. Roads need to be laid, and bridges built. Buildings and structures are being put up in ever increasing numbers. But infrastructure sector is what the steel industry is mainly interested in. But here the country's performance has been disappointing these last 10 years when, with the liberalisation of the economy, this sector was really expected to take off.

The steel industry -- particularly the longs segment -- faces three major obstacles to growth. One, consumption. The per capita consumption of steel is a measly 25 kg compared to 395 kg in the US, 289 kg for the EU and 84 kg in China. But this is perhaps natural for a country with limited purchasing power.

Two, companies are facing a problem of over-capacity. The rise in prices of longs is a temporary situation caused by the shortage of scrap rather than a rise in demand. While the consumption of long products is expected to be up by 2.01 per cent at 13.74 million tonnes, if 2001-02 turns out anything like 2000-01, the actual figure is sure to be less than that.

As estimated consumption dictates production, there will be a glut. Steel companies will not cut production because it leads to dis-economies of scale, leading to a rise in unit cost price. On the other hand, the prices are dropping that would squeeze margins further. The result: A price war, resulting in a shake out.

Consolidation could be the answer but this is not happening. As Mr J. J. Irani, former managing director of Tata Steel, says: ``On the world scenario, the problem of over capacity is being tackled through consolidation, such as that which has occurred in Europe and in Japan. There is no sign of such consolidation in the domestic market.'' So what are the other options? He says: ``One way out would be for the steel producers to agree to a certain production pattern as has already happened in the cement industry.''

The supply -demand balance can be corrected by making manufacturers add value. Long products are not principal to the export market. Therefore, the potential for growth is limited to the domestic market. But value-addition in longs is harder to achieve than in flats. There is some progress on this front, and items such as high-tensile steel and boiler-quality products (now being tested at SAIL's Bhilai plant) are being developed.

Companies can also become more cost-competitive. It is critical that manufacturers realise their potential of emerging as low-cost producers. This will enable the industry to face cyclical down swings.

An advantage the long products makers have is one of better stability. Flat products are usually associated with disposable incomes, and prices are directly linked to the economy's well being. Therefore, the demand is volatile and so are prices. The demand for longs is generally not volatile as it is more project based and requires planning.

For steel makers, the way out is a right mix of products -- flats and longs -- value addition and cost cutting. With all this, companies might ride out the tough times.