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S. Muralidhar

THE domestic steel manufacturers are on a roll. Buoyed by a dramatic improvement in steel prices, starting from January this year, the steel majors are all seeing an improvement in performance this fiscal. The recently announced half-yearly results of most of these companies bear testimony to the uplifting effect of higher realisations. But will this growth sustain? Are there other areas that need continued focus, and are they getting their due? Or, are they getting rolled over by the euphoria surrounding higher price realisations?

Global steel prices have stabilised, and are probably set for a slight softening of rates, largely due to the potential effects of anti-dumping and other protectionist measures adopted by the major consuming countries such as the US, the EU and China. After testing the price levels that existed in April-July 2000 quarter, prices of hot and cold-rolled coils have now started tipping downward.

However, if the current price trends continue, major steel manufacturers, such as Tata Steel, Steel Authority and Essar Steel, will benefit from the higher realisations and the strong order book positions they have for the remaining part of the current fiscal.

The domestic consumption of steel grew 8.8 per cent in the half year ended September 2002, compared to 6.6 per cent in the same period last year. However, the country's per capita consumption of steel continues to be a low 26 kg compared to a world average of about 122 kg.

The compounded annual growth rate (CAGR) for domestic consumption of finished steel during the six-year period ended 2002-03 is projected to be about 3.1 per cent, while the CAGR for production of finished steel during the same period is expected to be about 3.7 per cent. This is in comparison to an expected global demand growth of 5.5 per cent, and a growth of 11.5 per cent in China alone.

The fortunes of the domestic steel manufacturers are also inexorably tied to the timing and extent of the government's infrastructure spending.

The prospect of infrastructure work taking off on the Golden Quadrilateral highways project, an increase in housing activity and an improvement in the offtake of consumer durables and passenger cars should help the steel industry sustain the improved performance. However, all these growth factors depend on an overall improvement in the economy.

The performance of the steel majors in the first half of this fiscal is cause for cheer. Tata Steel announced a near six fold increase in its bottomline for the first while SAIL and Essar Steel cut losses by over 30 per cent. Despite the increased revenue from higher prices, containing costs and improving operational efficiencies need sharper focus, particularly by the loss-making units.

Backed by the confidence of being one of the lowest cost producers of steel in the world, companies such as Tata Steel have been giving exports a renewed thrust this year. While India's steel exports have been more or less excluded from the protectionist measures adopted by the three big steel consuming regions, it still continues to be vulnerable to changes in global steel trade due to its weak bargaining position as a steel exporting nation.

However, quality steel manufacturers will still be able to export to specific markets and benefit from the price differential that exists between global and domestic steel prices. There is also a ray of hope for competitive, quality steel producing companies from the possible closure of unviable units in the major manufacturing regions.

To keep the momentum, domestic steel makers have to continue to keep costs under control, and focus on optimum utilisation of production capacities, what with the installed capacity being far in excess of the actual demand for steel.

Another important point that integrated steel manufacturers need to concentrate on is that during times of higher price realisations, increased marketing muscle needs to be put behind branded and higher value-added steel products.

In the case of the large number of loss-making steel units, this could be the best time for the financial institutions and the Government to implement their long overdue restructuring exercise.

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