“Captive iron-ore mines or preference in bidding to pep up steel sector in India”

Steel is crucial to the development of any modern economy. China remained world’s largest crude steel producer in 2016 (808 million ton) while India lagged behind in third place (96 mt). India is also the third largest consumer of finished steel globally behind China and the US. The steel sector contributes nearly 2% to country’s GDP and employs over 6 lakh people. However, of late in India, the steel Industry is passing through a challenging phase. The total exposure of the steel industry stood at about Rs 3.13 lakh crore, out of which gross non-performing assets (NPAs) were about Rs 1.15 lakh crore (37%) as on March 2016. With crisis brewing in this sector, the Indian steel industry is now more dependent on government policies based on anti-dumping duties and rationalisation of import duties.

In an exclusive interview with Nageshwar Patnaik, Mesco Group chairman, J K Singh discusses various facets of the steel sector in India and offers few mantras for the government to boost the sagging steel sector in the country.

What is your opinion on the National Steel Policy? What does it mean for the demand pricing landscape?

India desires to emerge internationally as the second largest steel producer and to that extent the National Steel Policy of the Government of India 2017 is an imaginative and visionary effort to realize its full potential. The document also envisages that we remain globally competitive. What the country required was a vision for the steel segment and so here it is.

A country of the size of India definitely needed a visionary document to steer and focus its basic and fundamental infrastructure to enable growth parameters to flourish and which would additionally synchronize with the entire “Make in India” programme. India has the necessary growth enablers, the geographical resources, the consumption demographics and also the demand. Hence it is a very important document as it lays the foundations of the steel growth story. It will definitely be the guiding light in the planning and execution stage, both for the policy makers and the Steel Industry.

While I do admit that the National Steel Policy is ambitious and very bold, we need to have a “Billionaire Attitude”, if we want the nation to grow. The policy aims at increasing consumption from 61 Kgs to 161 Kgs /capita and increase capacity to 300 MTPA, both of which are ambitious but achievable.

What according to you are the main differences between domestic and global steel industry?

The steel industry globally is driven primarily by the Government which necessarily integrates the industry with the infrastructure projects and simultaneously incentivizes it for the domestic steel players. India needs to emulate these principles.

While on the one hand the steel makers need to be assured of Raw-material security in the form of dedicated and captive mines, on the other hand, the end products should be easily utilized by infrastructure projects. In addition, the Indian domestic steel industry needs constant handholding by the State, Center, the Bankers and Creditors.

Why steel prices in India are 15-20 per cent higher than global prices? Can the domestic steel industry compete with global giants and how can we prosper in exports?

The main challenge in India is the high cost of almost everything that gets into steel making and selling. It includes transaction costs, high cost of inputs and raw materials, high cost of power, high cost of labour etc.

Besides there are also costs towards uncertainties. These include sudden disruptions at the supply side of raw material, transportation bottleneck, challenges at the port etc. Given the right conditions, the right environment and appropriate and quick resolution of minor disputes and issues the Indian steel industry possesses the potential to not only cater to the domestic demand but also perform well globally.

We have had MIP, then we have had anti-dumping duty that is in play. Do you thing the steel sector will only survive with protectionist measures? 

This must be clearly understood by all concerned as there is a clear perception and understanding problem. I am against the very term “Protectionist” measures. MIP and anti-dumping duty are not protectionist measures. These are established international statutes and procedures laid down in our policies based on multi-lateral agreements and are essentially quasi-judiciary in nature. They are in place only to ensure that unfair trade does not take place. If any country or company engages in dumping, subsiding or there is a surge in imports then it is the responsibility of the government to act against such errant actions and put in place the measures in the form of MIP, Anti-dumping duty CVD etc. after  following the due process of investigation. It must be remembered that each stakeholder is given a due opportunity to be heard before any of these measures such as MIP are introduced.

After all we do need a level playing field both internally and globally, don’t we?

For Indian steel producers, the cost of capital and price of steel have been a challenge. Are you seeing signs of stability returning to the steel industry or is it too early?

The domestic steel sector has seen extremely hard days of low prices, high-level of imports and zero demand growth. However the good news is that there are signs of an early recovery, according to Industry analysts. Fitch Ratings states that even though challenges remain, the steel sector’s fundamentals have started to improve. “Indian steel demand rose 4.5 per cent in the financial year 2015-16, a slightly better growth rate than in the previous year. Demand was driven by higher public-sector spending, demonstrated by a 65 per cent year-on-year jump in railway-sector capital expenditure,” Fitch Ratings said in a recent note.

How has the steel demand-supply been in the last one year compared to world scenario?

The Indian steel industry has always strived for continuous modernization and up-gradation of older plants thereby leading to optimum energy efficiency levels. Some of its plants are extremely modern with state of the art facilities.

As I mentioned earlier the incentives of Government of India especially in the steel industry have yielded good results on the demand side, though we have miles to travel. Personally, I am more optimistic on the demand side than on the prices as India will grow at 7-8%. The multiplier on steel is 1.1 to 1.3 times the GDP growth and in China, it was 2, as they were spending much higher on infrastructure.

Is it not ironic that when the steel sector is looking up, some good plants are in trouble?

The issue started about 6 years ago and needs to be resolved because if you look at these plants, their EBITDA is positive. Neither there is any problem in the cost of steel making nor in their efficiency levels. It is more to do with their balance sheets and that needs resolutions. The recent NCLT process is a good step in that direction as it gives a fair opportunity to all to resurrect the project and save it from doom. It is a win-win situation for everybody – the existing promoter, the potential new promoter, the creditor all have an opportunity for revival. It must be remembered that essentially these are projects which are technically very viable and only need a little tweaking to set them on path again.

Do you think that initiatives like Make in India will spur steel demand and improve pricing?

Make in India is a great initiative of the government especially when it comes to getting the states to compete with each other and address ease of doing business. Our concern is cost of doing business. Ease is undoubtedly important; however costs are equally important. For instance the cost of bid premium in auction of mines as also land costs add to the cost of doing business. India is the world’s third-largest steel producer so far and the growth in the Indian steel sector has been driven by domestic availability of raw materials consequently; the steel sector has been a major contributor to India’s manufacturing output.

So you see when we enter into FTAs with Japan and South Korea, where they can sell steel in India at 0% import duty, and Southeast Asia and China can sell at 7.5%, then it clearly provides easy access to our markets. This is a disincentive for the Indian steel producers to go through the struggle of creating a manufacturing base in India. For Make in India to succeed such issues need redressal.

Do you see higher steel demand in the next fiscal?

Revival of India’s steel consumption depends purely on the government boosting spending on infrastructure, housing and road projects to absorb record output. As we all know the biggest spender in the country is the Government of India and so are the biggest users of steel. GDP growth of 2017 and 2018 is expected to be around 7.5% – 7.8% and it would also be dependent upon measures that Government would initiate with regards to fiscal stimulus and increase in infrastructure spending.

Has the government’s capital expenditure helped the steel industry?

As you know Power Transmission, Highways, Defence and Railways have been areas where we have seen big structural changes. Clearly, the government needs to push fast and incentivize the private sector to take the plunge as investment has not picked up. 

Production crossed 100 million tonnes in 2017, how can we take it further?

We have been successful in crossing 100 million tonnes of production in 2017. If we need to further increase our capacity, we need to make capital investment and steel being a capital-intensive industry requires huge investment. Capital should be available in at an attractive rate so that there is continuous flow of investment and capacity enhancement can take place.

In recent years we have also seen capital flow in the steel sector from international markets. We also need institutions which can help to fast track clearances and land acquisition mechanisms, start laying the foundation for debt markets for access to capital and clean the NPAs and put in a mechanism of risk assessment and management system so that capital is available at attractive rates.

According to reports, the stressed assets of steel sector, out of the gross NPAs, comprise around 29.38 per cent and stands at Rs 1.5 lakh crore. What do you see as a solution to this?

The stressed assets are a liability to the steel sector, which is directly or indirectly hampering the growth of the industry and the economy. The current debt level of most of the stressed assets is unsustainable and the debt needs to be written down to levels which can be supported by sustainable future cash-flows of these steel firms. Bankruptcy proceedings along with an interim holding agency will maximize recoveries, reduce recapitalizations and help find the right stewards for these stressed assets. With the formulation of reasonable and actionable restructuring plans, these assets would be able to attract more investors.

There are speculations of mergers and acquisitions in the industry. Do you see this consolidation beneficial for the industry?

Steel industry in India as well as in the world is a fragmented industry. With growing NPA’s, and the current situation where the industry is going through a downturn, there is a huge opportunity for consolidation through M&A and Consortium restructuring.

Mesco group took the lead in setting up a steel plant in Kalinga Nagar, which is billed as the steel hub in the country. How has the Group grown over these year and what is status of expansion plan, switch over Posco’s finex technology to produce steel?

As far as our ability and appetite to turnaround a sick company is concerned, we would like to highlight that in 2015, MESCO Steel successfully acquired Maithan Ispat Limited in Odisha as a stressed asset from a consortium of Bankers led by SBI. Having established our credentials, the consortium of bankers reposed their faith in our group and in a short span of just two years our in-house professionals from our parent company, Mideast Integrated Steels Ltd have been able to turn around this hugely Stressed Asset into a profitable proposition. We are thus in a better position to turn around another steel plant in Odisha, as we have complete understanding of the terrain as well as work ethos of the state.

On the backdrop of this expertise and experience we are now proposing to participate in this debt resolution process individually and jointly along with a Consortium Partner for mid-sized projects as well as a big-ticket asset. We not only fulfil all the eligibility criteria but also posses the skills and potential into making them viable and efficient projects.

How can the Government facilitate revival of steel sector in the country?

I have a few MANTRAS for the government which need to be taken in the right spirit towards achieving the growth building story of the nation.

  • Our observation is that the concerned ministries work in silos; ideally they should work in tandem, especially the Ministry of Mines, Steel, Coal, Power and Environment.
  • All clearances should be through the automatic route and time bound.
  • Bankers and Creditors taking harsh decisions on Debt hair-cuts should be given immunity from questioning/investigation to enable them to take sound, bold and appropriate decisions in the larger public interest.
  • Steel plants should be given captive iron-ore mines without going through the auction route.
  • If this is not possible, Steel plants should be given preferences in the mines bidding process.
  • Government should move an Ordinance against the harsh decision of the Honourable Supreme Court in respect of interpreting section 21 (5) of the MMDR Act as it will have long term and larger consequences across industry segments.