1. Research
  2. Leader Speak
  3. Leader Speak

Dr. S. K. Gupta, Executive Vice Chairman, Jindal Vijaynagar Steels Ltd

India Infoline News Service | Mumbai |

Discusses a host of issues affecting the steel industry, PSUs, SDF funds, joint venture with MNCs and JVSL.

Jindal Vijaynagar Steels Ltd (JVSL) is the latest entrant to the hot rolled coils market and the first in Southern India. The company has put up the first project in the country and third in the world based on Voest Alpine's Corex technology. The company, which faced technical problems when it first commissioned its Corex unit last year, has restarted its Corex unit from 8th August 1999. In this exclusive conversation spanning nearly two hours with Anirudha Dutta of Indiainfoline, Dr. S. K. Gupta, Executive Vice Chairman of JVSL, candidly discusses a host of issues affecting the steel industry, PSUs, SDF funds, joint venture with MNCs and JVSL.

Dr. S. K. Gupta is equally at ease in corporate boardrooms and academic institutions. After a short stint in Bhilai Steel Plant, he joined as lecturer at the Institute of Technology, Bombay (IIT, Mumbai as it is now known) in 1960 and by 1973 was the Professor & Head of Metallurgical Engg department.

Subsequently he had a long stint in public sector units ? SAIL, defence production and Mecon. He rose to become the Managing Director of Rourkela Steel Plant and later Chairman of Mecon. Dr. Gupta then joined Jindal Vijaynagar Steels Ltd (JVSL) in 1994 and was instrumental in bringing the Corex technology into India. Presently he is the Executive Vice-Chairman of JVSL and is also on the board of IDBI.

Can we start by asking you on your outlook for the global steel sector? While prices have moved up in the recent past, do you see the price rise being sustained? If so, can you enumerate the reasons for the benefit of our readers?

I do not expect very strong growth in prices in the near future. At best prices will grow by another US$15/ t. Asian steel demand has shown a negative growth of 5-6% in 1997 and 1998. We expect that in 1999 the growth will be about 1-2%. It is still sometime before the total demand gets back to the pre-1997 levels. Prices of hot rolled coils should touch about US$290/ t by the end of the current year and stabilize at those levels.

In a cyclical industry like steel (and true for many other commodities like petrochemicals), there is a timing mismatch between capacity build up and demand growth. In the current recession, worldwide incompetitive capacities are closing down. Hence, when demand comes, people will start building capacities. Towards the end of the cycle large capacities come into production. This boom period normally lasts for four years and during this time the steel producers make money. Personally I do not see many greenfield projects coming up from hereon.

Chinese demand and output from CIS countries have been the big question mark on the global steel scenario. Could you share your views on the demand-supply scenario in these key regions? Do you see Chinese imports increasing to the 1994 and 1995 levels, as there have been reports that China may shut down a lot of its "garage" steel making capacity? What would be the impact on Asia of the recent US and Russian agreement to limit Russian exports into USA?

I earlier mentioned capacity shrinkage in the global steel industry. This is happening inn two ways ? one is permanent closure of unviable units. The second is production cuts bylarge players ? this capacity can come back into production at short notice. China, on the other hand, was the growth engine for the steel sector in the last decade. I think China?s steel consumption will stabilize at current levels. Also the Chinese have reduced production by about 2mt. Does this mean they will again start importing steel in large quantities like 1994 and 1995? I think NO. And the reason is that the Chinese, like the Russians earlier, have been inefficient users of steel ? which is one of the reasons why erstwhile USSR used to consume 150mt of steel per annum and China was showing such phenomenal growth in steel consumption. I believe that the Chinese use of steel is becoming more efficient and hence, it will from hereon grow at a much slower rate.

In Russia and Ukraine there is latent capacity of 50-60mt. This is the big threat to runaway price increases in the global steel markets. The threat is to quite an extent mitigated due two reasons: firstly, trade protection in the form of quantity restrictions and anti-dumping duties in various countries. We have also imposed floor prices on imports, which is discouraging dumping of steel in India. Secondly, the Russian currency could be stabilizing.

Do you see any major technology breakthrough in the next couple of years? There has been a lot of talk on the development of iron carbide technology and budget pig iron. Could you enlighten our readers on the same? What is your view on this budget pig iron and implications for India?

No spectacular changes in technology are expected in the coming years. Some incremental improvements will continue. While I do not have the full details of the budget pig iron that Steel Dynamics Inc. is working on, my first reaction is that power consumption and/ or costs are likely to be very high given that a submerged arc electric furnace would be used. Such a process can be suitable for Canada or any other place where there is excess power available at very low costs. It will not be suitable for India in my opinion.

Let us shift the focus to the Indian steel sector. What is your outlook for the Indian steel industry over the next two years, especially considering the oversupply scenario? In the current environment, is it economically viable to set up greenfield projects? Who or what is responsible for the current mess in the Indian steel sector ? demand forecasts, indiscriminate funding by FIs and banks, unscrupulous promoters or the global scenario?

To answer the second part first, for the present, establishment of greenfield steel plants in India does not seem to be viable. Let me now discuss the outlook for the domestic steel industry and I will focus my discussion on the hot rolled coils (HRC) segment. Over the next 18 months, most of the additional capacity will come into production ? this will add about 3mt to our supplies and will be the extent to which we will have an overcapacity. Last two years, the domestic demand growth has been about 0%. We expect that towards he end of this year, we will have growth of 3-5%, which will sustain for about 2 years. A 6% growth means additional demand of about 550,000t on the current demand base of 9mt. At this rate of 6% growth, it will take about three years for the demand-supply imbalance to get corrected. The choice before the industry is, therefore, to export. Our view is that of the total capacity, at least 30% would have to be directed towards exports, 20% production cuts will have to be taken (mainly by the inefficient producers) and then the balance production can be absorbed in the domestic market. Long products, I am informed, is doing better than the flat products and this has been helped by production problems at RINL?s plants late last year.

Who is to be blamed for this mess in the Indian steel industry? I would say I am one of the persons to be blamed for this. I was the Chairman of National Committee constituted by the Government of India to formulate steel growth plan for 20 years, which was then fine tuned by the Working Group and later accepted in Parliament in 1993-94. We assumed a 9% growth in consumption between 1992-93 to 2001-02. And after that 7% growth till 2011-12. Till 1996-97, we had 10-14% growth in annual consumption. But last two years it was about 2%. As a result the average growth so far has been only 7%. That obviously raises the question where did we go wrong? In my mind there are two to three reasons for our going wrong:

  • We knew that government would be distancing itself from investment in infrastructure.
  • We also realized that government was distancing itself from investment in the steel industry.
  • In the euphoria of liberalization, we assumed that foreign investment will flow into the infrastructure sector and steel demand will boom ? an ideal condition for the private sector entrepreneurs to set up new plants.

However, what we did not bargain for was our bureaucracy ? which remained and continued to flourish. This bureaucracy and some muddled policies did not allow the investments to come in. In fact, a country like Japan never believed in our form of liberalization. The net result was the correlation of steel demand growth to GDP got vitiated. Last two years we have had 5% or so GDP growth, but steel consumption has not grown.

In the last 18 months, the government has taken some initiatives to bring investments into the infrastructure sector through policy initiatives and some direct investments are coming in. I also see some pick up in disbursements from the FIs to the infrastructure sectors ? though nowhere close to the kind of sanctions that have been done.

What is our outlook on domestic demand? Steel demand has been sluggish and showed a decline of about 1% in FY99, whereas cement demand has been fairly strong. Is there no correlation between steel and cement demand?

As I mentioned to you earlier, we expect that towards the end of the year steel demand will start picking up and it should average about 6% in the next two years. This will be mainly led by the infrastructure projects, referred to earlier. But the growth in steel demand may not translate into higher demand for Indian steel. The bulk of steel for the power sector, for example, continues to be imported. On prices, I feel that by December the net sales realizations of Indian companies will improve to Rs14,500/ t as against the present Rs13,700/ t.

In my opinion, the bulk of the cement demand is coming from rural and semi-urban housing. While one may get euphoric by seeing flyover construction in Mumbai and Hyderabad, precious little is happening in the rest of the country and in terms of real tonnage these do not count. Now tell me me how much of steel is used in rural housing? Very little. But, most of these commodities tend to move in tandem. Cement demand has picked up. I am also seeing signs of revival in the textile sector. Steel will follow ? maybe by the year-end.

Coming to JVSL ? Jindal?s are known for their project implementation skills at low costs. What went wrong with the JVSL project? On hindsight, will you still go for Corex or chose the more conventional BF-BOF route? Can you give the current status of the project and the work that still remains to be done?

Jindal?s were known for speedy implementation and low costs because of:

  • Use of second hand equipment and improvisation in technology; and
  • Their dynamism resulting in fast decision making.

As long as the scale of operations was small, not technology intensive and quality was competitive in a closed economy, their model worked fine. But when we tried to scale upto 10x our then existing size and go for the latest technology available, hen the company did not have the expertise or means to handle the growth. When the project was planned and funding started, there was euphoria all around and India had seen some of the best years in steel demand growth. Our project got funded and our equity and debenture issues were oversubscribed. As things turned for the worse in later years, our inherent weaknesses got exposed.

If we were to redo the whole thing again, we will still go for Corex technology. Our Corex operation, since its recommissioning earlier this month, has been performing very well. Our stabilization time and operating parameters achieved is better than Posco and Saldanha Steel. In the next three months, we plan to achieve production levels of 90,000t per month. I have no doubt that we will be the leading producer of HRC ? both in terms of operating costs and product quality. The only thing I would have liked to differently is to go for a completely first hand hot strip mill ? but when we plan a project a lot of things, including the project cost, have to be taken into consideration.

Answering your query on the current status of the project ? We have commissioned the following units:

  • Corex I
  • 2 nos. basic oxygen furnaces (BOF)
  • 1 Slab caster
  • 1 Ladle furnace
  • 1 Slab re-heating furnace
  • Hot strip mill
  • Cutting and finishing facilities

What remains to be implemented is:

  • 3mtpa pellet plant ? 67% completed
  • Corex II unit ? 67% completed
  • 2500tpd second oxygen plant ? 75% completed
  • Second slab caster ? 60 completed
  • We are also planning to add a second slab re-heating furnace, which will enable us to roll about 2mtpa of slabs in our strip mill. The additional 0.4mtpa rolling is based on bought out slabs.
  • Subject to cash flows starting in another two weeks, we expect to commission all the facilities by May/ June 2000.

What is the total project cost (incl. investments) and funding pattern? Please give the break up. How much has been spent so far and what is the timeframe for the balance sending? What quantum of funds remains to be tied up? What would be the total debt ?equity ratio?

The total project cost is about Rs52.15bn. I do not have the exact funding pattern as some interest funding is being negotiated with the FIs. For residual investments, we have obtained the approvals from FIs. Our project has been delayed by about 1 year and nine months. Due to this delay and the Corex debacle, the additional interest burden works out to Rs7.08bn. Interest to the extent of Rs5bn (1 year?s interest) will be funded by the FIs as loans. For the balance Rs2.08bn, the funds are being organized by the company by placing equity with suppliers, disinvesting equity in some joint ventures and assuring some cash flow from operations. The total debt-equity ratio of he project is in excess of 1.55:1. The exact number will depend on how the additional funds from FIs come in.

JVSL was a landmark project for its choice of technology and also for going in for JVs for auxiliary units. Do you think this model has failed given the problems with your JV partners? What are you doing about Tractabel? Do you think the Praxair JV also getting affected?

The model adopted by us is very sound, especially considering that we chose to go for Corex technology. The Corex route is not just about iron and steel making. It supports a lot of other industries like DRI, cement, power, oxygen plant and fertilizer, considering the calorific value and availability of the exhaust gas. Hence, total investment requirement in the steel plant alongwith the investment in auxiliary industries is quite high. And only the government can do fund raising in such a large scale. Hence, JVs have to be there. There were more reasons for going in for JVs ? the JV partner was expected to bring in new and better management practices, better technology and also specific expertise in a particular industry like Praxair in oxygen or Tractabel in power.

We have received some setback in our JVs, particularly with Tractabel. We will not repeat the same mistakes again. In my mind, most of the troubles are due to cultural incompatibility. Marriage of unequals almost never succeeds. Both foreigners and Indian promoters have to change. Same things are looked at differently by the Indian promoter and the MNC ? the Indian promoter is open to changes in certain agreements as one goes along based on pragmatism; but the MNC is unwilling to do the same. In fact, the first or second generation Indian entrepreneur had no organization around him, forget about appropriate culture! MNCs took advantage of such shortcomings.

Similar to Tractabel, we have had problems with Praxair as well. But Americans, we observe, are fair and practical and willing to negotiate ? or that has been our experience so far.

SDF loans have been a topic of controversy and a cause for heartburn to producers like Ispat Industries. Will you please explain to our readers the genesis of the funds and rationality of SAIL?s demands?

In my opinion, the SF funds definitely belong to those who contributed to that fund ? that is SAIL and Tisco. Someone who was not even born then cannot lay claims to those funds. Also there were other producers like Mukand and Musco, who were selling steel at similar prices to SAIL and Tisco and not contributing a paisa to the SDF ? they were reporting inflated profits during that period. The SDF was a notional fund created for the growth and modernization of the integrated steel plants. Hence, there is no justification in the demand of the new producers that the fund should be proportionately distributed to Ispat, Jindal and Essar. And do not forget that companies like SAIL and Tisco have contributed immensely to social development and employment generation in this country.

However, I will not agree if these funds were to be written off. The government should allow these funds to be converted into equity.

Given the current problems in the industry, what kind of restructuring do you envisage in the industry? Smaller players are already out of the market. Tisco is aggressively restructuring. Do you see players going bankrupt or takeovers or sellouts? What impact will the global consolidation have on India, if any? What about the alloy steel plants and pig iron/ sponge iron producers?

I immediately do not see much scope of restructuring or consolidation in the Indian steel sector. There is no competitive advantage of setting up alloy steel plants in India ? we import scrap. We import most alloying elements, with the exception of chromium. And we have very high power tariffs. The setting up of IPPs at specific costs of Rs50-56m/ MW is another swindling story in the Indian industrial horizon. Similarly the mushrooming growth of pig iron and sponge iron industry was patently unsustainable and a lot of these plants will have to go out of the system. When pig iron plants were being set up, the justification was that SAIL and RINL would stop producing pig iron and maximize steel production. The fact of the matter is SAIL or RINL were in no position to reduce pig iron production!

However, in integrated steel making I firmly believe that India has competitive advantages ? mainly that of quality iron ore and cheap and skilled manpower. This, I know, may sound cliched, but that is the truth. There is no reason why we cannot produce HRC at operating cost of US$170/ t. And our investment related costs should be about US$85-90/ t. For any other country the above two costs will be in excess of US$200/ t and US$100/ t respectively. But for mismanagement of projects and mismanagement of operations, we have no one to blame but ourselves! Even if our real interest costs are 3-4% higher than other countries, it is not a problem. We have to manage our projects properly and avoid corruption. The last named is true for both PSUs and private sector companies. Can you believe that SAIL has spent Rs200bn on modernization-cum-expansion and hardly any extra steel comes out of SAIL?s plants? There is today a big fear about Ispat?s project, unless the London branch of the family bails the project out. JVSL and Essar Steel are likely to survive, though Essar is also stretched on multiple fronts

When I met you about three years back, you had mentioned no cold roller in India will cater to automotive sector in the foreseeable future. You had given the example of a Japanese 1mtp mill with three shopfloor employees! Have your views changed? What do you think of the prospect of a large 1mtpa producer in India ? will he wipe out most other localized players? Or is it better to have 2 or 3 mills catering to regional demand?

Things have changed a lot in the last three years. The Tatas are setting up a 1.2mtpa CR plant in Jamshedpur. In my opinion they will be very competitive and they are doing the right things. They are the only company who can become international. We will be second in line. I believe setting up a large plant in one location is a very good model. Recently the British Steel Chairman told me that because of multiple location, British Steel loses a lot of money every year.

You have also been closely associated with SAIL. What ails the steel giant in your opinion and what advice would you give the steel minister or Mr. Arvind Pande for turning around SAIL?

In my opinion, SAIL should be broken up into four companies. Urgent action needs to be taken as it is already quite late. Bhilai and to an extent Bokaro will fetch good value ? about Rs70/ share and Rs40/ share respectively. Majority stakes (about 60%) in these companies should be sold to a strong partner, may be a MNC. Rourkela and Durgapur?s equity will probably be valued at Rs2-3/ share. Government should make marginal investment in these companies, like what British Steel did a few years back, with a payback period of 6 months ? these investments will mainly be towards debottlenecking.

You have been a PSU manager for a long time. How do you compare your stint with PSU vs. Private sector? What lessons have you learnt from the same?

PSUs today are a dying species. There were a lot of positive aspects of PSUs ? their motto always was maximizing gross margins and share the gains with stakeholders. Stakeholders meant shareholders, employees, suppliers, customers and society at large. The private sector is adopting these mantras today. The quality of manpower in PSUs is also as good as anywhere else. The big difference is the high level of government control and the resultant inability of the PSU manager to take decisions. Distribution of justice in PSUs is more important than commercial interests of the organization. 20% of top management time in PSUs is spent in efforts like increasing the usage of Hindi, answering parliamentary queries etc.



  • Save upto Rs.2.67 lakh with Pradhan Mantri Awas Yojana ...Know more
  • Now Save Rs.3150 on your Demat Account ...Click here
  • Now get IIFL Personal Loan in just 8* hours...APPLY NOW!
  • Get the most detailed result analysis on the web - Real Fast!
  • Actionable & Award-Winning Research on 500 Listed Indian Companies.