Mr. Arvind Pande, Chairman , Steel Authority of India Ltd.

Discusses in detail the steel industry’s prospects and SAIL’s restructuring efforts.

Nov 01, 1999 12:11 IST India Infoline News Service

Steel Authority of India (SAIL) is the 9th largest steel producer in the world with crude steel production crossing 11mt. SAIL has the largest market share of steel in India. The company has manufacturing facilities at six integrated plants. The product range includes mild steel items (longs as well as flats) and specialty steels comprising alloy and stainless steel. With the industry downturn, SAIL has been incurring heavy losses since last fiscal. The company has undertaken various restructuring measures to return to profitability.

Leading SAIL from the front during one of its most difficult periods is Mr. Arvind Pande, the current Chairman of Steel Authority of India Ltd. He passed his M.A. in Economics from Allahabad and Cambridge University, UK. Mr Pande started his career in the Indian Administrative Services in 1965 and has since then worked in various governmental and corporate capacities.

He was the Joint Secretary to the Prime Minister of India between 1981 and 1986. Mr. Arvind Pande has been associated with SAIL since 1986. He was Director (Corporate Planning) from Aug 86 to May 90. He took over the Vice Chairmanship of the company from 1993 and continued till 1997, after which he was elevated to his current position. In an exclusive interview to India Infoline, Mr. Arvind Pande discusses in detail the steel industry?s prospects and SAIL?s restructuring efforts.

Global Outlook: What is 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 same?

The global steel supply-demand continues to firm up gradually, albeit with some products and regions still missing out on the general recovery. Over the past month, this improvement has been reflected in prices rising in number of markets that had previously lagged in the uptrend.

Data published by the Steel Exporters Forum (SEF) shows that the prices of hot rolled coils have risen between Feb-March 1999 and July-Aug 1999. During this period FOB export prices from CIS countries have risen from a range of USD135-170 to USD150-190. In Europe the prices have increased from USD200-215 to USD250-270 (FOB).

A key factor behind the recovery achieved so far has been the cut in both domestic output and imports into major consuming markets of North America and Western Europe. North American imports of HR coils in May were down 50% yoy, while CR coils and beam imports are expected to drop as a result of recent anti-dumping filings. In addition, Russian steel export to USA stands to be roughly halved from 1998 levels under its export restraint agreement with Washington. USA imposing tariffs ranging from 19.65% to 67.59% on Japanese steel coupled with US Congress approving USD1bn bailout package for the troubled steel domestic companies has aided in reversing the downtrend. Signs of recovery have been noted in the formerly afflicted South- East Asian countries. An upturn of activity has been seen in Korea, Philippines and increasingly in Thailand and Malaysia.

Indications are that demand for steel is becoming more firm in South-East Asia. Crude Steel production in Asian region rose, above earlier year level, for a third month in a row. However though these economies are recovering, it may take some time for steel prices to stabilise.

International Iron and Steel Institute (IISI) has indicated that briskly improving markets will bring world steel consumption up by 2.3% to 719mt in 1999-2000.

Global Outlook: What kind of capacity addition is expected the world over the next two years and how will demand growth keep pace with it with respect to flat and long products respectively?

Most of the investment for capacity- addition in the steel sector have been either being abandoned or shelved off. Out of a total of 51mt of new iron and steel making capacity that have been added in Asia since 1994, nearly 8mt have been stopped, suspended or cancelled. The projects, which have been shelved in India, include among many others, Tisco's Gopalpur project, Mesco Kalinga, Mukand Vijayanagar and L&T's project. The alloy steel industry in India also faces a large overcapacity and a number of small producers have shut shop or are on the verge of closing.

The global steel industry is laying emphasis on consolidation rather than capacity addition. Mergers and acquisition activities have gathered pace and alliances and mergers have become the order of the day. Mergers of Thyssen and Krupp's steel division, British and Hoogovens are some of the major alliances.

China, Japan and CIS: Could you share your views on the demand-supply scenario in China and CIS countries. 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 is the outlook for Japanese steel demand? What would be the impact on Asia of the recent US and Russian agreement to limit Russian exports into USA?

In China, the production and consumption of steel has roughly doubled since 1990, and for the past three years the country has been the world?s largest steelmaker. Domestic steel demand in China will continue to rise steadily because of factors such as the world's highest economic growth, per capita steel consumption of only 87 kg and world's highest steel intensity of 135 kg per $1000 of GDP in 1997.

However, PR China's economic growth has slowed from year to year since 1996. The country's steel industry after years of impressive growth in terms of quantity has been concentrating in recent years on improving its productivity, efficiency, quality and range of domestic production in order to reduce reliance on certain higher value imports. In order to create more economic and competitive mills, a process of consolidation is taking place. The objective is to consolidate 800 odd steel plants around the big four of China - Baosteel, Anshan Iron & Steel, Wutan iron & Steel and Shougang Corp so that together they produce about 40%of the country output by 2000. In the short term, no additional steel making capacities are being envisaged for PR China.

Japan's domestic demand, despite enormous stimulus packages from the Government is slow on the recovery path. The construction and the automotive market are saturated. There have been concerted efforts to restructure the excessive capacity in the steel industry and crude steel output has witnessed a major decline in-FY 1998. The crude steel output was 90.98mt for FY1998 around 1.5% less than production in the previous year. Aggressive anti-dumping suits by the US have affected export performance. Japanese export of beams to US for the first five months of 1999 stood at 200,000 tonnes a 39% decline for the same period in 1998. Further export worries stem from the non-availability of Chinese import licences. Russian exports of almost all finished and semi-finished steel to USA are now limited to strict quotas - as a result of suspension agreements signed by the two countries in July. The European Union has also imposed strict limit on import of Russian steel, although quotas are raised annually by 2.5%. The biggest impact will be on HR and CR trade since the annual quota is much lower than 1998 shipment.

Sheet demand is showing signs of improvement across most of Asia especially in automotive & appliance industries. However, the main reason for the firmer sheet market is supply led. Voluntary and involuntary output cuts in Japan, Korea and Taiwan have been influential. In addition it is important to note that there has been significant rise in downstream capacity in Asia-especially in cold rolling which is not matched by steel making and hot rolled production. As a result both slab and HR prices in particular are rising. This is the case in Korea and Thailand where CR production has increased significantly this year. Thus the fall in Russian exports to US has not caused any over supply situation in the Asian region in the flat product category.

In contrast to flats, displaced CIS long products may increasingly compete against non CIS grades in number of Asian markets slowing down any regional price recovery. This is as a result of Russia?s long product export to China which has received a setback as a result of virtual ban on rebar & wire rod into the country.

In Russia, a general slowdown in exports has also been caused by the 5% export duty and a decree to put 75% of the dollar export earning under government control.

Domestic Outlook: What is your outlook for the Indian steel industry over the next two years, especially considering the oversupply scenario? How much have your sales in volume terms increase in HI of this financial year? 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 FI?s and banks, unscrupulous promoters or the global scenario?

The Indian steel industry, inspite of a poor performance last year, is gradually recovering and there are clear signs of improvement in steel production and market. IISI expects consumption in Asia to increase by 6% in 1999 and 3% in the next year.

In the first half of 1999-2000. the domestic steel industry is recording a growth both in production and sales. The consumption of steel is expected to rise to 24.5mt in 1999-2000 from 23.2mt in 1998-1999. Recovery in the steel sector gained momentum with July registering a near double digit growth. This growth was on top of a four per cent growth recorded in July 1998. Flats continued to be the main growth drivers. The consumption of HR coils, in the first half of the current fiscal rose to 2.26mt recording a growth of 18% over the corresponding period last year. Domestic steel companies have also succeeded in recording significant growth in exports. Rates were better than those prevailing in the preceding quarter. Unit value realization of HR was higher by at least $30 per ton in the global market.

Higher price realization coupled with higher operational efficiencies will aid in improving the bottomline of the steel companies.

SAIL sold total of 4.25 million tonnes of steel during the first half of the current fiscal, recording a growth of 12% over the corresponding period last year. The company also clocked a growth of 19% in production of saleable steel during this period.

The sales growth translates to additional sales of 4.71 lakh tonnes in HI in comparison to April-September' 98. During April-September' 99 SAIL achieved an impressive growth of 100% over the corresponding period last year, with cumulative exports touching 4.2 lakh tonnes.

The recession in the global steel industry, large scale dumping by CIS and South Asian countries has forced already many of the new entrants to shelve their new projects. Instead of capacity addition, the steel industry is now focussing on consolidation.

The demand growth projection of 37mt was based on the estimates of the report of Working Group of Iron & Steel for the 9th five-year Plan finalised in 1996. The working Group comprised representative from all major companies in the steel sectors, beside Govt. Ministers, steel consultants and financial institutions.

A host of factors have contributed to this downtrend. A slump in demand occurred following the decline in investments in infrastructure sector. Low investment by the Government in major infrastructure development projects compounded by the absence of clear cut guidelines/procedure/policy for investment infrastructure proved to be a major impediment. Capital expenditure by the central government as percentage of GDP came down from 6.6% in 1990 to 4.8% in 1997-98

The domestic demand constraints were aggravated by growing competition from low priced steel imports. This slashed profit margins in the steel industry. Export competitiveness of Indian steel also got eroded by the larger depreciation of East Asian currencies. An overall recession in the global steel industry further added to the woes of the Indian steel companies.

SAIL?s performance: SAIL is one of the navaratna PSUs and in mid-90s was a showpiece of how PSUs survive and win the onslaught of global and private sector competition and falling tariffs. What went wrong, which resulted in the decline in performance in the last couple of years?

Restructuring in SAIL: SAIL has over the past one year announced various restructuring plans. Could you brief us on SAIL?s restructuring plans both financial and operational?

As SAIL moves into the next millennium, customers will increasingly demand higher quality products at lower cost. The future will therefore belong to those who can discover, define and service opportunities well ahead of competition. To facilitate this, the company must acquire competitive capabilities, which will enable it to continuously deliver superior quality at lower cost.

With deterioration in financial performance, the need for accelerating turnaround and transforming the organisation is all the more acute. The aim is to build strategic capabilities by which SAIL can return to a position of profitability by the year 2000-2001.

The primary focus is on restoring the financial turnaround. Despite higher turnover in '98-99, the massive burden of Rs31.22bn of financial charges wiped out the company?s operational profit of Rs15.03bn. The proposal for financial restructuring, which in under consideration of the government, is likely to improve the financial ratios without any cash infusion. However financial restructuring alone would not be sufficient for the turnaround of the company.

SAIL has prepared a comprehensive plan to improve the company's competitive positioning which includes

a) short- term measures for operational improvements.

b) medium-term measures for enhancing technology, product and market capabilities.

c) Long-term measures for business restructuring.

It is important to realise that long surviving companies continuously restructure their business. This means that SAIL must focus on its core business of making carbon steels in which it has the potential of being the lowest cost producer.

Resources, being scarce, must be deployed in areas, which best suit organisational capabilities and market opportunities. This will necessitate withdrawal from all other activities which are non-core and non-viable.

Thus, restructuring the organisation assumes importance due to SAIL's inability to sustain persistently loss-making units and compulsion to raise much needed resources for upgradation of the core business. Hence, transfer of SAIL?s non-core assets including three power units at RSP, BSL and DSP and the Oxygen Plant at BSP, into joint venture companies, is justified as it will bring in innovative technology while simultaneously releasing funds for development of SAIL's basic business. SAIL is also considering hiving off the Salem Steel Plant into a 51:49 joint venture with a suitable bidder.

SAIL has 'appointed merchant bankers/consultants for exploration of JV?s for the other areas barring IISCO.

SAIL?s Rs21.07bn revival plan for IISCO, which envisages the participation of Tyazpromexport (TPE) of Russia as an equity partner was sent to the Russian government for clearance last year since it involves the rupee-rouble escrow account. However, there has been no response from the Russians so far.

Meanwhile, TPE has submitted a revised version of the proposal for vetting by the Gol in June 1999. This proposal envisages majority participation for TPE and a total Involvement of around Rs8bn.

The success of an organisation is greatly dependent on the marketing orientation of all its employees. SAIL is launching relationship marketing by introducing a comprehensive key account management programme, for the customers, which will offer the desired quality of service.

The process of customising production started last year is being further fine tuned. There is renewed emphasis on procuring and servicing order for high value products as well as increasing direct dispatches to provide just on time deliveries. SAIL?s presence in the remote corners of the country is being enhanced through an aggressive salesforce coupled with a dealer network.

Regaining cost leadership is vital to a successful turnaround. Since highly competitive markets restrict price increase, SAIL is focussing on exploiting its potential of being, the lowest cost producer internationally. This is being done through a rigorous cost cutting drive where all aspects of cost- operational costs, purchasing cost working capital costs and social infrastructure costs - are being targeted. This concerted effort from 1997-98 has already led to savings of Rs.7.32bn in 1997-98 and Rs.9.02bn in 1998-99. By continuous improvement in techno-economic parameters and technological upgradation through in-house efforts, SAIL plans to reduce costs every year by 10% to 15% for the next two to three years. Thereafter, a minimum 5% reduction in cost per year will be aimed.

The greatest emphasis in the entire exercise is on rationalising SAIL?s manpower resources while simultaneously developing them. The current exercise on downsizing will help bring the numbers closer to competitive levels. The reduction will take place through natural and voluntary separations. The VRS introduced in '98 received an impressive response from the employees. It achieved a separation of around 6000 employees. A second VRS with a more attractive package is now in operation where the response has been even more heartening. This scheme, which was operational till January 2000 has already exceeded the target of 10,000. SAIL has therefore decided to limit the operation of its VRS to 3lst October 1999 instead of 31st January 2000. The ultimate goal is to make the company leaner by reducing manpower by one-third in the next five to six years.

The challenge of restructuring is at once a daunting and exciting task. At the same time, it involves a painful process as it means getting out of a traditional comfort zone and SAIL family is gearing towards it. Conscious of the need to increase shareholders value, SAIL with inputs from M/s IDBI and Mckinsey chalked out this clear cut road map to become globally competitive supplier. This plan will help us to create value in excess of Rs150bn in the next 4-5 years and set the pace for future disinvestment by the government

Accounting Policies: Have there been any changes to your normal accounting practices during FY99? If so, could you specify the changes and its impact on the P&L account?

SAIL prepares its accounts as per the provisions of the Companies Act, 1956 (of India) and in the format prescribed under scheduleVI to the said Act. Usually the accounts are prepared on generally accepted accounting principles of India, consistently applied. However sometimes changes are required in the policy to implement any changes brought out in the statute, accounting standards, general practice in the other companies or to improve upon earlier treatment to correctly reflect the position of the Company. As per Companies Act deviations from the accounting standards prescribed by the institute of Chartered accountants of India are required to be disclosed.

During 1998-99 certain deviations in accounting policy from accounting norms were existing viz; accounting of leave encashment liability compensation under voluntary retirement scheme98, value of equity investments in subsidiaries, fixed asset retired from active use. The rationale behind each deviation alongwith its impact on the profits of the Company, to the extent ascertainable, was fully disclosed in the notes to accounts.

SDF Loans: SDF loans have been a topic of controversy and a cause for heartburn to producers like Ispat Industries. Will you explain the genesis of the funds and rationality of SAIL's demands? What are your other plans to restructure and reduce debt?

Iron & Steel items were considered as essential commodities within the scope of Essential Commodities Act 1955. Under this Act central government was empowered to control the production, supply, distribution etc, of the commodities covered under the act. In exercise of this power Central Government issued Iron & Steel (Control Order) in 1956. In pursuance of this order, Government set up Joint Plant (JPC) in April 1971 to exercise control over production, supply, distribution iron & steel items. In 1978 the functions of JPC were enlarged to provide funds to steel industry for modernisation, rehabilitation, research & development.

In order to meet the objectives stated the Steel Development Fund was set up in June 1978. JPC was authorised to add an element to the ex-works price of Iron & Steel items produced by the main producers as contribution to SDF. SDF levy was applicable only to the integrated steel producers.

The SDF levy was abolished w.e.f. April1994. At the time of abolition of levy the main producers i.e. SAIL, TISCO, RINL & IISCO were contributing at an average rate ranging from Rs 350-500 per tonne of various steel items. The steel produced by other steel producers in the private sector and imported steel were not subject to SDF levy. However they were free to fix their price in line with the price charged by the integrated steel producers. This enabled them to get increased revenue by way of higher price realisations

Since the levy was applicable only on products manufactured by integrated- steel producers and not by the secondary producers and accordingly, loan assistance was provided to integrated steel producers only. Thus the private players have no claim on this fund.

The ballooning capital charges have been a major contributor to SAIL losses. The increasing level of debts in the balance sheet and a diminishing net worth have taken the debt-equity ratio to unsustainable level of over 3.

Through the financial restructuring, we are targeting a long-term debt to equity ratio of I.I through a one-time capital restructuring and recasting of means of finance for current/future projects.

The proposal for financial restructuring is at two levels -

1 Restructuring of asset value: (a) Time overruns in modernisation projects have led to inflated asset values (due to accretion in capitalised interest) without corresponding increase in income generation capability, Therefore, the assets needs to be written down to the extent to interest capitalised, (b) Loans and advances to llSCO through SAIL should also be written off.

2 Restructuring of capital and liabilities: The write down of assets would have to be set off against Government/SDF debt. Hence it is proposed to waive around 75% of SAIL'S SDF loans of Rs 64.15bn (including accrued interest). In addition, it is proposed that the government of India's loan IISCO routed through SAIL and the accrued interest on it amounting to Rs3.81bn also be waived. Besides the interest waiver amounting to Rs5.06bn granted to IISCO in the past by SAIL on loans from its own sources is sought to be brought back to the books and adjusted against the waiver of SDF loans as above.

If sanctioned by the government, these measures will have a positive bearing on SAIL's profitability as well as help in mitigating financial risk by reducing its debt-equity ratio and improving the company's debt servicing capability.

Capex Plans: SAIL has been forced not to undertake fresh capex plans. Do you feel that this could impact the long term competitiveness of the company or that crucial repairs and maintenance are being neglected to the long term detriment?

SAIL plans to prioritise its projects to restrict capital investment to about Rs10bn annually. The thrust this year is to invest in projects that need to comply with statutory norms such as safety environment or to improve quality to preserve market share. Since private players such as TISCO would soon enter the CR market in a big way, Bokaro's Cold Rolling Mill modernisation is a priority investment as it is critical to maintain SAIL's share in the CR coil market. To improve the quality of coils and meet the stringent requirement set Indian Railways, installation of various facilities such as eddy current surface detector, ladle furnace, degassing in Bhilai Rail & Structural Mill is yet a critical investment area for SAIL, which is already on.

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