Steeling itself for change

Published : Nov 29, 1997 00:00 IST

Faced with slack demand and a drop in its turnover and profits, SAIL opts for cost-reduction strategies and is implementing a massive modernisation programme to remain competitive.


This is the third article in the series on the 'Navaratna' companies.

THE Steel Authority of India Ltd (SAIL), a Navaratna public sector company and India's largest steel producer, accounts for half the country's output of saleable steel. Although SAIL was formed only in 1973, its genesis can be traced to the mid 1950s when public sector steel plants, inspired by the idea of a "tryst with destiny", occupied the commanding heights of the Indian steel industry. (The other Navaratna companies are Bharat Heavy Electricals Ltd, Indian Petrochemicals Corporation Ltd, Videsh Sanchar Nigam Ltd, National Thermal Power Corporation Ltd, Bharat Petroleum Corporation Ltd, Hindustan Petroleum Corporation Ltd, Indian Oil Corporation Ltd, Oil and Natural Gas Corporation Ltd.)

While the early Plans envisaged massive public investments in the steel industry to establish a base for a self-reliant heavy industry in India, the squeeze on public investments since 1991 has affected SAIL directly and indirectly. The Plan investment in public sector steel companies increased marginally - from Rs.3,110 crores in 1992-93 to Rs.3,250 crores in 1996-97 - but this implied a decline in real terms. Moreover, the overall squeeze on public investment has affected other large-scale steel-consuming public sector units in the construction, power, light and heavy engineering and coal sectors. The decline in investment in these industries has imposed a demand constraint on SAIL and other steel companies.

The liberalisation policies of the 1990s have taken a dramatic toll on SAIL's turnover and profits. Its turnover in 1996-97 was 4 per cent lower than in the previous year. Profits fell by 61 per cent in the same period. SAIL Chairman Arvind Pande says that the sharp increase in input costs, amounting to about Rs.1,000 crores in 1996-97 and Rs.600 crores in the first half of 1997-98, has worsened the situation. (See charts 1 &2)

Given slack demand, SAIL and other steel companies are unable to pass on the increased costs to consumers and are cutting their own margins. The 27 per cent increase in the price of coal and the increase in freight charges and power costs over the last year, significantly increased input costs in SAIL's steel plants. A SAIL official told Frontline that the demand for steel has slowed down mainly due to the poor take-off of infrastructure projects and low levels of foreign direct investment and private investment. He says that the fortunes of the steel industry generally follow the course of the economy and that stagnant demand is the main problem.

The general recessionary conditions have affected other major steel-consuming sectors as well, among them the construction and engineering industries. The sharp reduction in import duties on steel, a feature of the liberalisation package, has aggravated SAIL's problems further (see Table). The slump in the domestic steel industry has coincided with the downturn in the international steel industry. The fall in customs duties has attracted desperate steel producers from abroad to India. SAIL has had to contend with steel imports from Ukraine, Russia, Kazakhstan and other countries, which sell steel here at prices below their cost of production.

In fact, SAIL and Essar Steel filed a joint complaint before the Anti-Dumping Authority (under the Union Commerce Ministry) against the dumping of hot rolled coils from Ukraine, Russia and Kazakhstan. Several companies have complained that there is inordinate delay in processing these charges. Arvind Pande says that anti-dumping allegations need a quick response so that damage to the domestic industry is arrested early.

Although Jamshedji Tata established the first integrated steel plant in India at Jamshedpur in Bihar in 1907, the industrialisation drive in the early Plans provided the first real thrust to steel making in India. Two other plants in the private sector, the Indian Iron and Steel Company (IISCO) and the plant established by Sir M. Visvesvaraya in Karnataka, are now SAIL subsidiaries. The Hindustan Steel Ltd was formed in 1954 to manage the first public sector integrated steel plant at Rourkela in Orissa. In 1957, Hindustan Steel Ltd took over the public sector steel plants at Bhilai in Madhya Pradesh and Durgapur in West Bengal. Bokaro Steel Company was formed in 1964 to manage the integrated plant in Bihar.

SAIL came into being in 1973 after the Government brought together public sector steel plants under a common administration. SAIL now manages four integrated steel plants - they are located at Rourkela, Bhilai, Bokaro and Durgapur - and two plants manufacturing speciality steels, the Salem Steel Plant in Tamil Nadu and the Ally Steel Plant at Durgapur.

As the largest integrated steel producer in India, SAIL controls half the industry. It has a market capitalisation of Rs. 800 crores, making it one of the biggest companies in India. The company claims that it is the ninth largest steel company in the world (it was ranked 20 in 1985 and 11 in 1996) and has recorded profits in the last 12 years. Its vertically integrated plants produce a range of saleable steel for applications in construction, engineering, power, railways, automotive and defence industries. In 1996-97, SAIL produced 11.6 million tonnes of hot metal, 10.32 million tonnes of crude steel and 8.9 million tonnes of saleable steel. (See chart 3)

Industry sources say that SAIL's marketing network of 43 branch offices and 47 stockyards across the country is far more extensive than that of its competitors. The company calls itself a "supermarket for steel". Industry sources say that SAIL, which, unlike the private steel companies, sells directly rather than through agents, is better equipped to maintain quality standards.

SAIL's vertical linkages in steel production extend to mining activity. Its Raw Materials Division in Calcutta manages seven iron ore mines, five limestone mines and four dolomite mines. These mines produced 23.4 million tonnes of iron ore (about 98 per cent of SAIL's requirements), 1.9 million tonnes of limestone and 0.5 million tonnes of dolomite in 1996-97. In fact, the location of the integrated plants, in east and central India, was influenced by their closeness to raw material locations, a crucial factor in the cost of production.

Despite the adverse conditions facing the steel industry, Arvind Pande said that SAIL has planned a cost-reduction target of Rs. 1,000 crores in 1997-98. He said, "We will use less coal, increase yields and improve operational performance at each stage of processing to cut costs." Detailed micro-planning is the key to reducing costs. A senior trade union source in Delhi confirmed that workers have been involved in the exercise. In the first six months of 1997-98 (ending September 1997), the company reduced costs by Rs. 277 crores.

Modernisation holds the key to SAIL's fortunes in the near future. Arvind Pande says that the objective of the Rs.15,000-crore modernisation drive is to upgrade steel-making technologies and productive capacity and, in the process, become more energy-efficient and improve quality. The key component of the ongoing modernisation drive - already completed at Rourkela and Bokaro - is the replacement of open hearth furnaces and ingot casting facilities with basic oxygen furnaces for steel-making and employing continuous casting techniques. A senior SAIL official says, "Continuous casting and basic oxygen furnaces ensure better quality steel through processes more easily monitored for quality control. The basic oxygen surfaces method is significantly faster, more automated and permits greater flexibility. Continuous casting is more efficient than the traditional ingot casting methods and gives increased yields while enabling better quality standards. SAIL is also modernising its finishing mills and is adding secondary refining facilities to improve quality.

Between 1992-93 and 1995-96, SAIL spent Rs.930 crores on its modernisation and capital expenditure programmes and another Rs.260 crores during 1996-97. The modernisation programme is being entirely funded by internal resources and commercial borrowings. SAIL's problems have also been compounded by the high interest charges it has incurred in mobilising commercial borrowings for the programme.

Critics have said that the Government has, by not offering SAIL a more cost-effective option by way of financial support, missed an opportunity to revive not only the steel sector but also other industries linked to this strategic industry.

A senior company official told Frontline that SAIL's modernisation drive to make hot rolled coils was delayed by at least seven years because of the delays in getting Government approvals. He said, "By then the competition had already moved in with upgraded technology."

Will Navaratna status enable SAIL to continue its task as the trend-setter in the Indian steel industry? The emphasis of the Navaratna package on globalisation and the formation of strategic alliances, without provisions for adequate financial and policy support raises a set of disturbing questions for the future of the steel industry in general and SAIL in particular. Although the company's exports have increased by 7 per cent in the first half of 1997-98 as compared to the same period in 1996-97, industry analysts maintain that in the long term, the company would do well to focus on the domestic market instead of venturing aggressively into the international market plagued by cyclical fluctuations. They point out the case of Reliance Industries, whose strategy is based on the assessment that it is the Indian market, rather than the global market that offers scope for long-term growth. A bias towards meeting the needs of a developing economy, according to a senior SAIL source, requires a more positive policy framework and measure of financial support for the entire steel industry, not just SAIL.

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