‘Resolving NPAs Is First Priority For Renewing Growth In Steel Demand’
Steel sector in India is witnessing a slowdown and comprise a huge chunk of the gross non-performing assets (NPAs).In an exclusive interview with BW Businessworld, Atanu Mukherjee, President of M.N. Dastur & Co, a premier metals, mining, and energy consulting firm, speaks about impact of GST roll out on the steel sector, consolidation in the sector, the slowdown in demand and more. Edited excerpts:
How do you see the goods and services tax (GST) roll out working for the steel industries?
GST will make the steel sector more organized and transparent. The new tax structure will enhance the ease of doing business by simplifying compliance mechanisms, enabling seamless movement and would also curb the parallel markets by bringing in more transparency. I do not expect any material impact on the GST rate on the end consumer though.
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?
In reality, the stressed steel assets are probably closer to Rs 2.5 – 3 lakh crore, although the official NPA figures may be lower. The distressed asset overhang of the steel sector is a severe burden to the growth of the industry and the economy. We have to resolve the stressed asset situation through the bankruptcy courts along with support from the government.
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. Our analysis shows that write-downs in most of the cases are north of 50 per cent. As a part of the bankruptcy process, such write-downs should be a part of the larger reorganization plan for the firm.
By formulating a credible and actionable reorganization plan, the firm should be able to eventually attract future investors for the reorganized company under a new capital structure. However, with the current down cycle in the steel industry, many of the large assets are unlikely to find immediate buyers and may sell at a deep discount exacerbating the write-downs for the banks and leading to larger recapitalizations.
Rather than selling at a deep discount or disruptively liquidating these large assets with the taxpayer/government paying the bill through recapitalization, a more orderly transition mechanism that maximizes recoveries could be through a thoroughly professional centralized quasi-government interim holding agency. Bankruptcy proceedings along with an interim holding agency will maximize recoveries, reduce recapitalizations and help find the right stewards for these stressed assets.
What is your opinion on the National Steel Policy?
I think the National Steel Policy is certainly ambitious and bold in its plans and propositions. I, however, feel that the plans for 160 kg/ capita of steel consumption and 300 mtpa of crude capacity by 2030 are extremely ambitious goals. Secondly, given our raw material advantage, we need to focus on improving our productivity, quality, energy and environment norms across the industry so that we can be lowest cost steel producers in the world.
As an industry, we have one of the lowest productivity at 300 tons/person year, our blast furnaces run at 50 per cent of the productivity levels of best-in-class furnaces, our energy consumption is one of the highest in the world, our transportation costs are 3 times that of US and China, our carbon emissions is one of the highest and our coal based secondary steel industry is one of the most polluting. But we are still one of the lowest cost producers at about $350/ton on the global cost curve.
We could either take a laissez faire approach or let the secondary steel sector consolidate and be subsumed by integrated steel producers eventually, or we could look at technology options like gas based direct reduction based on coal gasification to transform this sector. The latter will require that gas be delivered at less than $5 /mmbtu for the gas based DR plants to be viable.
This could only be possible if the government makes available the vast reserves of our high-ash coals based on an objective allocation criterion to create private hyper-scale regulated coal gasification monopolies, in the lines of private electric utilities. This could not only feed direct reduction plants but also coal to poly and chemicals plants.
The demand has been low in spite of the incumbent government’s push to infrastructure. What according to you are the reasons for this?
The fundamental problem is that we have continued depressed investments resulting in lower gross fixed capital formation in the country. Our fixed capital investment rate has been declining at an alarming rate from about 35 per cent of GDP in 2011 to a tad over 25 per cent in 2016, and the capital formation growth rate turned negative in 2016.
Public investments (like the recent Rs 396,000 crore infra initiative) through infrastructure by the government has been stepped up considerably, but this has not been sufficient to arrest a fall in overall investment. Secondly, public sector bank debt driven private investments, which is the main engine of investment growth in India has stalled in the past few years due to declining the NPA situation.
As the demand for steel is driven primarily by growth in investments and fixed capital formation, it is unsurprising that the growth for steel demand has tapered off. Unless the NPAs are resolved and the industrial credit growth takes off, confidence in the investment community for making new investments will be lacking. Resolving the NPAs are, therefore, priority one for renewing growth in steel demand in India.
With steel prices in India ruling 15-20 per cent higher than global prices, how can we prosper in exports?
Except for China, who frequently sells below their cost of production in international markets, I don’t believe that Indian steel prices are higher than global prices. There is a bit of price disadvantage outside the gates due to our high rail transportation costs to the port – but that should not be more than $10 or so, as most plants are within 250 kms of the ports.
The world has excessive steel capacity at about 2.4 billion tons compared to a consumption of 1.6 billion tons. Of this excess capacity close to 500 million tons of excess capacity is from China. Such, excess capacities drive down global prices and encourage dumping and trade wars.
Apart from anti-dumping duties, increasingly most of the steel producing countries will erect trade and tariff barriers to protect their domestic markets. We should grow our domestic markets and should strive to be a world class lowest cost steel producer.
Production crossed 100 million tonnes in 2017, how can we take it further?
To take production further we have to increase capacity utilization as well as add capacity. Currently, we are about 77 per cent on utilization and we could probably push that to 85 per cent over the next three years as demand picks up.
Adding capacity requires investments. Steel is a capital-intensive industry and requires investments to the tune of 800 MM$ per million ton of steel. So, availability of capital at attractive rates is essential for continued investments in capacity to happen. As global steel capacities consolidate over the medium term we will probably see international capital flows starting to happen in the steel sector.
Domestic capital flows in the steel sector will start happening as the NPAs are resolved through the bankruptcy courts, banks get recapitalized and start lending. We need to institute fast track clearances and land acquisition mechanisms, start laying the foundation for debt markets for access to capital and clean our NPAs and risk assessment and management system so that capital is available at attractive rates.
There are speculations of mergers and acquisitions in the industry. Do you see this consolidation beneficial for the industry?
Steel in India (and for that matter the world over) is a fragmented industry. India has a combination of integrated and secondary steel producers – the latter producing over 55 per cent of the steel in India. It is in the interest of the steel industry and the Indian consumer that the industry consolidates to get the benefits of scale, cost, and efficiency. I think that the current downturn and the distressed asset situation provide the steel industry with an opportunity to consolidate through mergers and acquisitions.
As a consultancy service to steel manufacturers, tell us about the queries you get from your clients?
The queries we receive are diverse ranging from country strategies and master plans to engineering large plants to restructuring and turnaround of operations. Our analysis, recommendations, and engineering have the potential to create strategic impacts which may result in movement of stock prices, change company valuations, improve profitability, enhance competitiveness and create sustained competitive advantage for our customers and nations.
Do you plan to expand your consultancy service outside India too?
We are a worldwide consulting organization. We have consulted for our customers over the past 60+ years in many countries across Asia, Americas, and Europe. Our European offices based out of Dusseldorf in Germany started in 1969. Our US operations are based out of New Jersey area, our Far East operations out of Tokyo, Japan, and our Middle East operations are based out of Abu Dhabi. Apart from that, we maintain a local presence through our project teams at customer sites worldwide.
What according to you are the main differences between domestic and global steel industry?
Steel markets are mostly regional and national in nature and each market is generally unique in terms of its characteristics. The North American markets, for example, have a higher composition for flat and value added and special steels. That is because of the nature and structure of the industry which includes automobiles, high-end capital goods, white goods etc.
The price premium that you get in US markets is higher, but so are the competition and the cost. Due to the mature nature of markets and availability of scrap, most of the North American markets are based on electric arc furnace based steel making technology.
The developing markets in Asia, on the other hand, are construction industry intensive markets and so the wires and bars form the majority of the product portfolio. These are highly price sensitive markets at the lower end of the commodity basket. India is similar to the developing markets in terms of 50:50 distributions between long products and most construction type flat products.
