The Hindu : Business : Salem Steel at a crossroads

Online edition of India's National Newspaper
Monday, Aug 09, 2004

Business

Business

Salem Steel at a crossroads

IS A Rs. 800-crore facility for rolling of stainless steel a `non-core' asset for a company which makes steel and which would realise a much higher unit price from a value-added product like finished stainless steel much in demand for both sophisticated industrial applications and consumer use?

Can such a facility owned by a premier steel company like Steel Authority of India Ltd (SAIL) and representing a downstream activity, be considered non-core on a par with activities like production of fertilizer or generation of captive power undertaken by the company?

These questions are relevant in discussing the future of Salem Steel Plant (SSP), a unit of SAIL, whose divestment, as a "non-core asset", in favour of a strategic partner holding 76 per cent share, was decided upon by the erstwhile National Democratic Alliance (NDA) government but has been deferred by the new Minister for Steel and Fertilizers, Ram Vilas Paswan.

Widely considered a "politically conceived" investment in the decades when steel plants were regarded more as generators of employment than as producers of a crucial industrial input, the SSP was implemented on the basis of "reverse integration.'' Dependent since its inception (1971) on imported hot rolled stainless steel (SS) coils, the plant took a big step towards backward integration with the installing of hot rolling facilities in the mid-nineties. Still, its viability continued to suffer from dependence for SS slabs on the Alloy Steels Plant of SAIL at Durgapur and purchases from SSP's competitors in the private sector. A rolling mill, with high input costs, including transportation of raw material, could hardly be expected to pay back its fixed capital or use full capacity. It has accumulated losses of about Rs 900 crores (against total investments of Rs 1,100 crores), though it recorded a token profit last year.

A missed opportunity

According to earlier estimates, an investment of Rs. 400 crores in slab-making facilities could have made a lot of difference to the viability of the SSP which, by all accounts, has not had a poor record in terms of work culture. The SSP is now 1,350-employees-strong and has ISO certifications for manufacturing quality systems as also environmental management. Its value added facilities include coin blanking — it is a supplier to Union government mints and also foreign importers — besides facilities to make pipes, utensils, corrugated sheets, door frames and other items. To its credit, the SSP has also established a brand presence in the market.

The million-dollar question now is whether SAIL, which has been spreading its resources thin over its four behemoths (Bokaro, Bhilai, Durgapur and Rourkela) will be inclined to invest a comparatively small amount in a slab-making facility at Salem. SAIL has been the beneficiary of a bailout in the last four years, with the Government writing off Steel Development Fund (SDF) loans of Rs 5,073 crores. Disinvestment in "non-core assets", including the SSP, was a condition for the bailout. A new phenomenon in the steel industry is the unpredictability of the market with increasing global integration of the economy. Just three years ago, the industry was canvassing for a Buy Indian Steel Act (a draft of which had been prepared) in the face of domestic demand recession and protectionist duties abroad. Right now, it is all smiles, with booming exports, especially to China, and shut down of capacities elsewhere. Indian steel producers, including SAIL, are announcing plans for mega investments — something that even the Tenth Plan (2002-07) document, approved by the National Development Council (NDC) just a year ago, did not envisage!

What the people of Salem wonder is whether the small investment required for a slab mill will be made by SAIL, taking advantage of the present market situation.

This question needs to be addressed though one also has to examine whether in an increasingly volatile market and globally integrated economy, the decision-making and accountability structures in the public sector will be a hurdle to a potential turnaround of the SSP and whether a private strategic partner would still be a better option for all concerned.

R. Gopalakrishnan

in Chennai

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