‘Stress in ferrochrome sector creates scope for consolidation’

Prices staying low in FY16 and in the first quarter of FY17 left a good number of manufacturers of ferrochrome, a substance used in making stainless steel, in dire straits. This has created a condition for capacity consolidation in the fragmented industry

Cyclicalityiscommontoallcommodities. But ferrochrome, usedinmakingstainlesssteel, hasseenwildpricefluctuationsintherecent quarters. Howdoyoucopewiththis?

Inthepastsixquarters, wehaveseen ferrochromepricesmovingbetween70cents and$1.40apound. Infact, thereweretimes whenthisstainlesssteelfeedstockwastraded wellbelow70cents, causingconsiderable distresstotheindustry. You, therefore, seea largedebtoverhanginthesector.

IMFAisbetterplacedthanitspeersinthe industrytowithstandthiskindofpriceswings becauseofitsbig-scaleintegrated operation. Thecompanygetsfull requirementofchromeoreand electricityfromcaptivesources. Sustainableoperationalviabilityofa ferrochromemanufacturerdepends onwhereintheindustrycost-curve itfindsitself. Weareonlyexposedto buyingmetallurgicalcoke, animportantcost componentfortheindustry, fromthemarket.

IMFA’sstrategytosellaround75percentof ferrochromeproductiononthebasisoflongtermcontracttoleadingstainlesssteelmakers, mainlyinSouthKoreaandTaiwan, withprices fixedonaquarterlybasisactsasahedge againstpricevolatility. IthinkIMFAhas structureditselfwelltodealwithindustry cyclicality.

Theindustry’speerperformancein2015-16 andinthefirstquarterof2016-17leftmany unitsindirestraits.

The capacity of ferrochrome industry in the country is highly fragmented. IMFA is an entity with ownership of both chrome ore mines and power plants. There are units with either ownership of mines or power generation capacity. You also have melting furnaces, which neither have captive mines nor power stations. The units in the third group are essentially swing producers, who will make ferrochrome when prices will rule high. They also work as conversion agents for merchant miners.

The stress in the sector, withmany uneconomic-sized units, creates scope for consolidation, which already has started happening. As IMFA’s plans are ready to raise annual chrome ore mining capacity from 600,000 tonnes to 900,000 tonnes by 202122 and then to 1.2 million tonnes (mt) in another three years, we shall in sync expand our smelting capacity. Our smelting capacity growth needn’t all be organic. We shall certainly look at acquisition opportunities that will come our way. But whatever we do, you can be rest assured that we will maintain a net debt to equity ratio that will give comfort to all stakeholders, including the lenders.

Three things underpin the success of our kind of business. First, build enough capacity in furnace upstream by way of owning chromite mines and power plants. Second, sweat assets to the maximum and optimise cost structure through constant focus on efficiency. Third, keep debts under control.