As SAIL struggles, private players race ahead

The ambitious modernisation and expansion plan of the public sector steel major, Steel Authority of India Ltd (SAIL), was conceived in 2006, when Sushil Kumar Roongta was the chairman. By the time Chandra Sekhar Verma took charge in 2010, the economic meltdown had sent the steel market in a tizzy, and the expansion programme had to be revisited. It was in only 2015, under current chairman Prakash Kumar Singh, that the expansion of Rourkela and Burnpur plants were dedicated to the nation.

In short, the modernisation of SAIL has spanned the tenure of three chairmen and two Prime Ministers: Manmohan Singh and Narendra Modi. But all going well, the programme, which has cost ~65,000 crore till February, should be completed by December.

The plan entailed taking the crude steel production capacity to 21.4 million tonnes (mt) from 13.5 mt in 2006-07. At present, SAIL's capacity is about 17 mt.

The private sector, meanwhile, has galloped ahead; JSW Steel has added 8 mt through the brownfield route; Tata Steel added 6.2 mt through a mix of brownfield and greenfield expansions; and Essar Steel has added 5.4 mt through brownfield projects.

The modernisation of SAIL was taken up at all integrated plants and the special steel plant at Salem; the expansion of Salem plant was completed in early 2008 and that of the others, too, were to be completed by March 2013. It's been four years since the deadline expired.

SAIL says there were valid reasons for the delay.

"Early 2008, the steel demand was buoyant. This pushed up the price scenario for most of the packages and in many cases led to re-tendering and non-turnkey mode of implementation. Subsequent to the global economic meltdown in 2009, the expansion had to be revisited and some of the schemes were impacted,” a company spokesperson says.

Further, the implementation was affected due to unforeseen soil conditions faced during execution, land encroachment, underestimation of raw material quantities by consultants, logistic issues, and inadequate mobilisation of resources by contracting agencies.

In contrast, one of the reasons behind JSW’s quick ramp-up, its officials say, is that it has been able to complete the project on time. Also, JSW doesn't engage contractors for projects - it works with its in-house project management team. What it takes seriously is the timeline, because when a project gets delayed, costs go up.

SAIL has, however, said that there is no cost overrun in the modernisation programme, but the final cost would be worked out at the time of contract closure, taking into account escalation, if any.

Sources close to the development, however, say that the steel ministry was keeping a close vigil on the modernisation programme of SAIL. “It wants SAIL to implement it on a war footing,” they say.

A government panel has been set up to monitor the ramp-up which would be the key to India's plan of achieving production of 300 mt. Further, the Boston Consulting Group has been brought in to advise on a host of issues, including how to lower the cost of production and ramp up capacity.

Perhaps the warning bell was sounded by SAIL's financial performance. Its last profitable quarter was that of March 2014-15. The entire steel sector had, indeed, gone through a rough patch, but in the third quarter of 2016-17, Tata Steel and JSW Steel managed a stellar performance compared to a ~795-crore loss by SAIL.

SAIL, however, points to an abnormally high wage cost at 21 per cent. SAIL's staff strength was 88,000 as on April 1, 2016, and is expected to be 83,000 by March 2017. In contrast, JSW had 11,904 employees in 2015-16. It still, however, doesn’t explain the difference in realisation between SAIL and, say, JSW Steel.

“The average blended realisation for SAIL is about ~34,000 per tonne compared to over ~39,000 per tonne of JSW Steel. Perhaps, it is because of the product-mix and percentage of value-added steel,” Jayanta Roy, senior vice-president of ICRA, says.

SAIL says JSW and Tata Steel have a higher weighted average realisation due to higher component of products such as cold rolled and coated products and a lower component of semis. Going forward, with the stabilisation of the new mills, the average realisation for SAIL would also improve.

Currently, semis account for nearly 25 per cent in SAIL's product basket. After the modernisation, it would come down to 12 per cent. Players like Tata Steel stopped selling semis a long time back.

Clearly, SAIL needs to get its act together fast. The government has a dream and SAIL can't afford to be a spoilsport.