Essar Steel recently increased its production capacity at Hazira in Gujarat from 4 million tonnes per annum (mtpa) to 10 mtpa with an investment of Rs 37,500 crore.
The cost of capacity addition at Hazira was much lower at $750 a tonne against the industry average of $1,000 a tonne. However, the fresh capacity addition has come at a time when the steel demand is slowing down with new investment in infrastructure projects hard to come.
The expansion has been executed not keeping in mind the current economic situation, but for the future, says Mr Prashant Ruia, Group Chief Executive, Essar.
Steel consumption in India is among the lowest 55 kg per capita while the next best Brazil boasts of a per capita consumption of 150 kg and in China it is 445 kg. Even to catch up with Brazil on demand, India would require a capacity of 200 million tonnes while India currently producers just 74 million tonnes, he said.
Given the prediction that GDP in India is expected to grow 7-10 per cent in next few years, the steel demand, in general, should be 1 to 1.5 per cent higher than that of GDP. One should not be surprised, if India turns into a net importer again, said Mr Ruia in a discussion with the Business Line .
How much revenue Essar will generate with the new capacity? Is there a pressure on profit margins with lower demand and increasing input cost?
We expect a revenue of Rs 40,000 crore from 10 mtpa capacity. Post-completion of the project, the company has a debt of Rs 20,000 crore, while the equity stands at Rs 13,000 crore, leaving us with a very comfortable debt equity ratio. If one wants to put up a similar capacity now, it would cost double than what we had spent. We hope to achieve a capacity utilisation of 80-85 per cent during the next fiscal and progressively ramp it up to 90 per cent.
Steel prices previously used to move in two-year cycles, but currently it has shortened to quarter or six months. We expect the demand to revive in the March quarter after a relatively poor last quarter. We will be listed among the lowest 25 per cent of steel producers in terms of production cost by second quarter of FY'13 when we increase our pelletisation capacity from 8 mt to 20 mt. There is a cost saving of $40-45 a tonne on the modern compact strip mill in Hazira.
Is the rising raw material cost a concern?
Managing the gas prices will remain a key challenge as the Government has accorded the least priority to the steel industry in gas allocation. However, we source 40-50 per cent of our gas requirement through captive source by using the gas produced as by product from the Corex and blast furnaces, which together produce about three mmscd of gas. Earlier, we were using these gases for producing power, but it will now be used for making steel. The coal and iron ore assets we have in Minnesota and Trinity in the US act as a natural hedge on these two key raw materials.
Which are the sectors you think will lead the demand?
We will be most favoured suppliers to most of the automobile companies that are vying to set up manufacturing base in Gujarat due to our quality and proximity. Auto companies can save on inventory by tapping our supply. Apart from auto, we are buoyant on ancillary sectors that have flourished in Gujarat. The location of our service centre at key markets also makes us the right fit for white good manufacturers.
What are your future plans?
We have recently completed acquisition of steel plant and coal asset in Zimbabwe. Though the quantum of investment in this asset has not been finalised, we would develop both these assets on priority. In India, the Hazira expansions have been completed and we will first consolidate on it in next two years before proceeding on fresh investments.
The Government has referred approval on Mahan coal block back to environment ministry. What is the current status?
We are setting up a 1,000-MW super thermal power project in Madhya Pradesh for which coal was to be sourced from Mahan Coal Block. We have sought a meeting with the Environment Ministry to clarify on any issues. We are yet to hear from the Government.
Will the ongoing 2G scam probe hit investments in telecom?
I do not want to comment on this as this interaction is on our steel projects.