Top Steelmaker Bets Big on India Revival by Adding Capacity

  • Steel Authority of India says more domestic capacity is needed
  • The company is borrowing to expand despite global overcapacity

Prakash Kumar Singh.

Photographer: Anindito Mukherjee/Bloomberg

Steelmakers in India are reeling from a global glut, sliding prices and high industry debt. Yet the nation’s top maker of the alloy is betting on a bright future for mills in the fastest-growing major economy.

State-run Steel Authority of India Ltd. is spending 40 billion rupees ($598 million) this year on increasing capacity about 43 percent to 21.4 million metric tons by 2018, part of a longer term goal of achieving 50 million tons in the next decade, its Chairman Prakash Kumar Singh said in an interview.

"We’re one of the largest economies," Singh, 58, said in New Delhi. "Demand for steel will grow -- it will boom. Unless we create this capacity, we’d be short sighted."

Producers such as Steel Authority of India and JSW Steel Ltd. plan to add capacity even as a global glut weighs on profitability. They are wagering that Prime Minister Narendra Modi’s focus on investing in infrastructure and keeping economic growth above 7 percent will expand steel purchases over time. For now, potential supply outstrips demand in India.

Click here to see why the government sees steel demanding doubling by 2026

Steel Authority of India posted losses for four straight quarters, and its 21 percent share-price drop in the past year lags the 2.2 percent rise in the S&P BSE Sensex index.

The New-Delhi based company will cut costs by 10 percent in the 12 months ending March, Singh said in the Aug. 5 interview. A voluntary retirement program announced earlier this month is expected to save about 1 billion rupees a year.

Singh said the alloy’s price has probably bottomed out. A 1,000-rupee per ton move in the steel price affects the company’s revenue by 14 billion rupees, he said. The alloy has dropped about 9 percent from this year’s high of 32,000 rupees a ton in May.

Steel Authority of India said it plans to borrow the 40 billion rupees through bonds, bank lending and foreign-currency loans to complete a 720-billion-rupee modernization program. The company’s total debt is about 320 billion rupees, according to data compiled by Bloomberg News.

India, the world’s third-biggest steel producer, has imposed anti-dumping duties, minimum import prices and safeguard taxes to protect domestic manufacturers as nations such as China export excess supplies at low cost.

While the industry globally is facing challenges today, Singh said India has to invest now to add mills as the process can take up to a decade.

That, in turn, implies a transformation ahead for Steel Authority of India into one of the biggest steelmakers in the world, he said.

"We have to start thinking -- or we’ll be in a situation where a lot of steel will have to be imported," Singh said.

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