There hasn’t been much change in the demand, but increasing raw material costs is putting pressure on steel producers to hike prices
Indian steel makers may go for another price hike as surging raw material--iron ore and coking coal-prices will pressurise steel mills to increase product prices, according to industry experts.
"It looks like prices will go up. Steel prices will move upwards keeping in mind that coking coal prices are being finalised at a higher level for the January-March period and iron ore prices are also moving up. So there will be severe cost pressure on steel mills which will lead to a price hike in January," Sharad Mahendra, vice president, sales and marketing, JSW Steel told Moneylife.
"Some steel makers are planning to increase steel prices by end-December or early January. Though globally steel prices are at an improved level, it's purely because of high raw material prices and there is no significant rise in demand. To protect margins and grab the better demand-supply scenario in the fourth quarter, steel companies are preparing to increase prices," a Mumbai-based analyst said.
Recently, state-run Steel Authority of India (SAIL) increased prices of long products by Rs300 to Rs37, 500 per tonne, citing good demand for long products as construction activity is likely to pick up in the coming quarter. JSW Steel has raised hot rolled coil prices by 1-1.5%.
According to the analyst, steel prices may increase between Rs1,000 to Rs1,500 per tonne. Mr Mahendra said, "It's difficult to predict the exact hike as coking coal contract prices are in the last stage of finalisation, but in terms of percentage it could be between 3% and 6% per tonne. It's just a guess now."
China is the largest steel producer, so whenever raw material prices go up either they have to shut down units or hike prices, added the analyst.
Now, the Chinese steel industry is coming back on track. Some market experts feel that threat of cheaper Chinese imports into the country may restrain domestic players to go for a large price hike.
However, Mr Mahendra said, "Even though the Chinese steel industry is coming back on track, we do not see it as a threat as the input costs in terms of iron ore and coking coal are very high, so the Chinese mills are not able to export their products at lower prices. Secondly, after capacity shutdowns, which were taken place because of the Chinese government's energy rationalisation policy, Chinese steel demand is forecast to be very good. So I don't think China's increasing steel production will impact the Indian market in the near term."
Supply of coking coal and iron ore would be another concern for steel makers as supply would be less amid higher demand from China and India.
"China's average steel production is 50 million tonnes per month. In September, steel production stood between 46 million tonnes and 47 million tonnes, however, the country managed to produce more than 50 million tonnes of steel in October and for this monthly rate of production the requirement of iron ore and coking coal is huge," said the analyst.
"Weather predictions in Australia, from where majority of coking coal comes, are very bad. It may impact shipments and movement of coking coal from Australia to the rest of country. In India, very few mines are working right now and production of iron ore has come down," added Mr Mahendra.
Ispat Industries has failed to live up to every commitment it made as part of the corporate debt restructuring package so generously approved by lenders in 2003. Will the lenders now act as they would if it were a small business they were dealing with?
Ispat Industries Ltd (IIL), which finds itself in dire straits thanks to almost two decades of severe mismanagement, responded to our recent series of articles on the company by asserting that it has been fulfilling its obligations to its lenders, "though there are some delays". However, the latest report on the progress of corporate debt restructuring (CDR), a copy of which is available with us, shows that the reality is quite the opposite. Ispat is way behind in meeting every commitment and the lenders are, at least on paper, concerned.
The report dated 22nd October says that the Lenders' Monitoring Committee (LMC) "felt that in order to bring financial discipline in the company, TRA mechanism should be strictly implemented immediately and close monitoring for the same is required by the TRA bank, viz. SBI." (TRA stands for Trust and Retention Account.) The report goes on to state that "the company was directed to submit expenses budget on a monthly basis in advance in respect of subsequent month to the lenders for their examination and approval by the LMC for effective monitoring of TRA." The report goes on to discuss the various compliance steps that Ispat has failed to take as part of the CDR. Here is a summary of how lenders see Ispat's compliance on various counts.
Financial closure for Ispat Energy Ltd (IEL): Ispat is setting up 110MW captive power plant through Ispat Energy Ltd (IEL), a separate company. The CDR scheme for Ispat approved in January 2003 envisaged financial closure of IEL by 31 March 2003, almost eight years ago. However, IIL could not complete the project. The CDR package envisaged recovery of Rs250 crores (already incurred by IIL on the above project prior to CDR package) by IIL from IEL in 13 annual instalments of Rs19.40 crore each from FY2006, payment of Rs70 crore per year by IEL to IIL towards Blast Furnace Gas (BFG), reduction in the expenditure towards power for IIL by Rs70 crore per year on implementation of power project and receipt of dividend by IIL from IEL to the tune of Rs18 crore per year. All these promises failed miserably. Further, while approving Rework Package in May 2009, the lenders stipulated that the financial closure for the captive power plant should be achieved by 31 March 2010. Ispat failed in this too. The deadline was extended up to 30 June 2010. This deadline has also come and gone. The generous lenders now say that "as the process for sanction of loan to IEL by FI/Bank is expected to take some time, IIL has now requested the CDR lenders to grant extension of time up to 30 December 2010."
Sale of flats of Peddar Road property: Ispat was required to receive Rs105 crore from the booking proceeds of the flats being developed in the Peddar Road property by March 2006. However, Ispat has not still done this. Two years after the initial deadline, Ispat was still talking of a schedule of payments extending well into November 2008. Ispat was generously allowed time up to 31 March 2010 to sell two flats. This was extended to 20 June 2010. How many small businesses would be given this luxury after they have mismanaged their businesses and have been unable to meet any commitments to their bankers? Ispat then came up with a new idea-that DTZ, one of the world's independent property consultants, has been appointed to market the flats. Ispat has been asked to bring in at least Rs40 crore by 31 October 2010 and Rs215 crore by April 2011. Ispat will in all likelihood fail to meet this commitment too.
In May 2009, Ispat got a "rework package". This comprised loans equivalent to interest for the period from January 2009 to 31 December 2009, aggregating Rs638.89 crore, to meet the working capital gap. Ispat promptly defaulted in payment of dues for July, August and September 2010. The overdue amount on 30 September 2010 was Rs294.46 crore, half of which was the interest cost.
Coke oven and pellet plants: Ispat was supposed to achieve financial closure for a one million tonne per annum (tpa) coke oven and a two million tpa pellet plant by 31 March 2010. Ispat failed in both. The bankers extended the time up to 30 June 2010. Ispat failed to meet this deadline too and requested for an extension up to 31 December 2010.
Damkowadi mines: Ispat has mines in Damkowadi near Nagpur, in Maharashtra, and had committed to start production from these mines by FY2011. It is nowhere near meeting this deadline and the lenders have decided to "appoint an independent consultant to evaluate the legal status, estimated reserve and present status of acquisition, etc."
Capex: The lenders had told Ispat not to incur further capital expenditure acquisitions and investments "without prior written approval of CDR lenders, except the normal capex required for the plant of about Rs60 crore per year." But Ispat has spent Rs143.81 crore during the 15 months (April 2009 to June 2010) on fixed assets, as against normal capex of Rs60 crore per annum provided in the CDR package. The lenders have told Ispat "to give justification for the said expenditure."
The lenders conclude their assessment of Ispat's compliance with the terms of the CDR by stating that as Ispat "has not been able to comply with the above conditions", EOD has occurred and lenders "have the right to convert the entire outstanding (Rs638.89 crore) along with outstanding interest, if any, into fully paid equity shares of IIL. Individual lenders shall have the right to exercise their respective conversion right." (EOD stands for 'event of default'.)
Well, we are not holding our breath to see what the lenders, IDBI Bank, IFCI, ICICI, Punjab National Bank and State Bank of India do. They will probably extend their generosity again. But a steel industry source told Moneylife, "time is running out for Ispat. It can only be rescued through a takeover, even though the Mittals are fighting hard to avoid it."
Not so long ago, wine producers believed they could expand the market in India significantly. It has quite turned out that way as demand is sluggish and they are burdened with unsold stocks
Four years ago, wine producers dreamed of expanding the growing interest in wine in the country. Today, those dreams remain unfulfilled as the industry struggles to squeeze out any worthwhile gains.
India is believed to be one of the fastest growing markets for wine. In fact, it's not only about wine, but it's among the fastest growing markets for several items-from food and clothing to fun and entertainment-with demand being generated from a fast-growing consumer class.
So, in 2007, the wine makers drew up big plans hoping to introduce the uninitiated to a new taste. And there was good reason for such hope. Domestic wine consumption had grown to about 10 million litres that year from just one million litres in 2001.
They introduced wine-tasting sessions that were well-received, held wine exhibitions that were well attended and wine producers even set up visits to vineyards, combining education with pleasure. Sure, these programmes have reached many who didn't know much about wines, but it hasn't helped expand the business much.
Why has acceptance been slow? Hemant Walunj, assistant winemaker with Vallée de Vin, believes, "People do participate in wine-tasting events and farm visits, but when it comes to actual buying the wine, many people do not. Price is the major factor, as wines cost a lot more compared to other liquors." Vallée de Vin (the name means valley of wines) produces and exports wines from its unit near Nashik, Maharashtra.
Subash Arora of the Indian Wine Academy blames the sluggishness on government policy. "One of the reasons that the wine industry hasn't performed as expected is that government policy is not conducive for selling of wine in India."
The global financial crisis may also have something to do with it, as the market for wine which was growing at about 28% up to 2007, has dropped thereafter by nearly 30%.
A year ago, Moneylife reported that large stocks of unsold wine could result in winemakers selling their products at reduced prices. For example, Sula Wines, one of the major producers, had about 40-50% of its wine stocks lying unsold in its tanks; it was worse with Indus Wines which had around 90% of unsold inventory.
In fact, a combination of low demand and damage to grape crops due to unseasonal rain over the past two years has resulted in the prices of wine remaining stable.
"Producers will first look to dispose off unused stocks. Even production is undertaken on the basis of the unsold stocks. But this is not the right way to go about the business," says Mr Arora. "Good marketing and branding strategies are required."
On the issue of prices, Mr Arora believes that while there is good demand in the domestic market, Indian wines have a narrow international market, catering to restaurants serving Indian food.
Ankush Mittal, director, Mittal Vineyards, also based in Nashik, does not expect prices to rise. "For the past two years the wine industry has stagnated due to recession. Production was increased in anticipation of a rise in demand which hasn't happened. So there is hardly any scope for rise in wine prices," says Mr Mittal. "However, if we have unseasonal rain next year also, the scenario could be different."
Clearly, wine makers have a lot to deal with, to turn around this situation. Of course, they will hope that the initiatives they have launched will not be wasted. Gaurav Chitnis who operates Unity Wine Tours, is encouraged by the response so far. "Business has been quite consistent. A lot of people are getting aware of the wine industry with many wine-tasting festivals held across cities. People continue to be interested in grape farm tours."