Despite robust demand, they claim to have suffered losses since April
Ashok Surana is a worried man. “This year has been terrible,” he says, distractedly answering his phone, “We want a …what was it that Obama gave America?”
“Exactly,” Mr. Surana says, “A bailout.”
As President of the Chhattisgarh Mini Steel Plant Association (CMSPA), Mr. Surana represents 175 steel manufacturers that produce 4.2 million metric tonnes of steel annually (about 6.5 per cent of national steel output) and, according to the association, directly employ about 30,000 workers in Chhattisgarh. Despite a robust demand for steel in the economy, CMSPA members say that they have suffered heavy losses since April this year, and are in danger of bankruptcy.
The CMPSA has approached the State government for help, failing which they plan to start closing their plants starting December 1 this year.
Mini-steel plants buy sponge-iron and scrap metal which is melted in electric furnaces and turned into steel ingots which are sold further to mills that make sheets, rebar and other steel products. While the cost of raw materials has increased, the price of their products has fallen, squeezing the mini-steel plants from both ends.
Industry sources say the problem began when the Orissa government began cracking down on illegal mining of iron ore. “This lead to a shortage of iron ore in the market and sponge iron prices shot up from about Rs. 15,000 per tonne in April to about Rs. 18,000 per tonne at present,” said a manufacturer.
Meanwhile, spot prices for steel on the National Commodities Exchange (NCDEX) dropped from a high of Rs. 28,910 per tonne in April to a low of Rs. 23,500 per tonne in July before recovering to about Rs. 25,500 per tonne in November.
Factoring in the cost of electricity at Rs 3.10 per unit, and 1000 units of electricity per tonne of steel produced, rough calculations indicate that profit margins for mini-steel manufacturers fell from about Rs. 10,800 per tonne of steel in April to Rs. 4,400 per tonne in November.
The dip in steel prices in the face of rising input costs has puzzled steel manufacturers, some of whom believe that a cartel of speculators is manipulating prices on the NCDEX. In a letter sent to Chhattisgarh Chief Minister Raman Singh, the CMSPA claims that market speculators are manipulating the steel futures market by constantly trading on approximately 74,000 tonnes of steel, currently lying in NCDEX warehouses across the country. “This steel is never actually bought or sold, but is used as the basis for paper transactions,” the letter alleges.
“While the volume of trades on the NCDEX is relatively low, the index serves as a benchmark, deflating steel prices across the country,” says Yash Aggarwal of Ispat India, a Raipur-based steel manufacturer.
Chhattisgarh steel manufacturers also expanded production capacity in 2009 which have kept steel prices low while increasing electricity costs. The Chhattisgarh State Power Distribution Company levies a minimum demand charge of between Rs. 7 lakh to Rs. 23 lakh depending on the size of the plant, irrespective of actual consumption. “The minimum demand charge makes it economically unviable to scale back production as you must pay the demand charge even if you stop production,” says Mr. Aggarwal.
The CMSPA wants the government to halve the minimum demand charge for two years, and reduce electricity rates until the industry recovers. However, sources in the government are uneasy about the bailout.
“As per the electricity act, we cannot force electricity companies to take a loss,” said a senior official, speaking off record as discussions are underway. “We shall have to come up with a cash subsidy, which is difficult at present.” said the official.