Sarvvijayee, Partner with one of the big four strategic consulting firm has over two decades of rich experience in consulting with metal and infrastructure industries. He has worked on varied domains including industry consolidation, assessing the impact of economic cycles, suggesting holistic go-to-market strategies to working with major industrial firms in improving their key performance indicators (KPIs).
Off late, one of the largest steel player in India has approached him with a tender enquiry. The enquiry has been initiated by the steelmaker, post the announcement by Indian Railways citing the intention to end its exclusive contract of rails purchase with SAIL (Steel Authority of India Limited) and opening the doors to invite private players for meeting domestic rail requirements.
The steel player wanted to engage Sarvvijayee in assessing the potential of the opportunity and also to suggest ways to align the same with the product portfolio, financial standing and potential profitability of the firm. Similar is the case with other Indian steel players who are eyeing this opportunity and are re-assessing their strengths and weaknesses to leverage the same.
Sarvvijayee and other strategy consultants who have been approached for this are comprehending the complexity of this enquiry given the huge opportunity underneath and the competitive intensity to convert the same by the steel players. They are pondering over the multi-dimensionality of the issue, analyzing and re-analyzing the sentiments for Indian economy and the steel companies before suggesting anything to the aspiring steel players.
What are the growth plans of Indian Railways? What shall be the quantum of the resource and investment requirements for the steel players to cater to this opportunity? Whether companies should respond by promising installation of new capacity to take on SAIL's monopoly all alone or should they partner with some experienced player to expand their product range? Will they be able to install dedicated steel plants for Indian Railways?
Government to end monopoly of state-owned enterprise over rail supplies
With the increase of 25 per cent in train accidents due to track defects in past two years (2014-2016), the government had to introduce a $15 billion safety fund. Now, the state rail operator (under the aegis of Ministry of Railways) has undertaken a mammoth task of modernizing the Indian rail network (the fourth largest globally) over a five year period at an estimated cost of $130 billion. Indian Railways have audacious plans to revamp 3,500 kilometre long tracks by the end of 2018. Railways need to cough up Rs 10,513 crore for this project. However, this drive is currently facing the heat due to ageing tracks and saturated capacities.
The SAIL's Experience
SAIL, a public sector steel producer has enjoyed the monopoly in supplying all the rail requirements for rail tracks for past 30 years. This was the result of an exclusive supply contract entered by Ministry of Railways with SAIL in 2003. However, in 2016 for the eighth time in past ten years, SAIL once again has failed to meet the demand for rails by Indian Railways to the tune of 250,000 tonnes, which is highest in terms of volume since the inception of the contract in 2003.
Additionally, the sudden and massive jump (45 per cent) in demand for steel (for rails) by Indian Railways since 2015, aggravated by the delay on part of SAIL to revamp its production has forced Ministry of Indian Railways to look for other private steelmakers for supplying enough rails. As per the report by Business Standard, Ministry of Indian Railways may soon come up with a global tender in order to procure 250,000 tonnes of rail tracks from private players across the world. This may imply opening up plethora of opportunities amounting to $700 million per annum for the private players.
This policy intervention might promote steel demand in the country and benefit the private steel players who are ailing due to cheap imports of long and flat products from China, Japan, South Korea and Russia (the cheap imports have forced domestic steel industry to cut their prices, which has further squeezed their margins).
Present Scenario of Rails in India
The domestic steel industry has been in stress from past three years (2014-2016) due to the global recession witnessed by the industry, worsened by the onslaught on margins of domestic steel players due to dumping of the steel products by countries like China, Japan & Russia.
However, the industry has shown some signs of recovery after the policy interventions and anti-dumping measures by the government agencies. Industry experts are of the opinion that government's effort in increasing infrastructure spending is going to give a major boost to steel demand in the country through 2020-21.
The biggest problem for the steel players is their gigantic contribution to the non-performing assets (NPAs) of some of the major banks of the country. Most of the major and small private steel players, except Tata Steel & JSW (Jindal South West) are today under the debt restructuring plan of the banks. The industry is bound to witness a significant consolidation in the market over the next two or three years, marked by paradigm shifts in the strategies and management of the major steel players.
Company Profiles of Major Steel Players:
1. JSW: O.P. Jindal group's entity JSW Steel Limited (JSW) is engaged in the manufacturing of iron and steel products . The company currently manufactures hot rolled steel strips sheets/plates, MS cold rolled coils/sheets, MS galvanized plain/corrugated/colour coated coils/sheet, steel billet, bars and rods. The company is not engaged in manufacturing of rails or related products as of now. As on date, JSW's steel plants are located in Karnataka, Tamil Nadu and Maharashtra. Their combined installed capacity is 18 mtpa.
2. Tata Steel: Tata Steel Limited (TSL) has an annual crude steel capacity of ~29.0 mt at present, which may decrease to ~18.9 mtpa post the proposed exit from the UK long and flat steel businesses. The domestic crude steel capacity of the company stands at 16.0 mt of crude steel. The company is also running operations in Thailand and Singapore. TSL has production units at Jamshedpur (Jharkhand) &Kalingnagar (Odisha).The product range of company comprises of both long and flat products and is currently not having any facility to manufacture rails in India .
3. SAIL: SAIL has five integrated steel plants (with an installed capacity of 12.8 mtpa of saleable steel and is currently undergoing expansion) and three special steel plants for manufacturing alloy steels and stainless steel. The Bokaro (Jharkhand) and Rourkela (Odisha) units are engaged in manufacturing of flat products; the Bhilai (Chhattisgarh) and Durgapur (West Bengal) units manufacture long products and rails; and the IISCO steel plant at Burnpur (West Bengal)manufactures structural products.
The other three plants are special steel plants viz., Alloy steel plant (ASP) at Durgapur in West Bengal with an installed capacity of 184,000 tonnes per annum (tpa); the Stainless steel plant (SSP) at Salem in Tamil Nadu with an installed capacity of 175,000 tpa; and Visvesvaraya Iron and Steel Plant (VISL) at Bhadravati in Karnatakawith an installed capacity of 98,000 tpa . The Government of India (GoI) currently holds 75 per cent stake in the equity capital of the company and has plans to disinvest three special steel plants in the near future .
4. JSPL: Jindal Steel & Power Limited (JSPL) is one of the major steel companies in India that manufactures wide range of steel products such as sponge iron, mild steel, structural, rails, pellets & plates. It has two production units, one in Raigarh (Chattisgarh) and the other in Angul (Odisha). They both have a combined capacity close to 5 million tonnes. The company is also having a manufacturing unit in Oman.
Naveen Jindal-led JSPL has a total rail manufacturing capacity of 60,000 tonnes per month including 30,000 tonnes for head-hardened rails. JSPL is eyeing addition of Rs 3,500 crore in its turnover figures from rails division in next 2-3 years.
Currently apart from SAIL, it is JSPL only that has facilities to manufacture rails. JSPL has bagged a contract of supplying 150,000 tonne of rails to Iran, comprising 130,000 tonnes of normal rails and 20,000 tonnes of specialized head hardened rails .
JSPL: Experienced a failed attempt to put brakes on SAIL's monopoly Jindal Steel & Power Ltd. (JSPL) after starting operations of rail and universal mill strived hard to get supply contracts from Indian Railways for the same. However, JSPL's concerted efforts could not garner orders due to the exclusive service agreement that Indian Railways entered with SAIL in 2003. In order to bring down the entry barrier, JSPL approached Competition Commission of India (CCI) in 2009 with the following demands :
a. To direct SAIL to end the exclusivity obligations with Indian Railways
b. To impose fines on SAIL in accordance with Section 27 of the Act for entering into an anti-competitive agreement
c. To introduce competitive bidding arrangement in the relevant market for the purchase of rails
d. To pay relevant costs to the information provider
e. To pass any order the Commission deems fit.
After several round of deliberations, CCI held the view that agreement between SAIL & Indian Railways was not anti-competitive due to following reasons:
a. Indian Railways action in selecting SAIL for the supply of rails was justified at that time, as there was no competition in the market. It provided security for supply of Research Design & Standards Organisation (RDSO)compliant rails to minimize the transaction cost and the cost of uncertainty, which is of immense importance for a national transport network like Indian Railways. SAIL is a more efficient supplier of rails than JSPL because of its welding capability deepened by the fact that it has been continuously upgrading its quality of rails to provide for longer rails capable of taking heavy loads, whereas JSPL's rails were still under field test. The report on the rail market exhibited that the supply of rails to non-Indian Railways entities amounts to 25 per cent of the total rails market and hence, SAIL cannot be said to be hindering competition or creating AAEC (Appreciable Adverse Effect on Competition) in India.
b. The MOU between SAIL and Indian Railways is rational on the basis of both price and quality and is not anti competitive. SAIL has continuously upgraded to meet the standards which are internationally comparable. Large scale operations of SAIL reflected that its profitability would not be affected even if the Memorandum of Understanding (MOU) was not signed. Therefore, no intention of anti-competitiveness can be inferred from the MOU.
Consequentially, the CCI held that neither SAIL nor Indian Railways had contravened any provisions of Competition Act. Although JSPL could not enter into contract with Indian Railway seven after approaching CCI, however, it has been supplying rail tracks to leading infrastructure companies such as Delhi Metro, Kochi Metro, L&T, NTPC, Tata Steel, JSW etc. JSW is keen to supply the new rail products for metro rails and bullet train and has bagged order from the Dedicated Freight Corridor Corporation of India Limited (DFCCIL) & railway projects in Iran.
The current opportunity of opening the doors to private steel players by Indian Railways, has once again raised the hope of JSPL to supply the rails to Indian Railways. Further, due to modernization and other visionary projects initiated at JSPL, it may enter into contract with Indian Railways which may now be of comparatively higher volume than that of the past.
The domestic steel industry has been under pressure due to cheap imports in the past decade. Government has taken concerted efforts in past one year to protect the steel industry. Steel companies have recovered from the slump, but they are still looking for a push to promote steel consumption in country. Would the Government's initiatives to spur economic growth with key focus on infrastructure and affordable housing, coupled with opening up of Indian railways rail supplies help the steelmakers in accelerating their turnover at an unprecedented phase?
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