State Of The Economy 2016

No rock and roll

The steel re-rolling industry has all but flattened out. Can government intervention save the units?

photographs: Soumik Kar

Dumping of cheap steel, weak demand and a drop in production has ravaged the steel industry in the country. It is no different at the Butibori industrial belt, a cluster developed by the MIDC, about 27 km south of Nagpur. The steel re-rollers here tell a woeful tale of an industry that has all but flattened out. Neeraj Aggarwal, who owns a re-rolling business called Shyambaba Re-Rollers, has shut his plant for now. With dismal prospects for his business, he sees Butibori turning into Detroit, a ghost town that once housed a vibrant auto industry.

“While steel prices have fallen to their lowest, as seen in 2010, input costs such as fuel and raw material prices have been increasing. Also, much of the demand is being taken over by cheap Chinese imports, leaving little incremental demand for Indian producers,” he says. Aggarwal, however, makes a distinction between smaller and larger units. “The medium-sized steel re-rolling units in Butibori are supplying to large corporates, and hence getting better margins. Smaller units do not have this luxury and are on the verge of closure or have already shut shop.” 

About half of the re-rolling and steel related mills in Butibori have shifted from 24-hour work shifts to eight-hour shifts, cutting production in the face of falling demand. Others are specialising into niche products, where margins are higher. At Shilpa Steel and Power, one of the biggest steel re-rollers in the cluster, the sentiment is not as bad. “Business has been lukewarm. But while steel prices have fallen, we have not cut our production,” says promoter Karan Bagaria. Set up in 1989, Shilpa Steel manufactures re-rolled steel including angles, brackets, channels and beams. It has a capacity of 1 lakh tonne per annum for rolling mills, 17,000 tonnes for towers and 12,000 tonnes for fasteners.

Fickle power
Butibori is not only suffering the brunt of low demand, but also unreliable power. Power prices are high and fluctuate based on MSEB whims. The body either decides to give a rebate and cuts prices or decides to charge more for transmission and distribution losses. To counter this, companies use induction furnaces and pre-heat treatment furnaces. “Purchasing power from third-party sources is very difficult as the minimum purchase contract is 1 MW. Our requirement is not even 5 MW since we have maintenance and off days,” says Bagaria.

The units want some rebate on what they say are prohibitive electricity prices. Manufacturers in Butibori pay close to Rs.6.3-7.5 per unit for power. In comparison, Chhattisgarh, which is also a large producer of steel and steel products, gets 25% cheaper electricity, allowing it to compete on price and still log higher margins than units in Butibori. Another issue is the ban imposed on the Chandrapur power cluster for flouting pollution control norms in 2010. While private players have been quick to respond, adopting pollution control technologies and backward and forward integration, the ban still remains in place, pending further orders from the authorities. 

Indo Rama Synthetics is the only non-steel company here, but a sizeable one, with a turnover of Rs.2,800 crore. “Of late, business has been stymied by stiff competition, an unfavourable product mix and a depreciating rupee,” says Mukul Dixit, president and site manager at the unit. Though its profit is shrinking, Indo Rama can battle the headwind. This is not the case with smaller units, which are struggling with low capacity utilisation, high input costs and bureaucracy.

Red tape
Getting land approvals are a major hurdle in Butibori. Shilpa Steel had to wait for a year-and-a-half to expand its land parcel from 30 acres to 37 acres. Companies say local officials are least bothered about expediting approvals. “An online self-approval system like in other countries would be helpful,” says Bagaria. He adds that corruption has reduced and transparency increased after a new MIDC head joined, but approvals are still a lengthy process.

  Aggarwal also frets about the C-Form, a document used in inter-state taxation when goods are brought from another state. Sometimes, the state government dithers and delays its refund, leading to a strain on working capital. When it comes to GST, there is still a lot of anxiety among industrialists here. “We are used to a regime of sales tax and VAT and a lot of our long-term projects are based on this tax regime. What will happen to these once GST comes into the picture? Will we get enough time for migration,” asks Bagaria.

Karan Bagaria, Promoter, Shilpa Steel and PowerMukul Dixit, President and site head, Indo Rama SyntheticsCredit is also hard to come by, with banks being cautious of rising NPAs. For smaller units, this means not enough working capital. Besides, companies also claim of difficulty in finding skilled labour. To solve this issue, the Butibori Manufacturers Association has now set up a training centre. But in polyester units like Indo Rama, attrition is a problem. Dixit reveals that once workers get experience, they move on to larger towns and cities. Waste management is another issue units are grappling with. Though Butibori has a common effluent treatment plant, companies say it is insufficient for treating their waste. Thus, they often have to put in separate sludge tanks for the same. 

SOS call 
Companies here are looking for government support in the form of increased import duties and stable power costs. The industry has also been vociferously campaigning for an anti-dumping duty, especially against China. Though there has been imposition of a minimum import price on 173 steel products, it doesn’t apply to stainless steel or pipes in the oil industry and will be in place for six months only. The same applies to the 20% safeguard duty applied on hot-rolled coils. “Some revival measures are required by the government or else we are doomed,” says Aggarwal. He says the government could release the funds that are currently held up for its large-scale projects that require steel. “Today, everyone is treading very cautiously and taking orders only with the raw material they have at hand. If the government announces some positive measures, there could be a spurt in demand,” says Ajay Agrawal, director, Sanvijay Rolling and Engineering. 

Ajay Agrawal, Director, Sanvijay Rolling and EngineeringNeeraj Aggarwal, Founder, Shyambaba Re-RollersRe-rolling mills often procure raw material keeping in mind future demand, as they do not want to be saddled with excess inventory. Sanvijay has six rolling plants around Nagpur, Butibori and the Hingna cluster. It has an output of close to 6.5 million tonne and clocked a turnover of Rs.1,200 crore in FY15. Due to the prohibitive cost of electricity, it buys billets to use in the manufacture of higher value stainless steel products. About 80% of Sanvijay’s products are used by tower manufacturers such as KEC, Kalpataru and Jyoti Structures, which execute projects for PowerGrid. 

 Most re-rollers in Butibori have transmission tower manufacturers as their primary customer base. But with several projects stuck in the pipeline, the power transmission sector is in the throes of a liquidity problem. So, while some of the bigger re-rollers in Butibori might have sizeable order books, the payments for earlier orders are still trickling in.

While the steel rollers in Butibori are not as leveraged as some big steel producers in India, they can only bear the pain only for a year or two. “Earlier, the market for structures was such that you could buy billets at a particular price, add your margins and sell it. But today, even structures are getting imported at cheap rates from China, so billet manufacturers are forced to lower prices. Our margins are getting squeezed,” says Agrawal. The government might keep touting Make in India through mega events, but the ground reality in Butibori is far from rosy. Urgent intervention is needed to prop up the re-rolling sector and allied businesses, or else this cluster may soon be a footnote.

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