Ravi Singh, Chief Executive Officer, Essar Steel – Processing and Distribution, outlines the general shift to customised steel with the economy tightening and customers increasingly looking for just-in-time inventories to keep cost in line.
Steel makers have learned that their customers no longer want raw steel.
Value addition is the key to sales as more industries want customised products rather than taking on the burden of processing the steel by third parties or themselves.
Essar has seven processing service centres in India, besides one in Dubai and the UK.
Have we reached a point where custom-made is the need of the hour.
Steel making is core business. It makes a lot of money when you have scarcity.
So, in a development stage of a country, where consumption is more than production one can make his money. However, nobody consumes steel the way the mill makes it.
In the case of auto, catering to customer specifications is a must.
For general engineering, the conversion will begin. When the market is buoyant, you tend to process everything in-house. When it tightens, you will consume only what your minimum requirement is for today as you do not know what will happen tomorrow. This is when you start outsourcing.
Ninety per cent of steel is processed before use in some form or the other. Either the customer will process it or somebody else processes it for him.
Steel service is close to the customer and linked to consumption.
Once a situation of steel glut arises, you find the service business is more sustainable and less cyclic than steel making, which can have massive fluctuations.
In the last three years, you will find two cycles of ups and downs each year.
Moreover, in the case of a service centre the consumption pattern does not change much.
If you are a sustainable service centre, it means that you have found customers who more or less have uniform consumption.
Are we heading for a steel surplus situation in the country.
If the 12th Plan does not take off the way it is envisaged then I guess we are looking at surplus.
So, you see steel demand moving to the just-in-time inventory mode.
The higher the product value, the less the customer wants to keep it and the more he wants it just-in-time.
Given the economic conditions, how are you fairing?
We will do more than three million tonnes at our service centres this year. Last year, we did about two million tonnes. All our customers such as Tata Motors and Maruti are here.
How is your capacity utilisation?
We will be close to 80 per cent this year. In service business, my learning is that you should not go over 70 per cent as service is all about flexibility.
When a customer comes and wants processing done one cannot tell him all my lines are full.
What are the margins in the service business and how much is auto and white goods?
White goods, we hardly do anything. Auto will be 600,000 tonnes.
We can supply steel as small as an A4 size paper. Products such as this command a 15 per cent margin on the value of steel.
What constitutes the rest?
The majority of steel goes into construction and general engineering. We are into all the big sectors where steel goes. That is why steel consumption is closely linked to projects and infrastructure.
When do you see demand coming in?
Demand in India has to improve, or there will be serious trouble. So, long term demand will come back if the 12th Plan gets moving and it should take care of all the capacity additions. An additional 25 million tonnes a year will be needed for five years. After that, you will need greenfield capacity to support any demand that comes up beyond 2018.
From Essar point of view, a number of hydropower and wind energy projects are coming up. We are also targeting supply to warships. We have the capability but not the certification.
Power plant is another area which requires a lot of steel and currently much of it is imported, especially for the ultra mega power projects as they require heavier plates which are not available in the country.
Another area is gas distribution. Huge gas network are being set up and this year alone more than a million tonnes of steel will go into the network.
Of the total production of Essar Steel, how much goes for value addition.
Everything except half-a-million tonnes is value-added or 5.5 million tonnes is value added in one form or the other.
Your target for this fiscal?
Aiming at Rs 1,300 crore, as this year the division has been made a profit centre.
– Sourced
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