In an interview to CNBC-TV18, Ankit Miglani, deputy managing director, Uttam Galva explains that the company's collaboration with ArcelorMittal which resulted in a revision of the product mix which prevented cuts in production.
Uttam Galva's volumes this year are to be flat year-on-year and though the company is attempting to target a 10-15% increase, Miglani is not very optimistic.
Below is an edited transcript of the interview. Also watch the accompanying videos.
Q: The resumption of production of ore from Karnataka has come as a big relief. Since you source some of your HRCs (hot-rolled coils) from Ispat, has the company indicated of being able to increase supply?
A: We haven't had any explicit discussions, but clearly, production levels have been lower from two of our biggest suppliers - JSW Ispat and Essar Steel. Obviously, once the supply of ore opens up, the availability of HRC will increase as well and that should make life a bit easier for us.
Q: Were you constrained in the past few months due to availability?
A: Certainly. Since the ban on mining, our imports of hot coil have actually doubled on restrained local supply. So we will now begin to phase-out and switch back to the domestic raw material supply chain and lessen imports.
Q: Does that impact margins?
A: No, it doesn't impact margins. It’s just that we had to readjust our strategy accordingly. Due to the restrictions on iron ore, domestic prices were higher than the global prices, which is why we were forced to import. We believe now that things are beginning to open up. Gradually the prices will rationalise to global levels.
Q: Since the landed price did have some bearing on domestic prices when the ban was in force, would you expect a slight drop in raw material prices?
A: Global steel prices have dropped by about USD 75 over the past four to six weeks. The only reason Indian prices have been holding up is because of the weakness of the rupee.
Iron ore prices, on the other hand, have been artificially high in the domestic market and this has strained the conversion cost for steel. We think that the price of iron ore will rationalise much more significantly than the price of finished steel over the next couple of months.
Q: Is the increase in imports only due to domestic problems or is it indicative of a long-term trend?
A: It is not a long-term trend. Imports went up because domestic supply was restrained and affected by irrational prices. To maintain production levels, the steel industry was forced to import.
Q: How is the demand for finished products?
A: There has been significant drop in local and global consumption. The scenario is much worse than the previous quarter as all our auto customers have indicated lower tonnages on either cuts in production or large inventory. The situation is similar from the white goods segment to the construction sector and in the global and domestic markets.
Q: Do you think the market is bottoming out or will it take some time to correct?
A: I don't believe it. The impact in China is due to a cut in interest rates which will not alleviate the situation to a large extent. Though they are spending a lot of money on infrastructure, the private construction sector is much slacker than before and is eating away all the stimulus from the infrastructure spending.
What adds to the uncertainty because is the change of guard in China due in October. So I don't see any upside or any triggers for a revival in demand for the rest of the calendar year. So I don't see any bottom unless you see the fall stopping somewhere.
Q: So what's the situation in terms of capacity utilisation and what is your forecast for the rest of 2012?
A: Fortunately, we have had more problems in selling the product than in maintaining of volumes and in this regard the Indian market is unique as compared to the global markets.
Our focus has been on niche products and our collaboration with ArcelorMittal to improve our product mix has allowed us to maintain volumes although the margins have not increased.
Had we been in the same product mix, we would have to probably cut production significantly, but fortunately that has not happened. Our volumes this year should be flat year-on-year. We are still attempting to target a 10-15% increase, but given the current situation, I am not very bullish.
Q: Do you expect to cut prices?
A: Absolutely. I think prices may have to be cut in dollar terms. In rupee terms, price is a function of the dollar-rupee trades during the course of the year because all steel prices are actually priced in dollars and converted to the local currency.
Q: Can you apprise us about your relationship with ArcelorMittal?
A: Together, we hold a little over 70% as promoters of the company and are very close to the threshold of 75%. So, there is going to be no restructuring of equity in the near future.
As far as seats on the board of directors are concerned, nothing has been brought up. But ArcelorMittal is very actively involved in the review meetings and all information is shared. Currently they are satisfied with the way we are working.
Q: Can you explain your interest in Lloyd Steel?
A: With the purchase of Lloyd Steel, we hope to create a million-tonne integrated steel production capacity in Wardha. There are no current synergies with Uttam, but we should be able to significantly add value to Lloyd Steel once we takeover.
We expect to own 52% by the end of the month and we will have management control. We have a lot of very interesting plans to improve the profitability of the entire unit.