K'taka steel cos facing expansion constraint: Kalyani Steel

Once flourishing steel companies in Karnataka may stagnate going forward as they will continue to face iron ore shortage even as Category A and B mines have started operating in the state after the Supreme Court clearance, says RK Goyal, Managing Director of Kalyani Steels. This may hamper the capacity expansion and further industrialisation of steel sector in the state.

“Even if everything becomes operational (all category A and B Mines), they will not be able to offer more than 10-11 million tonne of iron ore,” Goyal said.

The Supreme Court has restricted iron ore production to 30 million tonne in the state post a two year long mining ban, where as the requirement of all steel companies put together is more than 35 million tonne.

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“The state will always have shortage of iron ore. All the companies, which are dependent on iron ore from the state will not get sufficient quantity, they will be operating either at a lower capacity or will be forced to add raw material from other states or import where the landed cost will be much higher,” Goyal said.

Kalyani Steels, which operates a 7 million tonne steel unit in the state, has been dependent on e-auctions for its raw material requirement after iron ore mining was banned. Goyal said the company did not participate in the last week’s auction due to low quality and high prices.

Below is the verbatim transcript of the interview.

Q: Give us an update with regards to the e-auction first, when was the last e-auction that took place and what exactly was the demand this time because the last time we spoke to you in April, you mentioned that the demand was extremely lackluster?

A: Last e-auction was during last week. But the quality of metal, which was offered, was not very good. So we did not participate. Off late, in e-auction lumpy ore is available but it remains unsold basically because of very high prices. By and large almost everything gets sold at a price higher than the base price.

Q: A couple of other steel companies have alerted us that the category-B mines have started to supply iron ore, are you seeing the iron ore supply improving and if yes, going ahead how will this help you improve your margins which is currently at around 13 percent or so?

A: Some of the category-B mines have also started mining. They have started offering their material in e-auction. But all category-A mines, all category-B mines even if everything becomes operational, they will not be able to offer more than 10-11 million tonne of iron ore.

If National Mineral Development Corporation (NMDC) does another 10-11 million tonne, the total iron ore availability will not be more than 22-23 million tonne. As against the requirement of state for more than 35 million tonne, which means the state will always have shortage of iron ore and all the companies, which are dependent on iron ore from the state will not get sufficient quantity, they will be operating either at a lower capacity or will be forced to add raw material from other states or import where the landed cost will be much higher. This is another signal where how someone will expand the capacity, how a new investment will come. So, the state is going to suffer in terms of further industrialization in a steel sector.

Q: There was some improvement in your earnings this quarter in terms of the margin picture and in fact your EBIDTA has jumped up around 65 percent as well, what led to this margin improvement and do you think it is sustainable?

A: Last two years we have focused very heavily on our cost, largely on the energy and then utilisation of iron ore.

This focus on energy, focus on cost reduction has helped us in reducing our total cost and hence this improvement in EBITDA. We have become little selective also since raw materials are very expensive so we are doing businesses which are profitable, we are moving to a much larger value-added segment which has helped in improving the performance and I am pretty sure, this is sustainable. Any cost reduction is sustainable.