See growth in steel demand; working on iron ore pricing formula: Steel Secy

Below is the verbatim transcript of the interview.

Surabhi: I will start with the basics, can you tell us to what extent is the ministry involved in all the on-going conversations that we are now hearing with respect to resolution, are you in touch with companies like Bhushan Steel, Monnet Ispat, a lot of the heavily indebted steel players where banks are also now trying to find an answer?

A: Definitely not because it is completely a dialogue to be settled between the lender and the loanee. Now, these two along with the Reserve Bank of India (RBI) instructions, they are now trying to sort out the heavy issue of NPA. The role of ministry of steel was at the initial stages to work out the issues and the various formulations that is available with the banks to settle this issue of non-performing assets (NPA), to give the confidence to the bank that this is a sector which is on the revival mode and that has been done, and that will be on the revival mode in the coming years also.

The third thing which the ministry of steel is doing is to wait and watch and ensure that all these NPAs are getting resolved as early as possible. So the role of steel ministry was just to see the platform and the kind of various formations which the bank can adopt and therefore we had a meeting with bankers association and another meeting chaired by finance minister. After that, now it is completely between the bankers and the individual steel industries.

The government has moved ahead through ministry of finance with the ordinance of the RBI which has set the platform and now we are also equally watching as to how the things are unfolding and how these industries which are into heavy NPAs will be taking off. Having said that, it is equally important to have a fresh infusion of money in the steel sector.

Ekta: Just a quick follow up with regards to this. Out of a couple of the companies which are named within the 12, for example Monnet Ispat was already in talks with another company to possibly get bid out or possible some assets were on sale. So in your understanding, once these accounts go through the National Company Law Tribunal (NCLT), do you think that the same bidders can possibly buy the assets where the deal was possibly in progress?

A: NCLT will have a fresh look into each one of them. So, in the sense, what all formulations the bankers and the company has worked out, either they will work on the same formulations, so there will be a complete fresh look into the whole system.

Ekta: So the old bidders there could be fresh bidding for assets as per your understanding for the current NPAs on record?

A: It all depends how they proceed on this because all these companies have shown EBITDA positive, minus Monnet Ispat. So, the others which are named have shown good EBITDA positive in 2016-17 and definitely their performance is well, they are in their expansion mode. So, all these factors put together, the NCLT will be deciding on that. So, this is completely a decision between the bankers and the company and the RBI resolution.

Surabhi: To take this point forward, do you see or do you expect buyers to emerge because you are saying that these have been decent assets, many of the companies are EBITDA positive, do you expect buyers to come in, scoop down and buy the plants in totality?

A: It is all wait and watch. The steel plant is a huge money. It is not something very cheap. So it is not a small amount.

Nigel: I wanted to ask you about the import duties. On various items the import duties were reduced and we as responsible channel told our viewers that these duties were reduced less than 1 percent of the total imports that come in there. Is there something more that we should read because I think last week there was a notification that came out that on some products import duty has been reduced to around 5 percent, should we read more into it and also if you could tell us it is going to restricted just to these products?

A: We are working on a simple formula. What all we dont have in India, there is no logic in having heavy import duty on them. Under this logic itself the import duty was brought down to zero in nickel. Now what is pending is ferro-nickel; that clarification we are working on. Similarly on those grounds Cold Rolled Grain Oriented (CRGO), we are not manufacturing the input for CRGO. The Nashik plant of

Similarly, on those grounds, Cold Rolled Grain Oriented (CRGO), we are not manufacturing the input for CRGO. The Nashik plant of Thyssenkrupp which is going to make CRGO will be after one stage - that cold rolled fit for CRGO they will be importing from Germany, their parent plant and then sort of making CRGO here. That is the status today.

So unless and until we develop the technology to make the cold rolled coil fit for CRGO, there is no logic in having a heavy import duty on it. So, that has been reduced in the last notification we had recently in the last week. With that formula we are working. So, what is left today is the ferro-nickel and the coking coal. So, on these two we are in dialogue with the ministry of finance and we are very sure it will go to logical end.

Nigel: Just a quick follow up, what are the current steel imports on a per month basis, is it at around 5,00,000 to around 6,00,000 and also in terms of steel demand, last year demand was quite bleak, it was only around 2.5-3 percent, the start of this year as well, the first couple of months, it has been between 1-3.5 percent. What kind of a steel demand can we see in FY18?

A: What we are looking forward is to 4-5 percent of enhancement in the steel demand as we are proceeding ahead. Let me tell you, what you are saying it is just 1-3.5 percent is very good. We took seven years for our steel demand to increase by 10 kilogram per capita. As compared to that I think in three years we will be enhancing 10 kilogram per capita. So, it is a good progress but our intention is it should reach to double-digit as early as possible and that has a direct correlation of how much it will go in the infrastructure.

Also direct correlation that how much in the housing sector people start moving towards more steel intensive buildings. That is what the ministry is consciously working on in partnership with NBCC, in partnership with structural engineers, in partnerships with the big retail housing developers, so as to movement should start off to the steel intensive building both in rural and urban areas.

Ekta: I wanted to get your thoughts in terms of the progress of resolution according to you. Say, if we were to have this conversation same time next year, do you think that the non-performing assets (NPA) resolution within the steel space would have formidably moved ahead and we would be in a better place or do you think that there could be probably some amount of litigation which could get involved and hence the progress itself could be extended from The National Company Law Tribunal (NCLT) NCLT to maybe other courts?

A: I am very optimistic about it because steel is one sector which is now on a growth trajectory and India, with a gross domestic product (GDP) growth of targeting to 7 percent plus and the entire world is talking about steel in India as a bright spot. Under this scenario, I am very sure, and not just sure about it, not just being optimistic but confident also that all this will get resolved because ultimately steel has to be manufactured, steel has to be sold, there is a demand and all these NPA industries are contributing in the integrated sector, a major percentage of steel. So definitely those steel mills have to be rolling and the steel has to be there in the market.

So I am quite optimistic on that and I am very sure that the fresh loan will begin in this sector. We are on the expansionist mode, we already have a capacity of 126 million tonnes. Already investments are on to reach 150 million tonnes. So by 2020, our capacity 150 million tonnes, yes. After that, the market will take over for additional 150. Techno-economic parameters will take over for additional 150. So I am too optimistic that this issue has to get resolved and lending has to move ahead.

Surabhi: But the question is, by 2020, what kind of an Indian steel sector will we be looking at? I know I am asking you to crystal ball gaze now. Are we talking about 3-4 major companies, Tata Steel, the JSWs of the world, a lot of consolidation? What role then, does a company like Steel Authority of India (SAIL) have? Should we expect SAIL to go out there as these companies and plants get put up for sale and buy some of them?

A: If you look at the pie graph today, 57 percent is by secondary sector. So if I look at the crystal maze, secondary sector will continue to contribute 57 percent. 24 percent is in the private sector. They will continue to have their 24 percent. And only 19 percent is with the PSU and I am very sure they will strengthen their 19 percent further. So the size in the pie is going to be same by all three of them. So there is no question of anybody gobbling up others. Everybody has to outdo each other by better and better performances, better techno economic parameters, lesser cost of production of steel and more profits.

Nigel: First of all, you have done a great job in protecting the industry. We had minimum import price (MIP), we had anti-dumping duties, safeguard duties that are there. So, everyone is getting protected. I am a little worried about SAIL but. Last year the finance cost was close to Rs 2,500 crore. They have been reporting losses for the last multiple quarters. Is there a plan in there because SAIL is the big player in the market out there? Do you have a plan in place to turn around SAIL? Can we see profit numbers coming in the next 7-8 quarters? What is the kind of outlook over there because it is getting a little worrying?

A: Absolutely. You have asked a very pertinent question. From the ministry, we have formulated now a body which is monitoring the performance of each plant of SAIL and each plant of SAIL, we are trying to make it into a profit centre through the SAIL board and then SAIL has to tighten its belt. The return on investments, we are expecting in 2017-2018 it should start. They had a serious problem because they went in an expansion mode and delayed their performances, therefore, their return of investment did not start at all.

So 2017-2018 we are very optimistic. The return on investments will start and that will change the scenario. But yes, they have to tighten their belt. They have to compete. They have to come up with better product range and better realisation on their products. So there is no softness on that.

Nigel: Let us talk about NMDC. There were a couple of rumours that maybe you were looking at capping the prices of iron ore, domestically. Is that on the cards? That could be a bit of a negative for NMDC and the second factor is NMDC has been putting in money to set up their three million tonne plant. The first part is about iron pricing being capped. Is that on the cards? And secondly, with regard to NMDC, what is happening with regard to their three million tonne plant that they were looking to sell?

A: The first part of the question, the capping word is wrong. What we are telling them is there has to be a difference between profit and profiteering and that distinction has to come up. Plus too many changes, too much of fluctuation of price within a shorter span is also not good in any business. You must have seen two days back, there were better which were operating from Punjab where the steel price through SMS used to change at least 3-4 times, the pricing used to change. So all that has been stopped. Those people have been arrested yesterday and things are moving ahead. So as it is true for the steel price, equally true for iron ore. There has to be a system into it. You cannot keep on changing morning, evening the price of iron ore because iron ore is the unique selling point (USP) of this country. We are strong in steel because we have excellent iron ore with us. So that cannot become a liability, so the formula is getting worked out so that they have their profits in place, definitely which is their main business and they are able to operate upon it very well and move ahead.

So as it is true for the steel price, equally true for iron ore. There has to be a system into it. You cannot keep on changing morning, evening the price of iron ore. We are strong in steel because we have excellent iron ore with us. So that cannot become a liability, so the formula is getting worked out so that they have their profits in place, definitely which is their main business and they are able to operate upon it very well and move ahead.

On the second part of it is that and in Odisha Government also, we had discussions with them that they must, like we have done in coal, separately auction mines for the end users and separately for the mercantile. That will also put a cap onto the very high and fluctuating rates of the iron ore prices as we are moving ahead because many a times it happens that importing iron ore is becoming cheaper than what you buy within the country and that is not what one is looking forward to. The second part of it is that the mines to be translated as pellets, transformed into pellets and that is something export, we are going to encourage. That is going to go a very long way in getting an additional income to the entire business of steel.

The second part of it is that the fines to be transformed into pellets and that is something export, we are going to encourage. That is going to go a very long way in getting an additional income to the entire business of steel.

And you did question on NMDC on Nagarnar. Nagarnar plant is still under construction. Anyway, valuation we have to do for Nagarnar because running of a plant will have to be a joint venture because NMDC is not the steel running company, neither do they know how to make steel. So they will have to have partners. For that valuation is a must. So presently, we are at a very initial stages of valuation and construction is still getting completed. So we still have to go a long way into this.

Surabhi: I just want to quickly come back for a second on SAIL just to get clarity on this. There was some reports earlier that seem to suggest whether SAIL will come in and try and buy out some of the stressed assets. What is the ministry's view? Would you support SAIL if it were to do that or do you think that SAIL, at best should stay away and look at setting its own house in order and the huge finance cost that Nigel referred to?

A: You have said it. First they have to set their own house in order because we did make an assessment of running efficiency of different plants and SAIL still has to go a long way of improving their efficiency as compared to their partners. So they better set their house in order immediately. They cannot afford to be going into a less efficient way of working. So let them do that first and let us see how this whole thing unfolds.

Surabhi: Can you tell us if you have had any conversations with bankers specifically with respect to SAIL because even within SAIL, we are looking at a very large debt pile. Right now, there is no concern, we are not using the NPA word, nobody is. But what are your discussions with the lenders to SAIL telling you?

A: Unfortunately, the kind of loan which SAIL has got, their exposure to the banks is minimal. The exposure to the banks is a very tiny percentage of the total loan they have. They have more in terms of bonds and other things. So there is no point in talking to the bankers at this point of time. Their exposure is very high, it is Rs 44,000 crore of loan exposure they have. They are not NPA being a PSU, they are regularly paying their EMIs. So they do not come into the bracket of NPA. But the bank exposure and against that Rs 44,000 crore is hardly Rs 6,000-7,000 crore, a very small amount. So, it is not the bankers we have to talk about. So once bankers are free from this RBI business, then maybe we will talk about the SAIL and the banks.

Nigel: You were talking about iron ore pricing formula you are working on. By when can we hear about this formula because there are a lot of investors in NMDC, they are rather concerned about this. If you could give us a timeframe?

A: No, they need not. All the investors need not worry. NMDC will always be in a profit and any formula coming will enhance their scope. We will ensure that they will be getting better mines, more mines as they are moving into it and keep a balance of the iron ore. So it will never be at a loss to NMDC.

Ekta: Wanted to get back to the RBI issue and wanted to clarify or confirm that you mentioned this right at the start of the conversation that the steel secretary or the steel ministry will not be actively involved any more in terms of what happens to those 3-4 steel accounts which are now under the RBI and now with the NCLT. Is that correct that there will be no participation anymore from the Steel Ministry actively?

A: Yes, absolutely right. At this moment of time, we are wait and watch.

Ekta: What about the other steel companies which are not named in the 12 but have debt problems? How are you exactly participating in possibly a resolution or a turnaround?

A: They are not NPAs. They are paying off their debts and definitely, I think they will work out better and with more profits coming to the steel sector and more production coming to the steel sector, the expansion mode, a major portion will be put by the promoter themselves. So, you will have some expansion money to be put by the promoter and some, they will lift from the banks and that is the way the whole thing is going to proceed.

Nigel: You were telling us that you are expecting to go to around 150 million tonnes in the next few years and the longer term that we are looking at is around 300 million tonnes. Do those numbers stand and also, from where is the investment going to come because it is going to be lakhs of crore of rupees. I mean any kind of plan you have in terms of funding?

A: Yes. If you look at it, already the expenses are tied up to reach 150 million tonnes. it is under construction or at the stage of ramping, so that is not something very difficult to go. That is doable and will be done. Above 150, as we are moving ahead with that, the rough requirement will be Rs 10 lakh crore, but Rs 10 lakh crore spread over 10-12 years is around Rs 40,000 crore per annum. Out of that, the promoter themselves will be putting around 25-40 percent of

Above 150, as we are moving ahead with that, the rough requirement will be Rs 10 lakh crore, but Rs 10 lakh crore spread over 10-12 years is around Rs 40,000 crore per annum. Out of that, the promoter themselves will be putting around 25-40 percent of money. So banking exposure will be to a tune of maybe Rs 20,000-25,000 crore per annum which is not a big amount for a sector like steel and I am very sure with the sector going up, banks will be coming forward to lend for this kind of an expansion.

And we can also expect a lot of foreign direct investment (FDI) into the whole process. And with the procurement policy of preferential treatment to the steel made in India, maybe 40-50 million tonnes will come through FDIs. So with that combination it is quite doable. And we will plateau at 300 million tonnes because India can continue to absorb to that extent and that is where the country can go ahead.

Surabhi: When you spoke about promoters bringing in more money, that is the big problem, promoters putting in their equity. If that were to come in, half the problem would be solved. But you mentioned FDI. Have there been any conversations off late? Is someone coming in? are we talking about the Japanese?

A: They will be putting. Do not worry.

Surabhi: By when can we hear of something?

A: Let us see. Like you know me, once it finalises, I always tell you, but I do not tell what is in progress.

Surabhi: But the Koreans, the Japanese? Where are these talks happening and at what stage? If you could just leave by telling us that?

A: No, there will be a number of them. There may be surprise elements also. Wait and watch.