Steel sector: The 3 year story of operational performance

The steel sector is one of the most cost competitive industries, and requires plentiful accessibility of superior, low cost iron ore, and coking coal. Also, they require operational and process cost control measures to be efficient players.

However, the Indian steel market has many associated drawbacks in this regard, such as the shortage of coking coal and coke, high energy usage, infrastructure bottlenecks, unavailability of power, etc. Most of the integrated steel plants have their own power plants, which guarantee smooth supply, but mini mills are generally too small for this option to be feasible.

One of the measures that can be use to gauge the productivity enhancement techniques deployed by steel players is the energy used per tonne of steel production in the integrated plants and mini-mills. High energy usage results from poor quality coking coal and iron ore, which requires better technologies to be upgraded. Enhancing productivity techniques helps the companies to reduce their energy consumption, saving costs and producing better quality finished products.

To get an idea of the Indian steel players that are doing better at the operating level in the last 3 years, we have looked at the operating performance of the major steel players on an EBITDA/tonne basis. From the numbers in the table below, it can be seen that in 2010-11, JSW Steel remained at the top in terms of operational performance, among other major players like Tata Steel and SAIL. This was largely due to higher sales of value-added steel, which has acquired a higher premium than that of other steel products in FY11. However, the EBITDA/tonne for SAIL came down drastically in FY11, on the back of higher raw material prices that increased by 26%. This was mainly on account of higher imported coking coal prices, which went up significantly.

Steel is a commodity business where prices are determined by the market forces, which remain significantly volatile. Also, steel making is a relatively low margin business, and therefore, it is very important for the steel players to be cost competitive so as to be able to endure all phases of the steel cycle. This is well depicted in Tata Steel's operational numbers over the last 3 years. The company showed a steady performance at the operational levels, and remained more resilient in tough times than other players.