June, 27 2005
Left warns govt on privatization
India's communists, who prop up the government but who are upset at its decision to privatise 10 percent of a major firm, will boycott meetings of a panel liaising between them and ruling coalition.
Last month, the Congress-led government decided to sell part of Bharat Heavy Electricals Ltd, worth about $500 million, cutting its holding to 58 percent.
But in a sign of growing strains, the communists accused the government of ignoring them on most economic issues, including privatisation and oil prices.
"Our experience has been that on many issues where the Left has disagreements, the government nevertheless went ahead with its decision," Communist Party of India (Marxist) general secretary Prakash Karat said. "We are suspending our participation in... coordination committee meetings."
Communist parties won more than a tenth of the 545 lower house seats in last year's federal election. They are not a formal part of the government but have agreed to support it and are crucial to its survival.
Left-wing parties want the government to slash duties on petroleum products to soften the impact on consumers of rising international prices. But instead the government this month raised retail petrol and diesel prices 7 percent.
India's more than 240 state firms, half of them loss-making, make everything from condoms to steel.
Investment push with steel plant
The Adhunik Group has decided to pump in an additional Rs 1,250 crore in the state for setting up an integrated steel plant at Kandra, around 12 km from here.
With this, the groups total investment in the state is expected to touch Rs 2,000 crore in the next five years.
Speaking at a function for the commissioning of its Rs 750-crore sponge iron unit set up on an area of 120 acres, managing director of Adhunik Alloys and Power Limited Manoj Agarwal said the integrated steel plant would have a captive power plant and mines and would be ready for production by 2010.
This is just the first phase wherein we have set up two sponge iron plants and a blast furnace. The plant would function to its full capacity in the next three years. The capacity of the plant is 0.35 million tonne and we have a contract with Tata Steel for supplying at least 50 per cent of our produce to them for the next two years, he said.
In the next phase, the company will set up its steel making unit and its power plant. After the completion of our integrated steel plant we hope to produce a wide array of products, including rounds, flats and hexagonals. Our customer base would include TVS Sundaram, Tata Motors and the defence sector, he said.
Agarwal said the state has already given it permission for acquiring another 600 acres of land in Kandra. This would take the total area under us to 720 acres. Of this, 500 acres is on forest land, but we have compensated them with an equivalent piece of land in another area. We have also got permission for constructing a railway siding for the transportation of our goods, Agarwal said.
The meet was high on political significance as perhaps for the first time, chief minister Arjun Munda shared the dais with leader of the Opposition Sudhir Mahto. Munda has also invited Mahto to accompany him on his foreign trip next month to invite investments for the state. Also present were Tata Steels deputy managing director T. Mukherjee and JMM MP from Jamshedpur Sunil Mahto.
Lauding the group for commissioning the unit within the stipulated timeframe, Munda said: It was just two months ago that the MoU was signed and I am happy that the group has managed to commission its plant in just a short time.
Not willing to let go of the opportunity of sharing the dais with the leader of Opposition, Munda said: The opinion of the people about the state is changing fast and they are showing a keen interest to invest here. We hope to use these opportunities for the development of the state. See how even the ruling party and the Opposition has come together for development. I am thankful to the leader of the Opposition for refusing to speak and instead allowing me his time.
Zinc prices to be lower than estimates
Zinc prices in 2005 will be 6.4% lower than first estimated because of a build-up of stockpiles monitored by the London Metal Exchange, Goldman Sachs JBWere Pty said.
The metal, which is used to galvanise steel, may average 58 cents a pound, or $1,279 a metric tonne, this year, Goldman JBWere analyst Malcolm Southwood said in a report on June 21. The firms previous forecast was 62 cents a pound. Zinc averaged 47.5 cents a pound last year.
Over 100,000 metric tonne of metal was placed on warrant last week including the largest daily deposit into the LME on June 14, Melbourne-based Mr Southwood, 47, wrote in the report. There could be more on the way from 60,000 tonne of privately warehoused zinc in Europe and Dubai, Mr Southwood said.
Zinc stockpiles at warehouses monitored by the LME, the worlds biggest metals exchange, rose 11% on June 14.
Donald Lindsay, chief executive of Teck Cominco Ltd, the worlds largest zinc miner, said two days later he was disappointed by the size of the gain in inventories due to the delivery of hidden stocks, which will delay price increases.
Mr Southwood was Australias top-ranked commodities analyst in a survey published in October by Australias BRW business magazine.
He has worked as an analyst at the company for 10 years and before that in London with metals consultants CRU International.
Zinc prices have fallen 12% from a six-year high of $1,450 a tonne on March 6, partly as hedge funds and other speculators sold the metal amid concern about slowing demand growth from China for galvanised sheet steel used in products such as cars and washing machines.
Zinc for delivery in three months on the LME fell 2 cents, or 0.2%, to $1,278 a tonne on the LME as of 4:35 pm London time on Friday. It has fallen almost 3% this week. The metal has risen 28% in the past year.
Prices may recover to an average 64 cents a pound next year as mines fail to supply enough of the metal to meet rising demand, Mr Southwood said. He reduced a previous forecast of 67 cents a pound for 2006 because of the increase in inventories.
We maintain our view that there is a fundamental shortfall in the zinc market, Mr Southwood said. But there is now 100,000 tonne of additional inventory that will need to be eroded in order to elicit a price response.
Some analysts say zinc prices will fall next year as production increases and growth in demand slows.
Zinc is expected to average 56 cents a pound this year and fall to 53 cents a pound in 2006, Ryan Wilson, an analyst at Australias government forecaster, the Australian Bureau of Agriculture and Resource Economics, said June on 20.
After rising 10% in 2004, growth in Chinas zinc consumption is expected to slow, to 9% in 2005 and 2006, Mr Wilson said.
Robin Bhar, an analyst at Standard Bank Group Ltd in London, forecast in a report last month that zinc prices will fall 5.4% next year to 59 cents a pound, from 62.4 cents this year.
Goldman Sachs JBWere cut its rating on the shares of Zinifex Ltd, the worlds second-biggest zinc miner, to marketperform from outperform because of the revised.
Ground-level opposition is the biggest roadblock in Orissa
Political changes have had little impact on the Orissas investment climate. The state, where no government had survived for more than two-and-a-half years till the 1980s, has been witnessing stable governments for the last 25 years. At present, the Biju Janata Dal (BJD) government is in power for the second term.
However, the change of guard in the 1990s, 1995 and 2000 had some impact on projects announced by previous governments. In 1995, Congresss JB Patnaik as chief minister announced a review of the deal that the Janata Dal government, led by Biju Patnaik, had struck with the US utility major, AES Corp. AES had proposed setting up a thermal coal-based power plan at Ib Valley. A few months later, the same Congress government laid out the red carpet for AES. Similarly, the Congress government was keen on forcing Mesco Group to wind up their steel project at Dubri in Jajpur district. Since it was dubbed as Biju Patnaiks dream project, his successor did not spoil the party.
If the Congress government was witch-hunting in the late 90s, the Naveen Patnaik government, too, indulged in pulling out skeletons from the Congress cupboard. It asked the CBI to inquire into the Mesco-Steel Bond case as also several irrigation projects. However, the probe has not affected the projects. Government is a continuous process, so development works must go on, says Panchanan Kanungo, former state finance minister.
The BJD government has furthered many of the project decisions taken by the previous Congress government. The Dhamra and the Gopalpur port projects are on line. Similarly, MoUs signed during the Congress rule for setting up of alumina plants by Sterlite Industries and Aditya Aluminium Co have been converted into agreements.
The change of government at the Centre, too, has had little impact on project implementation in Orissa. The United Progressive Alliance government has provided support to state, which is ruled by the opposition BJD, to clinch the $12 billion deal with the South Korean steel major, Posco.
However, it is political opposition at the state level that has sealed the fate of many projects. The refinery project of Utkal Alumina International Ltd. has been struggling for the last 10 years because of opposition by tribals.
In Orissa, it is not the change of government either at Bhubaneswar or Delhi that matters, rather, it is political opposition at the ground level that threatens to the fate of many projects.
Growth in construction, auto to fuel demand for steel
Growth in the auto and construction sector will fuel demand for steel. The growth in demand is likely to hit a high of 8% annually, according to a recent report prepared by Tata Steel. Steel consumption growth is estimated to be 7% annually while the supply situation will remain tight.
As far as the auto sector is concerned, 22% growth is expected in the production of passenger vehichles and 27% in commercial vehichle production in the fiscal 05-06 over the fiscal 04-05, says the report. Over the same period, three-wheelers production will grow at 5% while that of two-wheelers will be around 16%.
The report says that the share of infrastructure in boosting steel demand between 03-15 will be the highest at 23%, closely followed by the construction sector at 22%. This is because of the large number of infrastructure projects that are being initiated by the government and also those in progress like the golden quadrilateral. At the same time, the governments decision to permit foreign direct investment (FDI) in construction sector will also be a key factor for the rising steel demand.
About 18% of the demand growth in steel will be due to manufacturing, 12% from automotives, 9% from consumer durables and 19% from other miscellaneous sectors, as per the report. Auto sector is a major contributor as the sector grew by almost 16% in the fiscal 04-05.
Centre-state tussle to the fore in Jharkhand
The National Democratic Alliance-led Jharkhand government has been at loggerheads with the United Progressive Alliance-run Centre right from Day One .
No surprise, then, that it is the projects which have been suffering for delay in granting of approval or release of funds.
The first decision the state government took was not to introduce value added tax (Vat) in the state (which later became applicable to all NDA-ruled states) from April 1, 2005, saying that it was not ready with the legislation, even though the state sales tax machinery had been gearing up for its introduction.
A section of entrepreneurs and businessmen had been expecting that Jharkhand would, in the recently placed state budget, announced the introduction of Vat. It, however, was not to be, even though the state may stand to lose revenue of Rs 52 crore in the next two years on account of low sale of mobile phones alone (West Bengal and Bihar have 4% sales tax compared to 12% here).
Take the case of mining leases, where the right to approve mining of major minerals lay with the Centre. Despite the state having received investment proposals of Rs 78,000 crore (till early May 2005), it has, since its creation, been able to allot only one iron ore mining block to a single party.
Jharkhand is said to have so far forwarded to the Centre mining proposals for over 20 major minerals and 11 coal blocks and is still awaiting the latters nod. Again, there are cases where delay in starting work on coal blocks is taking place as the Centre has, even though taken a decision, failed to convey it to the state.
Non-renewal of three mining leases of the public sector Iron & Steel Company (Iisco) by the state is another instance of the Centre-state tussle, even though the state has been trying to tell a different tale i.e that Iisco was allegedly not carrying out any mining activity in these mines. Industry experts say that the recent Cabinet approval to Iiscos merger with SAIL made sense for the latter mainly because of Iiscos iron ore mining licences in the rich Chiria region, among which are some cancelled ones. They allege that the state was aware of the impending merger and had taken the decision of canceling the three leases.
Chief minister Arjun Munda, on June 18, blamed the Centre for the slow pace of electrification. According to him, while the states target was to electrify 12,241 villages, it failed to achieve this due to non-cooperation of the central agency. Mr Munda said the agency did not release the loan amount to Jharkhand and had insisted that the state first return Rs 160 crore borrowed by it. According to him, even though the state had paid the amount, which should ideally have been paid by Bihar, the loan as yet to be disbursed.
Like the never-meeting parallel lines, the Centre-state tussle has been going on a harsh reality foreign investors as well as local corporates would have to accept before announcing their growth plans and projects in the state.
Wheel turns a full circle for IISCO
THE LOGISTICS advantage of Indian Iron and Steel Company (IISCO), along with availability of over 600 acres of surplus land and the anticipated flow of resources post-merger, places this nearly 100-year-old company at the threshold of a growth trajectory. But the merger holds promise for the parent, Steel Authority of India Ltd. (SAIL) too.
Industry experts say: "Once upgradation is completed along with the addition of some finishing mills and after IISCO stabilises at two million tonnes capacity (against three lakh tonnes now), taking it to a ten-million tonne production-level should not be a problem."
The merger, once in place, would benefit SAIL too. The reasons are simple. Although IISCO has been a SAIL subsidiary, post-merger it would become the public sector behemoth's fifth integrated steel unit. This would simplify interplant transfers, allocation of jobs and raw materials, especially coal and iron ore from Manoharpur rated among Asia's best iron ore mines.
This was also one of the first issues highlighted by SAIL Chairman, V. S. Jain, soon after receiving the Government's nod. He mentioned the synergies that could be tapped between IISCO and Durgapur Steel Plant (DSP) and through the use of the mines for SAIL as a whole.
IISCO and DSP are located in Asansol area, being about 50 km apart. Both are long products units manufacturing structurals, bars and rods, used in the construction sector and in projects. A day after the merger, the Managing Director of DSP, S. K. Bhattacharyya, spoke in the same tenor saying that the plants had complementarities and the way forward would be to synchronise production, so that a complete product package could be offered to projects such as dams or for transmission towers.
However, while this move would benefit SAIL as a whole, the fact remains that IISCO hardly faced any problem selling its products which were fast-moving items according to industry watchers. Riding on the industry boom and deriving the benefits of some investments in upgradation, IISCO reported a Rs. 46.60 crore profit in 2004-05, on a turnover of Rs. 1,487 crore (unaudited). Its accumulated losses still stand at Rs. 924 crore. Historically, high cost of operations, ageing equipment, low productivity and a large workforce (16,218 as on April 1, 2005) proved to be the bane of this once blue chip company in which even late Ramnath Goenka acquired a chunk of shares in the late Sixties/early Seventies.
[b]Ageing equipment [/b]
However, that sounded increasingly like a lore over the last decade, as the plant and the fate of its workers hung on a precipice. The management of the company, founded by visionary entrepreneur Sir Biren Mookerjee in 1918, passed into government hands in July 1972 as a loss-making unit.
It became a wholly-owned subsidiary of SAIL in March 1979 and the onus of upgradation rested squarely with the parent. Although SAIL was supporting the unit to sustain operations, in the absence of ministry support and in the wake of different postures adopted by various governments at the Centre, SAIL could do little as a state-controlled PSU.
An attempt at implementing a Rs. 6,000 crore modernisation plan through the turnkey approach fell through in the mid-Eighties, during the Rajiv Gandhi regime, and the fortunes of the ailing company fluctuated with that of the reigning government.
It became a Board for Industrial and Financial Reconstruction (BIFR) company in 1994. In 1999, the company got a reprieve, when as part of a package sanctioned for SAIL, IISCO got Rs. 1,947 crore waiver on advances received from SAIL for sustaining operations. Consequently, IISCO's accumulated losses dropped, cleaning up its balance sheet substantially.
This paved the way for divestment. However, a global tender for expression of interest (EoI) received only a lukewarm response even as an earlier effort to do it through participation of a secondary steel producer, sparked widespread opposition from the Left and the trade unions. In June 2002, the Government approved a revival package submitted by SAIL, which included a Rs. 540 crore component for implementing a voluntary retirement scheme (VRS).
In 2003, the operation of the Kulti foundry was closed with employees retiring through VRS. In between, some piecemeal modernisation jobs were taken up.
Now, SAIL has announced its plans to dovetail a Rs. 4,000 crore IISCO upgrade plan into its 2012 corporate plan announced earlier for its other units, taking the first major step towards fulfilling its decades-old promise made during the takeover.
The wheel for IISCO has now turned a full circle.
Bharat Forge acquires US forgings company
Continuing its international shopping spree, Bharat Forge Ltd (BFL) today announced its US $ 9.1 million (about Rs 40 crore) all-cash acquisition of the assets of Federal Forge Inc, the Lansing, Michigan-based design and manufacturer of forged steel components for the automotive industry.
This is BFL's third international acquisition, giving it a presence in the heart of North America's automotive industry, which is also its single largest market. The acquisition was concluded on June 24 following a renegotiation of the existing contract with the United Auto Workers (UAW). BF America Inc, the new company, will take over the 150 staff of Federal Forge, which had revenues of $60 million.
A statement released here today quoted BN Kalyani, chairman and managing director, BFL, as saying "The Federal Forge acquisition is a significant step towards implementing Bharat Forge's strategy of expanding our global footprint and establishing a manufacturing presence in one of our largest markets, the USA."
Kalyani further stated that BFL's strategy was to expand its dual shore manufacturing base through strategically located complementary facilities around the world. The first step was to establish in Europe while the next step was to pursue North America and China.
"The Federal Forge acquisition will enhance our market presence in the US, give us a strong foothold in the passenger car and light truck market and most importantly, a manufacturing base close to some of our largest customers," Kalyani added.
BFL's all- cash acquisition of Federal Forge's assets, which had filed for protection under Chapter 11 of the US Bankruptcy Code, will get all of Federal Forge's customers. These include ZF Lemforder (for General Motors) and Goodyear, among others.
"This acquisition has been done as cost effectively as possible. We have acquired the assets, just as we did with CDP, Germany. There is no baggage, no accumulated losses; it is a clean acquisition. The product line is similar to what we have in India and Germany but we needed a physical presence in the US and we get the customer relationships, too," Amit Kalyani, executive director, BFL, told the 'ET'.
He added, "We are working on China but it could take time. We are exploring all options," in a reference to the route likely to be taken, of an acquisition or a greenfield venture in China.
The US plant has an annual capacity to produce 50,000 tons of forgings while the Indian and European capacities will reach 350,000 tons annually, once BFL's capacity expansion in Pune is completed. AB Kalyani added that a new board was still to be constituted for BF America Inc.
"We will constitute a new board of directors for Bharat Forge America Inc in the next week-10 days. The management will be based in Lansing while the board will reflect the new ownership," he said.
BFL, which began its international acquisitions with the purchase of Dana Corporation's UK plant, shipping it to India, "really" put its global plans into action with the November 03 acquisition of Carl Dan Peddinghaus (CDP) GmbH, Germany. This was followed, in December 04, with the acquisition of CDP's aluminium forgings business for Euro 6.3 million. This gave BFL an entry into the passenger car segment. The Euro 29 million (about Rs 150 crore) German acquisition gives BFL three locations in Germany in addition to its existing India location.
Mr AB Kalyani added that they have funded the US acquisition through internal funding. He admitted that they have recourse to substantial funds, close to half a billion dollars, having raised $ 220 million through equity dilution. The balance is what banks are willing to lend.
Not the worst deal for Sail
Only a few years ago, the Steel Authority of India (Sail) was desperately trying to get rid of its loss making wholly-owned subsidiary Indian Iron & Steel Company (Iisco). Today, the merger of the two is being hailed as a win-win deal.
The truth obviously lies somewhere in-between. After year of losses, Iisco has just about turned around, thanks to firm steel prices. And the company will slip into the red the moment steel prices decline, unless substantial funds are injected in modernising almost everything at its over 125-year old Burnpur plant.
Sail itself had been making losses and could ill afford Iisco modernisation, hence the proposal to divest it or take on a joint venture partner. Having made thousands of crores over the last couple of years, today Sail is in position to make the necessary investment in Iisco. Whether it actually wants to pump in those thousands of crores into Iisco, the latters coal and iron ore mines notwithstanding, is something we cannot say for sure.
What is certain is that Sail will not be able to divest Iisco, not under the current political dispensation. Nor can it plead lack of funds to stall its modernisation. So, the choice is not of whether to revive Iisco or not but merely of finding the best way of doing so. On that count there is no dispute Sail would be better placed to exploit synergies if it merges Iisco with itself.
Since Sail and Iisco are doing exactly the same thing, producing and selling steel, a subsidiary structure with attendant duplication of overheads does not make sense. Neither is it desirable from a taxation perspective, as transfer of ore or coal from Iisco that Sail badly wants will be treated as sale and taxed. Manpower is another front where the merger could help. Iiscos ageing staff needs fresh blood which Sail can easily spare from its bloated manpower in a departmental set-up but not when Iisco is a subsidiary. On balance, the merger may not be the best solution, but certainly the best among the options available. That the stock market has barely noticed the deal affirms the same.
CM foreign flight to fly in funds
If the mountain does not come to Munda, Munda will go to the mountain.
It is now official. Chief minister Arjun Munda will leave next month for his maiden trip abroad. Details are still being worked out but what is certain is a visit to London to meet Mundas friend-in-need, steel baron Lakshmi Niwas Mittal.
The chief minister today claimed that he would attend an investors meet in Europe and added that L.N. Mittal had assured to use his own contacts to make the meeting a success.
It is not possible for all these investors to visit Jharkhand and survey the prospects, said Munda today, Thats why I decided to visit Europe and meet them together, said the chief minister.
According to sources in the chief ministers secretariat, the business trip will take Munda and his team to UK, possibly a few European countries and then to Canada. Asked for a confirmation, the chief minister was evasive. I cannot provide details now, he said, But all I can say is that if I succeed in my mission, Jharkhand will be setting a unique record of its kind.
These days Munda seldom stops talking about Lakshmi Mittal. Today, too, he reiterated that he is in regular touch with the steel Czar. He is taking the project in Jharkhand very seriously, the chief minister gushed.
There is a lot of scepticism already about Mundas foreign trip, with critics refusing to see it as anything more than a junket abroad. They point out that the first chief minister, Babulal Marandi, had also been to Malyasia, Singapore and Thailand, ostensibly in search of investors. But nothing came off. Then Bihar chief minister Laloo Yadav, too, had gone abroad to the United States to woo foreign capital, they recalled.
Critics believe that the chief minister is putting the cart before the horse. Investors will come when there is infrastructure, better communication and improved facilities, they point out.
With the chief ministers secretariat keeping the trip in a veil of secrecy, nobody appears to know who or how many people would accompany him. Even mines and geology minister Madhu Koda has apparently not been taken into confidence.
Koda, anxious to go on his first foreign trip, believes he deserves to be included in the entourage as most of the prospective investors are likely to be interested in mining. Surely I have a solid chance of making it? asked the excited minister innocently.
Koda confessed he has been trying very hard to find out the details about the trip. But bureaucrats have been most unhelpful so far. Since the chief minister holds the industry and energy portfolios, argued Koda, he is logically the only other minister who should be included in the team.
But the chief minister has not spoken to him about the trip so far, he added dejectedly, and the officials too are not telling him anything.
