India's SAIL Benefits from Lower Expansion Costs and Reduced Equipment Prices

---

Researched by Industrial Info Resources (Sugar Land, Texas)--India's largest steel producer, Steel Authority of India Limited (BSE:500113) (SAIL) (New Delhi, India), will undertake its planned capacity augmentation program at lower investment and expansion costs. Earlier, the company, which proposed to double its production capability by 2010 at an investment of $11.13 billion, was forced to increase its expenditure to $16.5 billion because of a hike in equipment rates and overbooked suppliers in Europe. However, with the present economic slowdown causing a downturn in the market, equipment suppliers are willing to provide bigger discounts and on-time delivery. SAIL is therefore expected to complete its expansion program with its original planned investment of $11.13 billion or less. The company is also exploring the possibility of larger rebates on existing supply contracts and negotiating harder on deals that have yet to be finalized. Globally, equipment suppliers are facing a slump in demand and are desperately seeking buyers.

Earlier, SAIL had announced that it was embarking on a modernization program across its facilities in Durgapur, Bhilai, Burnpur, Rourkela and Bokaro. The company had announced plans to increase production capacity from the present 15 million tons per year to more than 26 million tons per year by 2010. The augmentation project will include setting up new production lines and the construction of new blast furnaces. Recently, work on a new plant in Bhilai was also started. SAIL's earlier plan was to complete the modernization project by 2010, but there is likelihood that the projects may be completed in phases throughout the Eleventh Five-Year Plan, 2007-12. Although the firm's supervisory board has approved several other new projects, the execution and commissioning of these projects will be staggered.

SAIL has also placed an order with Siemens AG (NYSE:SI) (Munich, Germany) for a power distribution system to be installed at the Rourkela facility. The equipment will assist in increasing the pig iron production capacity from 1.9 million tons per year to 4.5 million tons per year. The company will also install a batch annealing system based on the hydrogen bell-type technology at its Bokaro plant, which is expected to process 860,000 tons per year of cold rolled steel specifically for the automotive market.

In a related development, SAIL has terminated the $400 million order awarded to POSCO E&C (Pohang, South Korea), a subsidiary of POSCO (NYSE:PKX) (Pohang), for building a blast furnace at SAIL's Bhilai facility. The Bhilai steel plant is undertaking a $2.4 billion expansion program, which will augment its production capability to about 3 million tons per year. POSCO had secured the engineering, procurement and construction order in February last year but failed to sign the agreement with SAIL. On June 19, 2009, SAIL's supervisory board took the decision to cancel the contract, since POSCO did not come forward to sign the contract despite several reminders. The contract, which was awarded to POSCO in the midst of increasing global equipment prices, was considered by industry experts to be a costly one for SAIL. SAIL will begin the re-tendering process to invite fresh bids for this project. Now, SAIL is expected to get a cheaper and lucrative deal for the same project.

Globally, demand for steel has been on a decline since May-June 2008, when steel production worldwide reached 119 million tons, which was the highest level in 25 years. For the first four months of 2009, steel production worldwide dropped 23% year over year to 354 million tons. India's steel production is expected to reach 80 million to 85 million tons from the present level of 60 million tons. SAIL is also expected to add about 10 million tons per year of capacity by 2011. The company is optimistic about its modernization program and is confident that, with the Indian economy reviving and estimated to grow at 6% next year, the upswing will positively impact domestic steel demand.

View Project File - 089001156 089001262 089001246 089001292

Industrial Info Resources (IIR) is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy related markets. For more than 26 years, Industrial Info has provided plant and project opportunity databases, market forecasts, high resolution maps, and daily industry news.