Until four years ago, the steel industry was among the sectors looking for higher growth.The booming realty business in the country and infrastructure expansion in the neighbouring Indian states saw huge investments being poured with leading business houses jumping into this industry.

Such was the growth in production and exports that the Nepal Trade Integration Strategy (NTIS) 2010 had categorised iron and steel products among 19 products having a better export potential. The robust growth in the export led to the country’s steel export to go up by a handsome 52 percent during a four-year period of 2004-2008.

Four years since then, the same sector is battling for survival with low market demands and slower sales. Now, almost all steel factories are running below their capacity, while some of them have already shut shop. Steel producers say that almost all the factories are making loss for the past few years due to high production cost and low market demand.

The total installed capacity of the domestic steel industry is 1 million tonnes, but none of the factories are producing at par with their installed capacity due to low market demand. ‘Nepal and the world-a statistical profile 2011’ published by the Federation of Nepalese Chamber of Commerce and Industry (FNCCI), shows only one out of the 17 factories running above more than 80 percent of the installed capacity.

Similarly, four are producing between 60-80 percent, five between 40-60 percent, four between 20-40 percent and three are producing less than 20 percent of the installed capacity.

Ganesh Bhakta Saakha, the senior vice president of Nepal Steels Rolling Mill Association, said that on an average, the industry is producing around 50 percent of its installed capacity at present.

Many may find it surprising, but the steel industry is one of the oldest industries in the country. It started in 1961 when the Jyoti Group established Himal Steels and Iron in 1961 in Parwanipur of Parsa district. The success of Himal Steels lured many business houses—Panchakanya Group, Golchha Organisation, Jagadamba Group, among others—into this sector. The growth started after 1990, making the country self reliant in steel products. In the years, the domestic steel industries also made huge technological strides from producing plain bars to TMT ones.

Steel producers say this industry has seen a de-growth of around 15 percent for three consecutive fiscal years. They blame the slump in the realty business for such a growth. “Until three years ago, the iron and steel industry was enjoying a high market demand followed by high price of their products due to a boom in construction business,” Saakha said. “With the slump in the construction business, the demand has slowed down considerably.”

With more players venturing out in the market, competition has become fiercer, resulting in price cut. Earlier, when there was a construction boom, almost all the factories increased their installed capacity, the move they now regret.

With the country still in political transition, the progress in infrastructural projects like roads, bridges and hydro ecectricty and other major consumers of iron and steel have remained slow. It has not helped the industry either. “If infrastructural projects come into operation, there will be a huge demand for our products,” said Bishnu Neupane, the managing director of Laxmi Steels. “But with the ongoing political instability and poor investment climate, it is highly unlikely that such infrastructural projects will come into operation soon.”

Laxmi Steels has an installed capacity of producing 120,000 metric tones annually, but it actually produces 48,000 metric tones per annum—a mere 40 percent of the installed capacity. It is very likely that it will go down further in the days to come, Neupane said.

Low capital expenditure from the government is adding to the woes of the industry. In the current scenario of a slump in the construction business, increased capital expenditure by the government through infrastructural projects could have given the much-needed lifeline to the iron and steel industry. “But the capital expenditure as planned by the annual budget of the government never materialises,” Neupane said. “Similar is the case this fiscal year too.”

The steel producers say increased production cost due to various supply side constraints has further marred the industry. The production cost, according to them, has gone up significantly in recent times due to high transportation cost, increased labour cost and power crisis.

The devaluation of the domestic currency against the US dollar has further increased the production cost. Major raw materials used in the production of iron and steel like the iron billet is imported from India in terms of US dollar. In the last three months, the Nepali currency has devaluated by more than 12 percent against the dollar. “Such devaluation in the Nepali currency has been instrumental in increasing the cost of raw materials and ultimately the cost of production,” Saakha said.

The producers also say the syndicate system in the transport sector is another big problem the domestic manufacturing industry has been facing. “We are not getting enough trucks to supply our finished goods,” said Abheek Jyoti, the engineering manager at Jyoti Group that owns Himal Steels, the oldest iron manufacturer in the country.

Manufacturers complain that even when there is demand, they are unable to supply because of the unavailability of transportation facility. They also say the cost associated with transportation has increased multi-fold over the past few years. “In the last six months, the transportation cost went up by two folds,” said Neupane. “We can’t even use our own trucks to supply our finished goods.”

Now, the major players in the domestic steel industry say their major concern is survival. “Our concern at present is neither growth nor high profit,” said Sahil Agrawal, the executive director of Jagadamba Group that owns Jagadamba Steels. “Once you start a manufacturing firm, it is very difficult to close it down. We are putting up a strong effort to combat the current issues, but we are having a tough time,” he said.

The severe energy crisis has not helped them either. “As the plant and machineries used in the production of steel and iron are very heavy, it is virtually impossible to operate them with diesel generators,” said Hari Neupane, the chairman and managing director of Ambe Steels.

However, the steel producers have not lost all hopes. “I think the phase of low demand will not last longer than one more year,” Saakha said. “Once political stability is had, the infrastructural development will take place, creating a huge demand for our products.”

The increasing export of steel products to regional markets, mainly India and Bhutan, is another opportunity for the domestic producers. India and Bhutan are the largest buyers of Nepali zinc sheet, hollow profiles, tube and pipe.

Iron and steel products had emerged as the country’s top export items in the last fiscal year. The annual trade statistics of the Trade and Export Promotion Centre (TEPC) show that the country exported iron products worth Rs 9.76 billion in 2010-11.

According to the NTIS 2010, the prospects of Nepali iron and steel export are brighter as the country is in a strategic location for trade with India, Bhutan, Bangladesh and Pakistan. The speedy development of infrastructure in India and Bhutan has increased market prospects for domestic steel producers, the NTIS 2011 said.  What makes the prospects of Nepali steel products bright is that many factories are certified by the Indian Institute of Standards (ISI) and permitted to use the ISI mark. According to the NTIS 2010, up-to-date technologies for producing quality products to meet the market requirements, ability of the Nepalis to deliver in time and in quantities requested and product costs slightly lower than those of Indian origin are the strengths of Nepali steel products.

Rising Exports
Iron and steel products had emerged as the country’s top export items in the last fiscal year. The annual trade statistics of the Trade and Export Promotion Centre (TEPC) show that the country exported iron products worth Rs 9.76 billion in 2010-11.

Fiscal Year     Amount
2008-09        8.72 billion
2009-10        8.60 billion
2010-11        9.76 billion

NTIS 2010 on Nepali Steel and Iron Products
Strengths
> Substantial investment from the private sector
> Up-to-date technology for producing quality products
> Long experience in production and export management
> Strategic location for trade with India, Bhutan, Bangladesh and Pakistan
> Several factories certified by the Indian Institute of Standards (ISI)
> Several factories approved for quality standards by the Power Grid Corporation of India
> Cooperation by Hindustan Zinc Ltd in supplying zinc to Nepal
> Ability of Nepali factories to timely deliver demanded quantities

Weaknesses
> High dependence on transport provided by Indian companies
> High cost of pre-shipment financing
> Poor labour relations
> Low labour productivity

source:The Kathmandu Post,12 June 2012