MUMBAI, February 20: The Industrial Development Bank of India (IDBI) has decided against funding any new proposals for grassroot projects in iron and steel sector."The ban on funding new projects will continue till the current glut in the domestic market improves," IDBI sources said.
Sources at IDBI said that while the financial institution is still extending funds for the expansion and modernisation plans of steel manufacturers, it has decided not to entertain new projects from groups which are new to the steel business.
"Steel manufacturers will face difficult times due to low international steel prices, dumping from CIS countries and lower import duties," industry analysts said. International prices are expected to remain weak especially in view of the lowering of prices by Korean companies after the recent Sout-east Asian crisis. Analaysts expect margins of Indian steel companies to remain under pressure during 1998.
The steel industry has been hit by a recession due to sluggish domestic demandwhich has kept realisations weak and has contributed significantly to the inventory build-up of manufacturers.
Most iron and steel companies have not been able to pass on the accumulated cost increases, which has adversely affected their operating margins.
Though the prospects of the iron and steel industry are positive in the medium to long-term, the profitability of these companies will remain under considerable pressure in the short run. The growth in the economy and expected capital investment will contribute significantly to the revival of fortunes of these companies.
IDBI has already stopped funding greenfield cement projects until the end of 1999 on account of the huge overcapacities in this sector. In June 1997, the term-lending institution had decided to stop lending to the cement sector for a period of six months assuming that the situation in the cement industry would improve. However, with the industry continuing to be crippled by overcapacities, the financial institution has extended thisperiod by over 18 months.
"We have, however, been extending funds to healthy cement companies for plant modernisation and development, since the likelihood of them defaulting is negligible," said a source at IDBI. It has received 14 proposals for cement projects.
The prevailing overcapacity in the cement industry has resulted in softening of prices across the board, although the regional imbalances in capacity build-up have resulted in the plants located in the south being less affected than plants in Rajasthan and Madhya Pradesh.
The Indian cement industry has witnessed very large capacity additions in recent times with installed capacity currently at about 105 million tonnes against 64.94 million tonnes as on March 31, 1993.
"In their bid to bridge the large demand-supply gap, cement manufacturers have now burdened themselves with huge over capacities," said cement industry analysts.
While demand for cement has shown a compounded annual growth rate of 8 per cent during the last six years, theanticipated offtake from the infrastructure sector has not yet come about.
The crash in prices has been particularly severe in Rajasthan and Madhya Pradesh, since the region has a higher degree of over-capacity compared to the southern states.
However, the commissioning of large capacities in the south coupled with exploitation of sea-route transport from Gujarat, is expected to have an adverse impact on the cement prices in southIndia.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
