One major outcome of the current industrial slowdown in the global steel market is the low volume of production. The preponing of capital repair plans of mills may defer the lack of demand issue for a limited period but if it persists, as it is happening now, the running of the mills would be a drag on the bottomline.
Apart from the rule of laws of the country, the right to exit for a steel plant depends on the kind of agreement it entered with its stakeholders, the management and above all, the employees.
In many countries, the closure of a non-viable unit is a regular phenomenon with states taking care of the unemployed under specific terms. Recently, Corus shed off 900 jobs in UK. This is a painful exercise and the welfare state bears the burden.
In India, the limited resources available in the hands of the government does not permit it to offer any substantial help under such an eventuality and this is compensated by the legal barriers to right of exit.
For medium and large units, the Bureau of Industrial and Financial Reconstruction (BIFR) was created for rebuilding and recovery plans of the units by reorganising and recasting the business plans.
It was not a fully successful experiment and the country is still grappling with an effective alternative for resolving the restructuring issue of a unit, large or medium, that owe huge loans to financial institutions and exhibit a poor EBITDA quarter after quarter. There are cases of large siphoning of the funds to sister firms and subsidiaries that are otherwise meant for reinvestment and replacement of machineries in the affected unit.
Industrial slowdown and lack of demand are often misconstrued for the fate of such units.
In case of merger and acquisition, the non-viability of the merged unit suffering under prolonged recession creates a huge problem for the parent unit like it is proving for Tata and very recently for Arcelor Mittal. In the latter case, steel-making units are found to generate surplus steel and therefore need to be shut down, while slab conversion in the other mill can generate finished products that can be sold to generate revenue.
This type of partial closure is opposed by the socialist government of France that blames the Mittal group for going back on its earlier commitment and has put all the mills in various locations of the plant for sale.
In France, the interest of total 20,000 workers is paramount irrespective of the partial viability of the plant, a strategy Mittal could have worked out successfully in some other country.
It appears market pragmatism alone is no longer dictating the terms of business.
There are gaps in mutual perception of the commercial functioning of the industrial units in different countries. The rules of the game are not uniform, but under no circumstances it should trigger an ugly spat between the government and the industry. Do we need a world body to resolve the crisis of this nature as it may entangle many other multinational companies in similar circumstances? But then, who listens to world bodies these days?
The author is DG, Institute of Steel Growth and Development. The views expressed are personal
