What drives profits of commodity players during downturn?

Continuing on about the Steel, I read recently about profits of the primary Steel producers.
Surprisingly, SAIL (steel authority of India- the state run integrated steel producerin India) had the highest profit among all Steel producers in the world including Arcelor Mittal which is 5 times its size. In my view, several issues are at play here. SAIL has depreciated plants with own resources of raw materials in most cases. Though the steel prices have come down substantially with other commodities like Aluminium, demand has not declined to that extent especially in rural India.
Now they have put their explansion plans on high gear thus taking advantage of prevailing low prices of various materials and services due to general downturn prevailing in most markets.
Read on..
SAIL 'steels' the show, tops world in profit stakes
BS Reporter / New Delhi October 9, 2009, 0:37 IST

While SAIL is operating at full steam, the capacity utilisation among other global biggies is just 50-60 per cent.
Government-owned Steel Authority of India Ltd (SAIL), the country’s largest steel producer, has emerged as the top profit-making steel company in the first six months of the calendar year, leaving behind global majors like ArcelorMittal, Posco, Bao Steel and Nippon. Sector analysts expect this trend to continue at least for the next two-three quarters.
An analysis of the financial performance of nine leading global companies during January-June 2009 showed that only three of them registered profits, with SAIL’s profit being the highest.
SAIL reported a net profit of $571 million in the January-June period of 2009, while other steel companies reported huge losses. Only Korean steel producer Posco managed to come close to SAIL by reporting a net profit of $564 million in the first half of the current calendar year. Tata Steel, another major Indian producer, also managed to do reasonably well, with a net profit of $458 million in the said period.

A STEP AHEAD
* SAIL reported a net profit of $571 million in the January-June period of 2009, while other steel companies reported huge losses * Only Korean steel producer Posco managed to come close to SAIL, reporting a net profit of $564 million in the first half of the current calendar year * Tata Steel, another major Indian producer, also managed to do reasonably well, with a net profit of $458 million in the said period * SAIL has improved its operational efficiencies on account of various measures, like rationalisation of manpower and enhancement in techno-economic and operational parameters * It is also a zero-debt company and, therefore, there is no interest cost pressure on its balance sheet
SAIL, with a 14-million-tonne (mt) capacity, is the world’s 21st steel company in terms of manufacturing capacity — much behind sector leader ArcelorMittal, which has a capacity of 103 mt. The L N Mittal-owned company reported a net loss of $1,855 million during January-June 2009, while Nippon reported a loss of $1,043 million, Severstal a loss of $944 million and US Steel a loss of $831 million. However, Bao Steel managed a profit of $98 million.
SAIL has improved its operational efficiencies on account of various measures, like rationalisation of manpower and enhancement in techno-economic and operational parameters, including coke rate, energy consumption, blast furnace productivity, etc. SAIL is also a zero-debt company and, therefore, there is no interest cost pressure on its balance sheet.
“For the next two-three quarters, SAIL is poised to perform better than other global players. This is mainly due to the robust domestic consumption growth that is being witnessed month after month. Moreover, domestic prices have remained stable. While SAIL is operating at full capacity, the capacity utilisation among other global biggies is just 50-60 per cent. Global giants are likely to see a recovery only after two-three quarters,” an analyst said.
According to a SAIL executive, new initiatives to achieve a better product mix and increase production of value-added steel have resulted in better realisation. Adoption of innovative practices suggested by employees across SAIL plants resulting in substantial savings, the executive added.

Steel production irreversible move to developing countries?

Last month, I spent couple of days in my alma mater which is celebrating 50 years.
I was participating in golden jubilee celebrations as well as attending a seminar / course on process modeling.
Place was beautiful as usual at that time of the year with rains and wonderful sunsets .
I found boys and girls were confident and smartly dressed (unlike most of us when we were students).

Before you think that I am trying to become a travel writer let me come to the topic of this blog.
During the discussion with some of the professors, I was told that India has emerged a 3 largest Steel producer in the world.
My impression was that it is in the 5th place.
Yesterday, I came across an article which said that in fact according to SAIL (steel authority of India- govt. run largest producer of Steel) India is likely to emerge as the 2 or 3 rd largest producer of Steel in the world in next few years. Of Course, China is in number one position. May be we are seeing gradual but complete shifting of all the smoke stack industries from industrial world to developing world which will have far reaching consequences....
Read on..


India to be among the top three steel producers: SAIL 25 Jun 2009, 1848 hrs IST, PTI
RANCHI: India is poised to occupy the second or third position in the world's steel industry, the Steel Authority of India (SAIL) said here on Thursday.
"Two years back we were the third largest producer in the world steel industry. While world steel industry is going through a turbulent period, we are still growing and are poised to occupy the second or third position in the years to come," SAIL Chairman S K Roongta said.
In 2008, India was the fifth largest steel producer in the world.
"In fact, in the period January to May India has already become the third largest producer. It speaks of our performance and industry," Roongta said while speaking at the 47th foundation day of the SAIL's Management Training Institute.
Former President A P J Abdul Kalam was the chief guest at the function.

world change

Recently, Reliance Industries (RIL) in India commissioned one of the world's largest refineries and productionised the oil and gas field (off the east coast) simultaneously involving the investment of Rs 100,000 crores. This is a great achievement by any criteria.
Excerpts form the recent interview with the chairman Mukesh Ambani appears below.

What I would like to point out is that he feels the change world has seen is not just cyclic but is a reset. And it won't go back to old way of doing business... He also mentioned that it is not just commodities alone...
And we have to reorient our way of thinking completely & there will be huge opportunities available.
Another small point one should notice is that size of US deficit is 1 trillion dollars which is almost size of India's GDP!

Read on...

The rules of the game will change in all aspects of economy and business, says Mukesh Ambani.

Edited excerpts:

The bonus came as a surprise to your investors. What was it meant to be—a signal?

It was a Reliance tradition, a commitment that whenever we finish a value creation cycle, we make sure that everybody is rewarded and in this value creation cycle—this was the biggest in our history—we had nearly Rs1,00,000 crore of assets coming on line. And it has improved India’s exports; the natural gas has really helped the fertilizer and the power economy. And so, after all the stakeholders, it was the shareholders’ turn. This was a commitment that we have made and this is something we are committed to.

Is it a project completion cycle or a value creation cycle as you defined it?

It’s a value creation cycle. In any project, ultimately the end objective is to create value and the value creation is for the whole economy.

At our last India Business Leader Awards conference, you said globally asset prices have to go through a reset. What did you mean by that and do you think prices have been reset?

What I really meant is not only asset prices. Fundamentally, what I mean by reset is that the rules of the game in the future will no longer be the same as the rules of the game in the past. And they will apply to virtually all the aspects in terms of economy and business as we know it.

You were not referring purely to commodity prices globally?

I really was saying that what we have been used to for the last 20-30 years and what we are going to see in the next 20-30 years—that’s a reset. You can apply it to many different things, but a reset is a reset. It’s a new way of adjusting to a new reality.

Do you think that reset has played out, things have globally bottomed out?

I think that what has happened is that there is much more recognition that it is a reset. When I first said this, people thought we are going through a cycle, and the cycle’s come back. In my view, (a) reset changes the rules of the game completely.

So we are at a stage where, yes, we are out of the ICU (intensive care unit), but we are still in the hospital?

Globally, I still think that we need to see a clear recovery path in terms of how we repair balance sheets and how do we repair balance sheets of countries, balance sheets of consumers in the developed world. Within that, India is still a very small part of that world and the good news is that our balance sheets are strong. The country is strong, our consumers are not leveraged, our corporates are good and our economy has a lot of potential.

But our balance sheet still has some question marks as a country?

Relative to everybody else, we certainly look good. So, relative to the $1 trillion-plus (Rs46 trillion) deficit in the US, relative to what is happening, I still think that. And everything is relative. Surely, we have to strengthen our balance sheet. But that really is our opportunity. That is why I think that India has to seize this opportunity.

Do you think global demand-supply conditions will improve and these globally focused companies continue to do better going into next year?

I think that as the world readjusts, understands the resets and charts out a path to repair and renew, there will be opportunities. The challenge really is that one has to recognize that on the back of debt there is overcapacity, and that overcapacity has to rationalize.

For Indian companies, in virtually all sectors, the challenge really is to be the most productive, to be the most competitive, to be the most efficient, so that in every sector they have the opportunity to come out in the top quartile. I think if we do that, we will not only adjust with the external world, but I think we will also create more value for our domestic markets.

Globally too, commodity cycles have overcapacities.

My view is that with the debt pinch that the world has gone through, you would be surprised as to what kind of capacity readjustments there will be virtually in all sectors.

You spoke about an asset cycle. Are you ready for the next value creation cycle at Reliance as well?

Yes, we are. We have laid that down pretty well. We laid down from AGM (annual general meeting) to AGM over the three- to five-year period.

So you will have to wait for the next AGM to get specifics of that. But the direction is not changing at all.

Who says public sector is paid poorly?

Read the article below on Air India which appeared recently. Air India is thousands of crore in the red, but not the employees. Who says public sector employees are paid poorly.? Pilots even get an allowance called RVSM (hold your breath) for maintaining safe distance between aircraft while flying. (1 crore = 10 million, 1 USD = 48 INR approximately).

Read on..

Maharaja’s Rich Subjects

Not only is Air India overstaffed, some of its officials are overpaid — 5 per cent hog a fourth of the wage bill

By Anjuli Bhargava

Swallow this: Air India has 1,790 employees who earn over Rs 24 lakh a year. That is 5.6 per cent of its total 32,000 employees. The total wage bill for these 1,790 employees is around Rs 800 crore. In other words, nearly a fourth of the total salary paid annually goes to just 5.6 per cent of the staff. Of this, 181 employees are based abroad and 1,609 in India. Of those in India, 838 are pilots and 770 are engineers; 363 of these earn over Rs 50 lakh a year, whereas six employees earn over Rs 1 crore annually.

Hold onto your seats. This is only the taxable income these employees earn. There is almost no record of their non-taxable earnings. The airline’s total wage bill is about Rs 3,600 crore a year. It has 125 aircraft in operation, offering a total number of 48,000 daily seats. Jet Airways, with 107 aircraft and 12,000-odd employees, has a wage bill of about Rs 1,200 crore. So, not only is Air India overstaffed, it also overpays its staff.

A commander with nearly nine years’ experience in a private airline earns Rs 50-70 lakh a year, while his Air India counterpart will earn around Rs 60-80 lakh a year. This may not seem very different.

But in reality, things are pretty different. On an average, an Air India or Indian Airlines pilot will fly a lot less than a Jet Airways pilot. This is due to a crazy agreement signed between the pilots’ union and the management. It allows them to fly a lot less than what is prescribed by the Directorate General of Civil Aviation. As a result, they fly an average of 700-750 hours a year (Indian Airlines) and 550-650 hours (Air India) against 900-1,000 hours for a private airline pilot. They do up to three landings in a day (for the fourth landing, the airline has to pay them extra), while private airline pilots do up to six. A Jet Airways pilot recently told me that he flies three times as much as his friend in Air India does, and earns roughly half — both are from the same batch of school and pilot academy.

In Air India, line (regular) pilots and executive pilots are entitled to a host of complex allowances such as experience allowance, licence allowance and fixed productivity allowance. Many of these are applicable for outstation night-stops. The executive pilots are reimbursed for phone bills, car maintenance and fuel. They get a literature allowance to keep abreast with the world. In many cases, accommodation in Indian Airlines and Air India colonies in Vasant Vihar (Delhi) and Santa Cruz (Mumbai) is provided at throwaway rates to senior pilots so many rent out their own houses, and use official accommodation. Predictably, getting retired pilots to vacate has been a challenge in the past.

The pilots’ allowances move from the sublime to the ridiculous. One hilarious example is the RVSM allowance. RVSM is the reduced vertical separation minima that the International Civil Aviation Organization requires one to maintain between aircraft flying above a certain level. For some odd reason, the pilots of the erstwhile Air India are paid an allowance towards this. Can someone explain why such an allowance would be needed? Doesn’t it just make sense to keep a healthy distance to avoid mishaps? This system is unique to Nacil, the company that runs Air India; (Jet, for instance, has no such allowance). In spite of the merger, Indian Airlines pilots insist on 50 per cent over and above their normal duty rate for hub-and-spoke flights. Similarly, some pilots who no longer fly get a fixed amount for 80 hours of flying in a month.

But regular pilots are put to shame by yet another category — deputy general manager (DGM), operations. I counted 174 of them in Nacil’s annual listing, and most of them earn a taxable income of Rs 75-80 lakh a year. Some of them must be performing a really special task — invisible to the naked eye — since their annual pay is well in excess of Rs 1 crore.

In many cases, DGMs earn more than the GMs, and in some cases even more than the executive director! Age, years of experience and educational qualifications have little to do with what you draw. For example, two GMs with the same years of experience, age and degree — both are class 10 pass — earn Rs 1.18 crore and Rs 71 lakh respectively. Parity is clearly unheard of in Air India. Educational qualifications, as you may have noticed, seem pretty irrelevant too.

In the pilots’ defence, I must add that pilots’ globally earn well and are entitled to many benefits, and in the case of Air India, many of these benefits have been agreed to by previous managements. Any proposed withdrawal will naturally be resisted. It is now up to the new management to do it as painlessly as possible.