Stress in ferrochrome sector creates scope for consolidation: IMFA MD

Subhrakant Panda
Prices staying low in FY16 and in the first quarter FY17 left a good number of manufacturers of ferrochrome, a substance used in making stainless steel, in dire straits. This has created a condition for capacity consolidation in the fragmented industry, says IMFA Managing Director Subhrakant Panda in an interview with Kunal Bose. Edited excerpts: 

Cyclicality is common to all commodities. But ferrochrome, used in making stainless steel, has seen wild price fluctuations in the recent quarters. How do you cope with this? 
In the past six quarters, we have seen ferrochrome prices moving between 70 cents and $1.40 a pound. In fact, there were times when this stainless steel feedstock was traded well below 70 cents, causing considerable distress to the industry. You, therefore, see a large debt overhang in the sector. 

IMFA is better placed than its peers in the industry to withstand this kind of price swings because of its big-scale integrated operation. The company gets full requirement of chrome ore and electricity from captive sources. Sustainable operational viability of a ferrochrome manufacturer depends on where in the industry cost-curve it finds itself. We are only exposed to buying metallurgical coke, an important cost component for the industry, from the market. 

IMFA strategy to sell around 75% of ferrochrome production on the basis of long-term contract to leading stainless steel makers, mainly in South Korea and Taiwan, with prices fixed on a quarterly-basis acts as a hedge against price volatility. I think IMFA has structured itself well to deal with industry cyclicality. 

The industry’s peer performance in 2015-16 and in the first quarter of 2016-17 left many units in dire straits.  
The capacity of ferrochrome industry in the country is highly fragmented. IMFA is an entity with ownership of both chrome ore mines and power plants. There are units with either ownership of mines or power generation capacity. You also have melting furnaces, which neither have captive mines nor power stations. The units in the third group are essentially swing producers, who will make ferrochrome when prices will rule high. They also work as conversion agents for merchant miners. 

The stress in the sector, with many uneconomic-sized units, creates scope for consolidation, which already has started happening. As IMFA plans are ready to raise annual chrome ore mining capacity from 600,000 tonnes to 900,000 tonnes by 2021-22 and then to 1.2 million tonnes (mt) in another three years, we shall in sync expand our smelting capacity. Our smelting capacity growth needn’t all be organic. We shall certainly look at acquisition opportunities that will come our way. But whatever we do, you can be rest assured that we will maintain a net debt to equity ratio that will give comfort to all stakeholders, including the lenders. 

Three things underpin the success of our kind of business. First, build enough capacity in furnace upstream by way of owning chromite mines and power plants. Second, sweat assets to the maximum and optimise cost structure through constant focus on efficiency. Third, keep debts under control. 

At one of your two operating mines in Odisha, you began underground mining earlier this year alongside opencast operation. When will you start underground mining in the other mine? 
IMFA is the first among nine groups present in Sukinda valley, which hosts around 97% of the country’s chromite resource, to have initiated environment friendly and highly productive underground mining at its Mahagiri mine. As we were preparing for underground mining, we encountered many naysayers who believed that the valley having soft rock is not ideal for underground mining. Successful Mahagiri operation has proved them wrong. At our other mine called Sukinda, we are making preparation to do underground mining. In fact, in our reaching ore production of 1.2 mt by 2025-26, contribution of underground operation will be significant. 

What’s the price outlook for ferrochrome? 
Prices are now around $1 a pound and settling into a sustainable zone, with decent margins for producers visible over medium term. China’s emergence as the leading producer of ferrochrome based on ore imports mainly from South Africa, and global production and demand rises of stainless steel leave their impact on ferrochrome prices. 

What do you think of the government flip flop on export duty on chromite, first withdrawing it and then soon thereafter reintroducing it? 
This resource, not abundantly available on per capita-basis in India, needs conservation for local-value addition. So a levy discouraging export of chromite should always be there.