icrn phw energy cse dte gobar times rwh csestore iep aaeti
Web Specials

Where SAIL's profits come from

4 Comments
Date:Nov 26, 2012

State-owned steel giant’s profits are increasingly from raw material subsidies, not real economic value addition

sailAs the debate over the methodology of allocating natural resources continues, the Planning Commission, in a note dated October 21, has questioned the Union coal ministry’s position of giving free coal mines to even state-owned entities.

“The terms and conditions given are not clear on the process of auction for Government companies. It needs to be clarified whether methodology used to determine reserve price of the coal resource for private companies is also applicable for the government firms. If so, then how this process will be different from the process adopted for private companies,” a senior Planning Commission official informed a news agency.

Meanwhile, a recent assessment of the steel sector by Centre for Science and Environment (CSE), a Delhi non-profit, found that state-owned firms which were granted free or significantly discounted resources performed poorly on the environmental front as well.

The findings under CSE’s Green Rating Project study was observed for Steel Authority of India Limited (SAIL)—a state-owned steel producer with several significantly discounted iron ore mines under its belt.

“One of the reasons of poor green performance of SAIL is because of the leeway or advantage provided by the cheap iron ore, allowing the factories to continue to operate sub-optimally with inadequate maintenance, thereby causing high pollution levels,” says a senior researcher from CSE.

CSE found the extent of financial benefit gained by SAIL from differential price of iron ore (market price of ore minus cost of iron ore incurred by company) was a whopping 70 percent of its operating profit in recent years (see table, 'Cheap iron ore brings in the moolah').

Cheap iron ore brings in the moolah

Parameter Units
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
Value of Iron ore consumed In Rs crores
1,488.31
1,725.38
1,791.95
1,844.36
2,337.79
2,667
Volume consumed Million tonnes
24.65
25.44
23.28
23.24
23.07
22.00
Iron ore mined cost for SAIL Rs./ tonne
603.7
678.1
769.7
793.5
1,013.3
1,212.3
Average market price of iron ore for the year for NMDC ore* Rs./ tonne
1,629.9
2,024.6
2,855.7
2,583.1
4,287.7
4,104.2
Average market price of iron ore assuming 10% lower value of SAIL ore to NMDC due to slightly poor quality Rs./ tonne
1,466.1
1,822.1
2,570.2
2,324.8
3,859.0
3,693.8
Difference between market price and SAIL cost for iron ore Rs./ tonne
862.4
1,144.0
1,800.5
1,531.2
2,845.6
2,481.6
Differential value in iron ore costing due to captive mines   Rs. Crores
2,126.1
2,910.8
4,191.8
3,558.9
6,564.8
5,459.4
Operating profit stated Rs. Crores
10,966
12,955
10,946
11,871
9,030
7,658
Share of differential iron ore value as operating profit Percentage
19%
22%
38%
30%
73%
71.3%
Net profit Rs. Crores
6,202
7,537
6,170
6,754
4,905
3,543
Ratio of differential value of iron ore as net profit Percentage
34%
39%
68%
53%
134%
154%
Source: Analysis of SAIL Annual Reports and financial statements, Centre for Science and Environment, Delhi
* Source: NMDC ore price as per letter dated 25 Jan 2012 by Chief Minister, Odisha to Union minister of mines,
http://www.orissaminerals.gov.in/Download/DO-CM-reg-mineral-resource-ren...
(as viewed on November 5, 2012)

In other words, had the government just sold iron ore in the open market (like it does through other state-owned firm NMDC Limited), it would have earned a revenue of say Rs 5,459 crore in 2011-12, which is equivalent to almost 70 percent of SAIL’s operating profit for that year. This needs to be compared with SAIL’s annual dividend (payout) to government—it was only Rs 700 crore in 2011-12.

CSE study, thus, finds that government is increasingly grandfathering SAIL.

“Availability of raw materials, particularly iron ore from captive mines, at a much lower price for SAIL plants could be one of the reasons for comparatively less efficient use of the same, resulting in higher levels of pollution”, said Ashok Ghose, a steel industry veteran.

Ignorant of these apparent fallacies, the Indian government continued to freely hand over to SAIL the Rowghat mines in 2009.

Maharatna tag questioned

Given these facts and accounting insights, even the ‘Maharatna’ tag of SAIL needs to be questioned. The tag granted by the Government of India through its Department of Public Enterprises (DPE) is for state-owned entities with certain eligibility criteria, and allows greater financial and operational autonomy in decision making. Among other criteria, a company should meet average annual net profit of over Rs 5,000 crore during the last three years for being granted the tag.

However, as per the CSE study, SAIL’s profits were found to be artificially inflated by government (read citizens) subsidy of iron ore.

“In fact, with its current state of affairs and even with all the cheap iron ore, it may lose its Maharatna status if it continues to underperform in financial year 2012-13 as the average net profit for three years is expected to slip below Rs 5,000 crore (see table)”, says the senior researcher at CSE

Read full research report: The other side of SAIL's profits (.pdf)

 

 

AddThis

Good article. Well done Ishika and Uma!

Interesting research on profit-making companies backed by government incentives! 700 Cr dividend to government of India and a contribution to People of India seems like a drop in ocean, compared to it Maharatna status. SAIL is a respected company and has been deserving more attention from public domain. The report indicates the potential role of our industrial policies backing public-owned companies and profit share.

It would be interesting to know, in general, what is the meaning of Maharatna and Miniratna status given to the public or private companies by government recognition?.

Thank you.

Arun

28 November 2012
Posted by
Arun

In my opinion, the article is based on improper understanding of working of steel industry. Steel plants with huge capacities cannot and should not operate without captive mines since there will be lot of uncertainty regarding quantity and quality of iron ore. It is wrong to conclude that poor performance on environmental front is due to captive mines.At a time when we are witnessing so much of wrong doing by private sector, it is unfortunate that the authors have declared a war on a respectable public sector company. Incidentally, Tata steel and JSPL, both private sector companies, have captive mines for both iron ore and coal

29 November 2012
Posted by
Anonymous

V. Good research.

Well done ishikaa!

29 November 2012
Posted by
Anonymous

Good analysis

But my question is why government is grandfathering the SAIL unit. I believe SAIL/Ministry of Steel inputs are necessary for this article. It is then analysis gets completed.

My other question is what will be the impact of steel prices if SAIL has to purchase its raw material.

I would also like to know what is the ratio of steel production to total manpower of SAIL's different units, TATA Steel, and other steel plants who are on top of your rating. I believe manpower at SAIL is on higher side which is important for densely populated country like India. This could be one of the reason why government is grandfathering SAIL

At the end I am not steel sector expert but I found article interesting and had certain queries

1 December 2012
Posted by
Nivit

Post new comment

The content of this field is kept private and will not be shown publicly.
CAPTCHA
This question is for testing whether you are a human visitor and to prevent automated spam submissions.


(Comments are moderated and will be published only after the site moderator’s approval. Please use a genuine email ID and provide your name. Selected comments may also be used in the ‘Letters’ section of the Down To Earth print edition.)
CSE WEBNET
Follow us ON
Follow grebbo on Twitter    Google Plus  DTE Youtube  rss