The alliance is to capitalize on a new excise duty exemption being granted to domestic steel companies supplying to hydro power projects
Bhutan’s steel industry, which saw a downward slump since 2008, are now more hopeful as 4 major steel factories will be working together in what they are calling a ‘strategic alliance.’
The four factories are Bhutan Rolling Mills Limited, Bhutan Steel, Lhaki Steel and Rolling Mills and Druk Iron and Steel.
Though the companies will maintain their own identities, with the alliance, they will work together as one unit to buy raw materials in bulk from India to get a better price and also sell all their products at the same price from one point.
This co-operation was made possible after the steel companies got an assurance from the government that they would get an excise duty refund or exemption for supplying steel to hydropower projects.
Currently, Bhutanese companies have to pay a 12.36 percent excise duty on import of all primary raw materials like pig iron, ferro-silicone, cast iron, etc.
“So far, only Indian companies enjoyed this exemption, giving them an advantage while bidding for works in the projects,” said an industrialist on the condition of anonymity.
The other reason that the 4 factories are coming together is that the government is in the process of getting the hydropower projects to also accept steel manufactured in Bhutan even for the major works like dam, tunnel and power house.
Despite having all international and national quality marks, Bhutanese steel are only accepted for minor works in the projects like constructing offices and settlement.
“The understanding is that while the government will convince the project to put us in the list of approved suppliers for Indian contractors, we also have to ensure that we can deliver both in quality and quantity by coming together,” said the industrialist.
Already hydropower project authorities have visited the steel plants for quality checks and other due process before being put in the approved list of suppliers.
Once on the list, the hydropower construction companies can send out tender quotations to the Bhutanese entity to bid along with Indian bidders.
The final reason that the companies are cooperating is that in the long run they want to be able to compete in the main export market in India against bigger players there.
According to Industrialists, the alliance makes a lot of sense. “Once we are together, we can buy larger amounts of raw materials at a lower cost directly from the main manufacturers pushing down the cost of making steel,” said an industrialist.
After buying the raw material all the four factories instead of all making the same sized TMT bars will focus on making different sizes in large quantities so that they can meet large orders and are more efficient. They will also be sharing the best technical and manpower resources.
During sales, the alliance will see a common point of sale, whereby all the prices of the factories will be the same ensuring that they do not cutch each other out.
Industrialists associated with the project also addressed two potential concerns that may come up in the future.
One concern from some observers is that the coming together of the only 4 factories in Bhutan that manufacture TMT bars used for construction will lead to a monopoly or cartel, whereby there would be no competition and so consumers would lose out through high prices.
An Industrialist said that though the prices would be uniform, the Bhutanese consumers would be free to import steel from India if they feel the price of steel in Bhutan is too expensive. He also said that their main target was the Indian market and hydropower projects and that the domestic market only constitutes a small portion of it.
He said, “Between the four of us we have an installed capacity of 20,000 tonnes per month of which the domestic demand is only 800-1500 tonnes at the moment. This domestic demand even includes the smaller works in the hydro projects.”
He added that it did not make sense for the 4 factories to come together to benefit from the domestic market which was only a marginal part of their market.
The other potential concern would the fact that if excise duty exemption is given to the steel industries to supply steel for the projects then it could lead to a drop in the government’s excise duty revenue.
The industrialist said that since the factories are currently not supplying to the projects in a big way there was hardly any excise duty revenue for the government to be lost. He also stated that as the Indian companies were already exempt from excise duty.
He said instead that government revenues would significantly benefit from the Corporate Income Tax of the steel industries if they could get major orders from the multi-billion hydropower construction pie.
The 6 steel industries are collectively worth under Nu 2 bn and they have more than Nu 1 bn in loans with financial institutions.
Up to 2006, steel was considered to be a profitable business with only three factories in Bhutan. By 2008, Bhutan saw another three big factories taking up the total number to six which lead to a rush for limited resources and price undercutting.
The 2008, the global economic crisis made matters worse with a slump in demand in their main market of India.
This was made worse by the fact that hydropower project authorities did not allow the factories to supply steel for the main works.
The recent downturn in the Indian economy coupled with a credit and Rupee crisis have again made the situation very bleak for the steel industry. While some have shut down others are operating at bare minimum capacity.
The factories have submitted their proposal to the government recently to get necessary approvals.