Contents 20 Surge in global steel demand may push up domestic prices 22 Metal companies infuse funds to meet spike in demand 23 Indian iron ore production estimated to rise in FY18 24 Coking coal demand-side management needs a look: NC Jha 26 Coking coal prices ease in March 27 Motown ends FY18 on a high note 29 Apr-Feb pig iron, sponge iron consumption dips 30 Residential unit sales drop 40% in 4 years 32 Global crude steel output down 5.48% in Feb m-o-m 33 Traffic handled by major ports up 5% in Apr-Feb 34 Indian Railways’ Feb iron-ore handling down 3% y-o-y 35 Tata Steel wins bid to acquire Bhushan Steel 36 JSW Steel plans to invest $500 million in Texas unit 38 Vedanta wins bid offer for Electrosteel 39 Corporate Update 40 Hyundai issues final acceptance certificates for two long-rolling mills 42 ‘Make in India’ in public procurement helps cos garner `5,000 cr 43 This impending trade war could define the real master 50 Price Data 51 Ferro Alloy Data 52 Production Data
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6 | COVER STORY
FY19: year of steel industry consolidation?
18 | COVER STORY
Mergers and acquisitions and brownfield expansion likely to be primary route of expansion in the short to medium term.
Are we moving towards steel cartels? With the NCLT proceedings under way, the steel landscape may change, says Dr Susmita Dasgupta, Joint Chief Economist, JPC.
21 | Feature
India pips Japan in crude steel production in Feb India outstripped Japan to become 2nd largest steel producer in February.
45 | Special feature Will Donald triumph in his trade tactics?
Donald Trump’s trade tactics are bound to throw a spanner in the growth prospects of India’s steel companies.
48 | INTERVIEW
RINL may turn profitable (after 3-yr gap) in FY19: CMD The outlook for the steel industry is positive, as all the consuming sectors are looking up, CMD of RINL, P Madhusudan, says.
Cover Story
FY19: year of steel industry consolidation? M&A and brownfield measures likely to be primary route of expansion in short to medium term Madhumita Mookerji
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Cover Story
T
he Indian steel industry has traversed quite a long way to have now entered a new development stage, post de-regulation, riding high on a resurgent economy and increasing demand for steel. Rapid production volume increase, since our focus has traditionally been on volume rather than quality or sales, has resulted in India becoming the second-largest producer of crude steel in 2017. The country was the largest producer of sponge iron or DRI in the world during the period 2003-2015 and emerged as the 2nd largest global producer of DRI in 2016 (after Iran). India is also the 3rd largest finished steel consumer in the world. Most analysts pin hopes on an expected 7 percent or thereabout growth in the steel industry over the next couple of years and the very fact that our per capita consumption level is a mere 61 kg against the global average of 208 kg, leaves the door ajar for growth in consumption, going ahead. But, with what kind of feelings are we ending financial year 2017-18, in the steel industry? The balance sheets of most of the steel companies are already stretched a bit due to the prolonged low pricing scenario, at least till FY16. Even though prices improved in the last one year, there was no significant respite. Also, most of the players have been in the process of expanding through the brownfield route, spending more in terms of capex. Goutam Chakraborty, Assistant VicePresident, Institutional Research, Emkay Global Financial Services, tells Steel Insights: “We expect, most of the companies will be in the mode of higher capex in the coming 2-3 years. Higher steel prices would be helpful in this regard to maintain better covenants.” Chakraborty, adds: “I think the sentiment
turned out to be more positive towards the end of the year with improvement in demand. So far in 11MFY18, till February, 2018, the consumption of finished steel has grown by 7.6 percent to 82 million tons (mt) and production rose by just 2.8 percent to 95 mt. Improvement in consumption has been encouraging and much needed.” Well, global recession that percolated down to lower domestic demand, dumping by China, policy short-sightedness and various other factors led to the pile-up of huge debts with the steel sector emerging as the largest contributor to the banking system’s overall non-performing assets (NPA) corpus. The aggregate debt of the 5 companies - Essar Steel, Monnet Ispat, Bhushan Steel, Electrosteel Steels and JSPL - stood at `148,289 crore as on March-end, 2016. And the development that readily comes to mind in the year that was, ie, 201718, is the government-instituted National Company Law Tribunal’s insolvency proceedings against sick and debt-riddled steel companies, in which Essar Steel and Bhushan Steel played key roles. Their assets were up for sale and many were confident that the same would eventually end up in the hands of players who care about operational efficiency since most of these were “quality assets” as said a source. When these bad assets were put on the block, there was a scramble to obtain these because it would mean a sure way of consolidation and increasing of business, a kind of brownfield expansion. The resolution process under the Insolvency and Bankruptcy Code (IBC) for 5 steel companies (Bhushan Steel, Bhushan Power & Steel, Essar Steel, Monnet Ispat & Energy and Electrosteel Steels), which account for around 17
The top three players, including Steel Authority of India, JSW Steel and Tata Steel, could constitute 60-65 percent of India’s steel production. Consolidation will benefit large steel players with economies of scale and better bargaining power on sourcing, which would improve the product profile. Acquisitions provide immediate availability of capacity and improve the market share in a demandgrowth scenario as large players are already operating at high levels (80-90 percent).
percent of the domestic installed capacity, saw participation not only from domestic metals players, but overseas steel majors and financial institutions too. So Tata Steel was after Bhushan Steels and ArcelorMittal and Liberty House, both UK-based companies were bidding for Essar Steel and Essar Steel itself, under a changed name from Mauritius, was bidding for its bust assets in India. In fact, as per the latest reports, Tata Steel is soon likely to become the country’s largest steel-maker, having been declared the successful resolution applicant by the committee of creditors (CoC) of Bhushan Steel for buying out its stressed assets, pipping JSW Steel to the post. However, the decision is subject to required approvals from the National Company Law Tribunal (NCLT) and the Competition Commission of India (CCI). The decision was taken by the lenders. Bhushan Steel has an unpaid bank debt of over `48,000 crore, and the acquisition may cost the Tatas around `35,000 crore, as per sources, though this amount could not be confirmed. Bhushan Steel, which is the third largest secondary steel producer in the country with annual capacity of 5.6 million tons, posted a loss of `3,501 crore and revenues of `15,027 crore in FY2017. Tata Steel will borrow new debt in 2018 to acquire stressed assets after completing an equity rights issue for repaying some loans, according to analysts. Under the ongoing insolvency process, Bhushan Steel is the most indebted company and secondbiggest in terms of capacity with claims of about `56,000 crore. As part of bankruptcy proceedings, the company was selected as the highest bidder to purchase a controlling stake in Bhushan Steel earlier this month. The two major primary bidders were Tata Steel and JSW Steel. After Tata Steel was picked as the preferred buyer on March 6, Bhushan Steel employees challenged the decision. On March 19, NCLT asked the committee to consider the objections raised by Bhushan Steel employees over the bids submitted by Tata Steel. JSW Steel as well as a group of employee in a tie-up with a private equity firm, had bid for Bhushan Steel in an auction conducted after the firm defaulted in payment of close to `48,100 crore of loans. Once the acquisition of Bhushan Steel is completed, Tata Steel would be increasing
Steel Insights, April 2018
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Cover Story
Are we moving towards steel cartels?
S
o much has happened within such a short span of time! The National Company Law Tribunal-initiated insolvency proceedings have led a few of India’s largest steel companies to bid for the debtriddled assets put on the block. Does it mean a morphing is on the anvil in the steel landscape? Dr Susmita Dasgupta, Joint Chief Economist, Joint Plant Committee, Ministry of Steel, tells Madhumita Mookerji, that apart, logistics and information technology appear to be the next business opportunity areas in steel. How? These areas can be used to negotiate capacity rationalisation, increase specialisation and improve margins. Moreover, with the market for graphite expanding hugely, no one seems to be interested in producing for the steel furnaces. Here is the time then to shift towards the induction furnaces, she says. Excerpts from an interview:
What were the key developments in the steel sector in the year that was? I am not too good at tracking the steel industry over a short term! The movement of prices, the increase or decrease of production do not interest me though these are important things to be interested in! For me, the structural movements of the steel industry become very significant. In other words, I look out for larger movements. For this, the year that has been has gone off in the following manner. To my mind, the most important element of the steel business in India has
18 Steel Insights, April 2018
been the national Company Law Tribunal (NCLT), which has decided to sell the bad loans of the steel companies like Essar and Bhushan. There is clearly a scramble to obtain these bad loans because that means a sure way of consolidation and expansion
of business. So Tata Steel is after Bhushan Steels, ArcelorMittal and Liberty House, both England-based companies are bidding for Essar Steel and Essar Steel itself, under a changed name from Mauritius, is bidding for its bust assets in India.
The Indian steel industry is going towards mega steel giants with the possibility of large steel conglomerates and cartels. I am not too comfortable with this because cartels are the most certain ways of death for any industry.
SPECIAL FEATURE
Will Donald triumph in his trade tactics? Madhumita Mookerji & Tamajit Pain
W
hen the US of A sneezes, the rest of the world catches a cold. And the recent slapping of tariff sanctions on steel and aluminium imports onto Uncle Sam’s terrain has raised a hue and cry across the major economies of the world, namely the countries against which POTUS (President of the United States), Donald trump has raised his quiver of arrows. China leads the pack of protesting countries. The sanctions, imposed on March 8, include a 25 percent tariff on steel imports and 10 percent on aluminium imports. The implication of this move is that the steel and aluminium consumed in the United States becomes more expensive and will trigger inflation since especially steel is such a widely consumed material in industries such as construction, automotive, white goods, etc. However, a few days later, the US Trade Representative, Robert Lighthizer, said that certain countries would receive temporary tariff exemptions while they negotiate with the United States. These included the European Union, Canada, Mexico, Argentina, Australia, Brazil and South Korea and led many to say that the quotas were being tailor-made to target a particular country, which obviously is China. The sanctions had sparked a sharp reaction from the European countries, which lobbied hard for an exemption, basis the continent’s long-standing military alliances and strong economic ties to the United States. The tariffs would apply to all countries, meaning leading exporters like China, India, Russia, South Korea and Turkey would be hit. The POTUS’s proclamations explained that the relief is intended to help the domestic steel and aluminum industries revive idled facilities, open closed mills and smelters (in the case of aluminum), preserve necessary skills by hiring new workers, and maintain or increase production, to ensure that the domestic
industries can supply needed material for national Defence and critical industries. Meanwhile, the markets are now waiting for the US to publish a list of Chinese products that could be targeted with additional tariffs after a US inquiry found China guilty of intellectual property theft and unfair trade practices, as per a media report. Trade wars
The immediate threat was that of retaliatory tariffs by the countries affected by the US sanctions and which have the potential to escalate into a trade war especially between the two biggies – the US and China. The European Union, a major exporter to the US but US steel makes up less than 1 percent of EU steel imports, threatened to impose retaliatory import tariffs on US imports ranging from brands like Coke and Levis to Budweiser beer and Harley Davidson motorcycles. “China and the rest of Asia are among the largest exporters of metals to the US and China has already threatened to trigger a trade war,” say industry sources. Further, the European Commission (EC), the EU’s executive body, had threatened to retaliate by imposing trade penalties on a long-list of American products, worth around $3.4 billion in annual trade. The Commission said total imports of steel had increased to 29.3 million tons in 2017 from 17.8 million tons in 2013, largely due to global overcapacity and measures taken by third countries to limit dumping. “The investigation will examine the situation of the products concerned, including the situation of each of the product categories individually, also based on the most recent developments, such as any trade diversion resulting from the US measures,” the Commission said. It has given interested parties 21 days to complete questionnaires or submit information to aid its inquiry. The European Union itself has until May 1 to secure a permanent exemption from “the US metals tariffs. Europe says it wants
to avert a trade war but the Commission has proposed a series of measures if the White House hits EU producers, including a challenge at the World Trade Organisation and import duties on US products such as orange juice, bourbon and Harley-Davidson Inc motor-bikes among other items. However, trade wars are really no good and result in temporary muscle flexing. As per an industry source, it would be interesting to remember 2 things about a trade war. “First, trade wars were last seen in the 1920s and 1930s when countries tried to encourage domestic industry by putting high tariffs on imports. Eventually, this led to rising inflation, production inefficiencies and finally resulted in the Great Depression of 1930s. Rarely has any nation benefited from a trade war. Secondly, trade wars tend to eventually degenerate into currency wars. When every country puts higher duties on imports, the only way left is for countries to devalue their currencies to make exports cheaper. This again leads to competitive devaluations creating losses across the globe.” Why the US sanctions?
But first, let us explore why did the US take up the issue of trade war at this juncture…? Why is the US keen to protect the domestic metals industry? It may be recalled that President Trump had made the issue of the US’ rising trade deficit a major election manifesto and many say he is following up on that, keeping an election promise. Data reveals that over the last 20 years, production of aluminium in the US has fallen by over two-third and that gap has been filled in by imports from China. Obviously, Trump feels that the US metals The affected steel products are described as follows. 1. Carbon and alloy flat product (flat products) 2. Carbon and alloy long products (long products) 3. Carbon and alloy pipe and tube products (pipe and tube products) 4. Carbon and alloy semi-finished products (semi-finished products) 5. The initial, intermediate solid forms of molten steel, to be re-heated and further stainless products
Steel Insights, April 2018
45
Interview
RINL may turn profitable (after 3-yr gap) in FY19: CMD
R
ashtriya Ispat Nigam Ltd (RINL), also known as Vizag Steel, is expecting to be back in the black in fiscal 2018-19 after a gap of 3 years. In the last fiscal, RINL, the second largest steel-making company in the public sector, posted an EBITDA of `200 crore. In an interaction with the media, CMD of RINL, P Madhusudan, said the outlook for the steel industry is positive, as all the consuming sectors are looking up. RINL is now reaping the benefits of expansion and modernisation, which has stabilised by now, coupled with steady markets, mostly in the southern region. Excerpts:
How was the last fiscal for RINL? What kind of growth do you expect in 2018-19? We had a good year in 2017-18. The industry expansion and modernisation is happening. External factors, which influenced the market in 2015-16, resulted in stress. This resulted in an operating loss of `660 crore for RINL. We made a recovery in 2016-17 and brought down the operating loss to `250 crore. The situation has improved further in the last fiscal and I am happy to announce an operating profit of `200 crore in 2017-18. RINL is now reaping the benefits of expansion and modernisation, which has stabilised by now coupled, with steady markets, mostly in the southern region.
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Our 6.3 million tons per annum (mtpa) expansion has been commissioned. The rated capacity in BF3 is improving and slowly moving towards 100 percent capacity utilisation level. Modernisation of BF2 has been done and all furnaces are working. We have produced 500,000 tons in March 2018. In this run rate, we would be producing 6.5 mtpa crude steel in 2018-19 and saleable steel of around 5.7 mtpa. How do you see the steel market behaving? What would be the impact on margins? The markets are also fairly stable now. Coal prices, which had increased, have come down. Markets have absorbed the price and volumes are also available. This has resulted
in a positive EBIDTA of `200 crore on a sales turnover of `16,500 crore, a growth of 31 percent year-on-year. In Q4, we made a cash profit after twoand-a-half years. This has been possible because of the internal initiatives taken in 2017-18. We have increased the usage of PCI in BF1 and BF3, leveraging on higher PCI rate. This has led to reduced usage of expensive coal. We have also seen a 32 percent growth in sales in the southern markets. The enhanced sales volume led us to focus more on the southern markets. We are giving more emphasis on the product mix. Logistics is a challenge and to reduce pressure on railways we have forayed into
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Tear along the dotted line
Tear along the dotted line