Steel Insights, August 2016

Contents 20 ‘Value-added grades insulate us from market vagaries’ 25 India recommends anti-dumping duty 28 Iron ore upgrading help comes from Down Under 29 REITs market size in India surpasses Asia-Pac 30 GST may spur real estate growth 32 Car sales get extra mileage from good monsoon in July 33 Coking coal offers sizzle in July 34 Tata Metaliks commissions enhanced capacity at DI pipe plant 35 Corporate snippets 38 Shell Lubricants launches two new products for India 39 Primetals replaces LD (BOF) converter for ArcelorMittal Ruhrort in Germany 39 ExxonMobil collaborates with Micromatic Machine Tools 40 Steel Industry owes `300,000 crore to banks 41 Iron ore handling by major ports sharply up in Q1 y-o-y 42 Railways’ May iron ore handling up 7.83% m-o-m 43 Global crude steel output down 2.47% in Jun m-o-m 44 Steel prices firm up in Aug post-July volatility 45 China slaps dumping duties on Japan, Korea, EU steel 46 Does Brexit give China easier entry into global steel space?

51 Reverse auctions put conveyor belts in reverse swing

4 Steel Insights, August 2016

6 | COVER STORY Steel’s Comeback Kid

Essar Steel springs a surprise with Q1 numbers. But what factors are driving this comeback?

26 | FEATURE

Govt extends MIP on 66 steel products Duty ranges between US$341 - US$752 per ton; effective till Oct 4.

27 | FEATURE

India sets up another committee to review iron ore pricing Indian steel ministry will soon conduct review of iron ore pricing.

48 | INTERVIEW

Wadhawan Port ideally located for Ro-Ro traffic Neeraj Bansal, Deputy Chairman, outlines future of JNPT’s new satellite port.

54 | INTERVIEW

‘Sponge iron prices unsustainable at current levels’ Post-monsoon, prices of sponge iron are expected to rise, says D P Deshpande, MD, Tata Sponge

Cover Story

Essar Steel springs a surprise with Q1 numbers

Steel’s Comeback Kid

In November 2015, Essar Steel reported a `30,000-crore debt on its books and production at its flagship plant dwindled to 200,000 tons. Closure talks were even doing the rounds in the market. A number of banks classified the company as a non-performing asset (NPA) in the OctoberDecember period. And a June deadline was served by the banks to find a buyer for the majority equity stake in the company, failing which, the banks said they would find a buyer themselves.

Cut to July 27, 2016: Essar Steel Ltd published its first quarter (April-June) results – which showed a 12 percent jump in revenues backed by a nearly 50 percent surge in output, zero finished goods inventory, development of 3 new grades of steel, and a lot more!

But wait! If the statements coming from the top management are anything to go by, this low-cost flat carbon steel-maker has lined up many more milestones for the current year, an output growth of 58 percent and capacity utilisation of 80 percent being the top agenda in that list.

So, what drove the company to stage a strong come-back? How did it plan to beat the recession blues? Rakesh Dubey of Steel Insights, on a recent visit to Hazira, looked for answers and got clues that may infuse some fresh blood into the beleaguered steel market.

Point of inflexion?

Essar Steel, the flagship company of the Essar Group, is never short on two aspects: curiosity (for new technology) and selfconfidence.

In 2012-13, when the company’s net loss doubled to `2,785 crore, the management still exuded confidence in returning to profit, which it did, within a couple of years. So, when the banks gave it a deadline of June

6 Steel Insights, August 2016

2016 to find a buyer, the company just prepared for yet another comeback. Which it did, as early as in the first quarter.

With more than a 12 percent rise in revenues and 15-18 percent EBIDTA margin, what made the Q1 results special was the growth in physical performance.

A 48 percent jump in flat steel production (year-on-year), 58 percent growth in pellet production and 52 percent increase in liquid

steel – all these, coupled with almost zero inventory of finished goods – makes the company further confident of beating the recession blues.

Total sales grew 41 percent to 1,201,000 tons during the quarter, compared to 852,000 tons in the same period last year. Also, the company’s downstream facilities in Pune and Hazira clocked impressive performances, adding to the overall high growth.

Cover Story Contributing factors

While the measures taken by the company have had its impact on the quarterly results, there is no hiding the fact that the minimum import price (MIP) imposed by the NDA government in February 2016 played a pivotal role.

According to a company spokesperson, “Over the last few months, introduction of the MIP and BIS standards by the Government of India has been beneficial in curbing imports of steel at predatory prices.

The oversupply situation that was prevailing in the market till recently has been contained to a large extent, and Indian steel companies are now able to achieve better sales realisation in the domestic market.”

Oommen, on his part, couldn’t but agree.

“Why we were suffering before the MIP was implemented is that one country after another started putting trade and non-trade barriers against Chinese products. Starting with the US. It propagates free trade and all that stuff, but slapped the maximum amount of protection! So, the US, Indonesia and so many countries started putting restrictions and that is what was making it difficult or the opportunity left for China was minimum.

Wherever the opportunity existed, it started

dumping. Thankfully, the MIP came in at the right time,” he stressed.

However, the MIP came as a generic medicine that benefitted one and all, but Essar’s performance reflected its multifaceted initiatives that helped the company outplay competition.

De-commoditisation & value-added grades Much of the credit for zero finished goods inventory goes to Essar Steel’s effort to “decommoditise” steel and focus on value-added grades (VAG) and tailor production to suit customer requirements.

“Over 300 grades of steel that we produce give us flexibility to alter the product mix, depending on market demand. Actually, steel is produced as per customer needs. Hence, finished goods inventory is zero,” said Subhajyoti Mukherjee, Deputy CEO, Hazira Assets.

In the last one year, Essar Steel has developed 17 new grades, which have given it a first-mover advantage in many industrial segments. In the quarter ended June 30, 2016, it developed three new grades – one each in the automobiles, yellow goods and Defence segments, he said, adding that 23 percent of revenues comes from products developed in-house.

Financial highlights Q1 2016 -17

Commenting on the stellar performance, Dilip Oommen, Managing Director & CEO, said, “Over the last few months, we have taken several steps to strengthen our operations. We have also been able to maintain higher operating margins. In addition, the markets have been stable and customer response has been encouraging.

This gives us the confidence to aim for full production, going forward.”

All Figures in KT

Steel Insights, August 2016

7

GOVERNMENT

Steel industry owes `300,000 crore to banks Steel Insights Bureau

T

he steel industry has outstanding loans of around `300,000 crore in various banks, thus making the sector one of the largest contributors to nonperforming assets (NPA) in the country.

Steel Minister Birender Singh said in the Lok Sabha that efforts are on by banks and the Reserve Bank of India to restructure the loans given to the steel industry so that these could be recovered.

“Yes, it is true that the steel industry has an outstanding loan of around `300,000 crore,” he said while responding to Congress Member Jyotiraditya Scindia’s comment that the steel sector was one of the largest contributors to NPA in the country.

Expressing concern over the prevailing situation in the steel industry, Singh said the government was making efforts to revive the industry so that the steel companies can repay the loans.

The minister said during Question Hour that China has produced 25- 30 percent more steel than its domestic consumption and the country has been trying to export steel to India where its demand is growing.

With Chinese steel in the market, prices have fallen, resulting in domestic steel producers suffering heavy losses.

To check this situation, the government has imposed the minimum import price (MIP) for steel with effect from February which helped prices to again go upward in the last 2-3 months, Singh said.

“However, global steel prices continue to be low, which is a matter of concern,” he said.

The minister said the Indian steel industry was currently passing through a severe downturn, due to global overcapacity, resulting in major steel producing countries selling their products in India at prices often lower than their cost of production.

40 Steel Insights, August 2016

“Consequently, domestic producers have had to significantly reduce prices, thereby eroding their profit margins,” he said.

Representations have been received from the Indian Chamber of Commerce and the Indian Steel Association to consider working out a suitable package to support the steel industry, he said.

Centre taking steps to make India 2nd-largest steel producer

Union Minister for Steel Birender Singh recently said the Centre is making all efforts to boost steel production so that India could become the second largest steel producer in the world.

“The central government has started taking steps to boost the country’s steel production. `62,000 crore will be spent

to enhance production capacity of steel manufacturing plants.

India’s core sector output expands at a faster 5.2% in June

Core sector industrial production in the country expanded at a faster pace of 5.2 percent in June 2016, against a slow 2.8 percent growth in May 2016, but at a slower pace compared to the four-year high growth rate of 8.5 percent recorded in April.

Output in the 8 core sector industries comprising coal, crude oil, natural gas, refinery products, fertiliser, steel, cement and electricity, which carry nearly 38 percent of the weight of items included in the Index of Industrial Production (IIP), stood at 3.0 percent in June 2015.

Core sector output growth, which showed positive growing in April, May and June this year, recorded cumulative growth of 5.4 percent during April-June, 2016-17.

Production of coal, which has a weight of 4.38 in the index of industrial production, increased by 12 percent in June 2016.

Cumulative coal production during AprilMay, 2016-17 increased by 5.4 percent yearon-year.

Production of crude oil (weight of 5.22 in IIP) decreased by 4.3 percent in June 2016 awhile its cumulative production during April-June, 2016-17 decreased by 3.3 percent over the corresponding period of the previous year.

Production of natural gas (weight of 1.71 in IIP) decreased by 4.5 percent in June 2016 while cumulative production of gas declined by 6.1 percent over the corresponding period of the previous year.

Production of steel (weight of 6.68 in IIP) increased by 2.4 percent in June 2016 while cumulative steel production during AprilJune, 2016-17 increased by 3.8 percent over the corresponding period of the previous year.

Cement production (weight of 2.41 in IIP) increased by 10.3 percent in June 2016 while its cumulative production during April-June, 2016-17 increased by 5.7 percent over the corresponding period of the previous year.

Electricity generation (weight of 10.32 in IIP) increased by 8.1 percent in June 2016 while cumulative production during AprilJune 2016-17 increased by 9 percent yearon-year.

Interview

Wadhawan Port ideally located for Ro-Ro traffic

W

ith a vast experience of 20 years in the Indian Revenue Service across segments like direct tax administration, investigation, tax-payer service, vigilance, legal and co-ordination, Neeraj Bansal has been holding the post of Deputy Chairman, Jawaharlal Nehru Port Trust (JNPT), since August 2014. He outlines the future of the new satellite port JNPT is in the process of building as well as key port sector issues to Kingshuk Banerjee of Steel Insights.

Excerpts What is the future vision of JNPT? Jawaharlal Nehru Port Trust’s (JNPT’s) forward vision includes setting up of a new port at Wadhawan. This all-weather satellite port is a joint venture of Maharashtra Maritime Board and Jawaharlal Nehru Port.

A memorandum of understanding (MoU) has also been signed. It could be having 100 million tons of annual cargo handling capacity with 14 to 15 terminals.

The total project could be about `10,000 crores. With this port which would boast international standards, JNPT could firmly look into the future.

What are the factors favouring a port at Wadhawan?

There are several positive factors behind this decision. One has to keep in mind that a port cannot be set up just at a seashore.

Several favourable factors have to be taken into account.

First, this satellite port is just 100 nautical miles away from JNPT. So when it becomes operational, it could de-congest traffic load of JNPT which is practically a win-win situation for both ports.

Secondly, this new port would have 20 metres of natural draft which could firmly

48 Steel Insights, August 2016

place India on the global maritime map.

With 14 metres of draft, JNPT now can handle 6,000 - 7,000 TEU container vessels.

With the upscaling of draft to 15 metres, JNPT could be handling 10,000 TEUs to 12,000 TEU container vessels. At present, one feasibility study is on which could be finished by the end of 2016. After that, 6-9 months would be required to do the second phase of capital dredging work. So, by the end of 2017, augmented TEU vessels could be catered to.

But things are changing very fast. The future will bring 16,000 - 18,000 TEU container vessels and only ports with 16 - 20 metre draft could handle that kind of big vessels.

One thing has to be made clear here.

If we do not get prepared for the future, the port of call of mother ships would be in Singapore and China and only daughter vessels would be catering to Indian ports.

So, in order to not miss the bus, this 20 metre draft port is the need of the hour so that in the coming days, mother vessels could visit India.

Thirdly, many new services like Ro-Ro could be introduced in the new port once it is commissioned. That apart, there could be bigger handling capacity for POL and dry bulk cargo as well.

Fourthly, coastal movement would be boosted through dedicated berths.

The government is giving a lot of importance to coastal shipping. So coastal vessels would get exclusive treatment and the new port would have a dedicated coastal berth for that purpose.

So if any coastal container cargo applies to avail of services of the port, it would have a time window for it at a dedicated berth.

We also want to upscale this operation so that all kinds of coastal cargo could be offered dedicated services.

It needs to be mentioned here that JNPT would also have a small dedicated coastal berth by 2017. It would be a shallow one and JNPT would have 3 old container cranes to run its operation. JNPT now has container vessels through coastal shipping and sometimes owing to paucity of berths, we try to accommodate them elsewhere.

But once this dedicated berth is set up, the port could assure coastal cargo-carrying ships arriving at the port of this dedicated berth.

Actually, we need very upscale coastal cargo handling berths. Private ports may not be pitching for this because ultimately they look at their return on investment. But government ports are leading from the front, in order to create an environment of reduced carbon footprints through scaling down of the fuel cost and in decreasing load from the road.

So coastal shipping could be a game changer.

Fifth, the port would be set on reclaimed land of 300 - 400 hectares. There is adequate rail and road connectivity.

There would be tremendous potential for hinterland cargo as well.

Lastly, Maharashtra is the most industrialised state in India but it has only one container port and waterfront of that too would be exhausted after commissioning of the fourth terminal.

So to cater to increasing demand of industry, one all-cargo port is the call of the day. Even smaller ports have not come up.

Mumbai Port is entangled in environmental issues.

But cargo has to be handled at some point. Thermal power stations are coming up. Though import of coal is diminishing nowadays, nobody can say what the cargo profile would be after 5 years. It’s a dynamic

Interview

‘Sponge iron prices unsustainable at current levels’

P

roduction and consumption of sponge iron have been facilitated by the opening up of iron ore mines and the consequent drop in the prices of this steel-making raw material. However, the current price levels of sponge iron are an issue and a function of the glut in the steel industry. Post-monsoon, prices of steel products are expected to rise, which would give a boost to sponge iron prices too, Digambar Pandurang Deshpande, Managing Director, Tata Sponge, informs Madhumita Mookerji of Steel Insights.

What’s more, these prices are likely to hold for the medium term, till the inventory stockpile is cleared up.

Excerpts:

Please give an overview of the sponge iron market at present. What have been the operating profits like in the last fiscal? How much capacity utilisation is taking place?

The production and, therefore, consumption level of sponge iron has gone up by over 20 percent last year, to over 28 million tons (mt). One of the reasons for this is easy availability, with the opening up of iron ore mines, and lower cost of iron ore, as compared to the preceding 3 years.

Higher supply of sponge iron has put pressure on the market price. The price has dropped by almost 50 percent in the last 2 years. The operating margin for the entire industry has registered a drop, as a result.

By how much have operating margins gone down in the industry?

Well, they have gone down by -5 percent to

54 Steel Insights, August 2016

5 percent. Three-four years back, these were at a considerable 10-20 percent.

What was the scenario at Tata Sponge in the last one year?

Tata Sponge posted a profit of `31 crore last year as compared to `91 crore logged in the previous year.

The company has an installed capacity of 390,000 tons per annum (tpa). It produced 362,000 tons last year, in spite of a planned 120 days’ major renovation shutdown of its oldest kiln. Tata Sponge outsourced manufacturing of sponge iron to a small extent and sold over 387,000 tons of the commodity.

the industry. This is to be expected, since sponge iron is one of the lowest cost inputs to the secondary steel industry. It would have displaced some scrap, or some pig iron from the buyers’ basket.

When seen against the tepid growth rate of Indian steel consumption – at about 5 percent, the elastic growth of the sponge iron industry is significant. The drop in operating margins of the players would, however, suggest that it is not necessarily a healthy growth and leaves some room for a possible downward adjustment.

What has been the demand scenario like?

The market for finished steel products has been very sluggish over the last few years.

How is this trend impacting the sponge iron industry?

The demand of sponge iron has also elastically gone up to match the supply of

As explained above, the sponge iron industry has taken a hit on margins, to an

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Tear along the dotted line

Tear along the dotted line