Steel Insights Aug 13

Chief Editor Rakesh Dubey, Tel: +91 91633 48159, E-mail: rakesh.dubey@mjunction.in Executive Editor Tamajit Pain, Tel: +91 91633 48065, E-mail: tamajit.pain@mjunction.in Editorial Board Dr Abhirup Sirkar, Professor Economics, Indian Statistial Institute (ISI) Dr Amit Chatterjee, Consultant and former Advisor to MD, Tata Steel Ltd Jayant Acharya, Director (Commercial & Marketing), JSW Steel Ltd K Ranganath, former CMD, KIOCL Vikram Amin, ED (Strategy and Business Development), Essar Steel Ltd Rana Som, Former CMD, NMDC Ltd Advertising Soumitra Bose, Tel: +91 92310 00232, Email: soumitra.bose@mjunction.in Sumit Jalan, Tel: +91 91633 48243, Email: sumit.jalan@mjunction.in Subscription Rachita Das, Tel: +91 91633 48045, Email: rachita.das@mjunction.in Toll Free No.: 1800 4192 000 1. Press 8 for publication Email: publication.tbss@mjunction.in Design Debal Ray, Sobhan Jas For suggestions, feedback and queries, please write to steelinsights@mjunction.in

Registered Office mjunction services limited, Tata Centre, 43 J L Nehru Rd, Kolkata 700 071 Website: www.mjunction.in Corporate Head Quarters: Godrej Waterside, 3rd Floor, Tower 1, Plot V, Block DP, Sector V, Salt Lake, Kolkata 700091, Tel: +91 33 6610 6100, Fax: +91 33 6610 6187 Bhilai: Room 321, 3rd Floor, Ispat Bhavan, Bhilai Steel Plant, Bhilai 490001, Tel: +91 788 6451066, Tele/ Fax: +91 788 2221071 Bokaro: Room 19, Old Admin Bldg., Bokaro Steel Plant, Bokaro 827001, Tel/Fax: +91 654 2226132 Burnpur: SAIL - IISCO Steel Plant, Materials Building, Order Department, Ground Floor, Burnpur 713325, Telfax: +91 341 2240107 Chennai: Basement, Begum Ispahani Complex, New No 91, Old No 44, Armenian Street, Chennai 600 001, Tel: +91 44 64624733-35, Fax: +91 44 25216536 Durgapur: Room 618, Ispat Bhavan, Durgapur Steel Plant, Durgapur 713203, Tel: +91 343 6510185, Tele/Fax: +91 343 2586946 Jamshedpur: Kashi Kunj, Ground Floor, Road No. 02, Contractors Area, Bistupur, Jamshedpur 831001, Tel: +91 657 6519985/86/90/91, Fax: +91 657 2230040 Mumbai: Jolly Bhavan II, 403, 4th Floor, 7 New Marine Lines, Mumbai 400020, Tel: +91 22 66510663, Tele/Fax: +91 22 66510662 New Delhi: C127, 2nd Floor, A One Plaza, Naraina Industrial Area, Phase I, New Delhi 110028, Tel: +91 11 65661774/65413288, Tele/Fax: +91 11 25897000 Noamundi: C/o TATA Steel Limited, Mines Purchase Cell, PO: Noamundi, Singbhum (West), Jharkhand 833 217, Tel: +91 9204791638/9234368606 Rourkela: Administrative Bldg., Room 624, 6th Flr, Rourkela Steel Plant, Rourkela 769011, Tel: +91 661 6514142/6511412

mjunction believes that all junctionites, customers, suppliers, partners, etc should practice the highest ethical standards in their daily operations.

Report a concern to ethics@mjunction.in

Copyright: All rights reserved. No part of Steel Insights can be reproduced or copied in any form or by any means without the prior permission of mjunction services limited. Please inform us if any copyright has been inadvertently infringed.

EDITORIAL Dear readers, The first quarter of 2013-14 is over and we are in the middle of the second. But there is no respite from the slowdown. India’s economy expanded less than five percent for a second straight quarter on ebbing investments.

Steel consumers – automobile, capital goods, consumer durables and construction – are reeling under recession trends, which are pulling down steel market sentiment.

The rupee’s depreciation by 11.7 percent against the dollar since March has come as a boon though. Expensive imports have stoked domestic demand, prompting Tata Steel, Steel Authority of India and JSW Steel to think of price increases despite the sluggish scenario.

Another positive development is the best monsoon this year since 1994. The rains, the main source of irrigation for the nation’s 235 million farmers, help drive rural spending on cars, consumer goods and construction.

The festive season, considered auspicious for purchases, starts next month. Industry is hoping for a revival in demand this season.

Industry insiders feel the automotive firms are low on inventory and may start re-stocking anytime.

Higher demand and firmer prices will help Indian steel makers recover from the slowest sales growth in the last quarter.

SAIL, the country’s second-biggest steel maker, is forecast to report its lowest quarterly net income in nine years, while Tata Steel’s profit may decline by more than 50 percent, according to estimates.

JSW Steel swung to a loss in the three months to June 30 from profit a year earlier.

Steel prices have fallen 30 percent in two years as Europe went into recession and on uncertain Chinese demand.

Meanwhile, the bid for UK-based Stemcor’s India assets, mainly for its ore-processing facilities in eastern India, hogged the limelight with dozens of steel mills in the fray.

Stemcor’s trading business is supported by iron ore mining interests, predominantly in India, with investments in two iron mines.

Reports suggest the enterprise valuation of Stemcor’s Indian assets was $750-850 million.

India’s consumption slowed 3.3 percent to 73.34 mt of steel in the year ended March. Yet, steel companies are seen expanding capacity to about 100 mt in a few years. An assured supply of iron pellets will be an advantage as iron ore mining in India is facing regulatory action on environmental concerns and alleged irregularities.

Meanwhile, the decision of global steel makers ArcelorMittal and Posco to scrap their India projects because of delays in project implementation and depressed market conditions highlighted the sorry state of affairs of the steel industry.

In this edition of Steel Insights, we tried to find out why steel demand is unlikely to revive in the last half of 2013-14. We have tried to do an in-depth analysis of the view, seconded by prominent analysts in the sector.

The edition also carries an interview of Usha Martin’s top management highlighting the company’s growth plans in these trying times.

Disclaimer: This document is for information purpose only. Certain information herein has been acquired from various external sources believed to be reliable. While we have taken reasonable care to compile this report, we in no way assume any responsibility for any error or discrepancy in regards to information contained herein. Readers are requested to make appropriate judgment without any prejudice or compulsion.

(Rakesh Dubey) Steel Insights, August 2013

3

Contents 35 Pellets to be under pressure on likely additional capacity 38 Labour cost arbitrage must be addressed 42 Stainless steel mills under severe stress 43 Steel consuming sectors languish on low demand 45 Speed breakers ahead for auto industry 46 Castles in the air?

47 Seaborne coking coal prices inch up in July 48 Siemens delivers dephosphorisation plant to Indian steel producer 49 Danieli to supply pickling line to Bangladesh Abul Khair 50 Tata Steel focusses on Odisha plant for growth 51 SAIL’s July production up 3% y-o-y 52 RINL’s April-July saleable steel output up 9% 53 JSW looks at 12 mt of crude steel in FY14 55 Sesa Goa Q1 net profit down 57% 56 US launches probe into steel pipe imports from India 57 Silicon manganese market expected to remain soft 60 Mining royalty hike a concern 61 Traffic handling by major ports down 0.99% in Apr-Jun 62 Railways coal handling falls 3.3% in June m-o-m 63 Macroeconomic indicators of India 64 Global crude steel output down 3.2% m-o-m in June 65 Domestic long & flat markets 66 Domestic raw materials

4 Steel Insights, August 2013

6 | Cover Story

Steel demand revival doubtful in H2 Industry is pinning hopes on government, be it to reduce fund cost or boost demand through infra projects

22 | Interview

Post expansion, UML will go for consolidation: Jhawar UML will aim to stabilize its operations and ensure that the new assets work

30 | SPECIAL FEATURE

How much of imported iron ore do we need?

Imports unlikely to be more than 5-6 mt

34 | SPECIAL Feature Buyers’ make bee line for Stemcor’s India assets

Stemcor’s Indian assets likely to get enterprise valuation of $750 million-$850 million

36 | Feature

Posco, Arcelor pullout impact may be neutral Global steelmakers’ pullout will not upset the demand supply equilibrium in India

Cover Story

Steel demand revival doubtful in H2 Tamajit Pain

I

n the April-June quarter of 2013-14, steel demand in India, the world’s third-largest user of the alloy, grew at the slowest pace in at least five years as consumption waned amidst an economic slowdown.

Demand rose 0.3 percent to 17.8 million tons (mt) in the three months ended June 30 from a year earlier, according to provisional data from the steel ministry. Production climbed 3.1 percent to 19.5 million tons (mt), widening a glut.

India’s economy expanded less than

6 Steel Insights, August 2013

five percent for a second straight quarter as investments slowed down. Lower domestic consumption prompted steel makers to seek overseas markets, pushing up alloy exports by 14 percent to 1.13 mt while imports dropped 33 percent to 1.33 million tons in April-June, 2013-14, according to ministry data.

Steel makers in India are looking at options to boost exports to a record level as a plunge in the rupee increased the value of sales overseas. Analysts expect exports to climb 30 percent to 6.8 mt this fiscal itself.

Cover Story However, domestic demand still remained a major concern area for the steel mills. In 2012-13, steel demand rose 3.3 percent to 73.3 mt, less than half the government’s eight percent estimate. This requires some brainstorming to find out the reasons for the slowdown and what the situation would hold out as we enter the second half of the fiscal.

As said Usha Martin Managing Director Rajeev Jhawar: “The domestic demand outlook continues to be very weak. All the players are delaying execution of their new capital expenditure plans because they are waiting for a new government to be in place and see which way policies are headed. This slackness in demand will continue till there is better clarity on such issues. I do not see domestic demand picking up in the next 18 months.”

“Factors like the hike in interest rates, squeeze on liquidity, lack of major expansions or infrastructure projects and the impending elections are making the overall mood negative,” he added.

The second half of any financial year is typically considered a busy season with demand pick-up being led by the end of the monsoons. Steel mills are mostly used to seeing a decent order book in the second half of any financial year with projects getting a boost as the fiscal end nears.

But, this year, the situation is different.

The demand outlook is gloomy with the harsh impact of the economic slowdown looming large. The steel mills are facing margin pressures and liquidity crunch and were unable to raise prices owing to low demand. Added to this, they were faced with huge debt burden, depreciation in the rupee value and raw material constraints.

India Ratings cut outlook

The slow consumption data in the first quarter of 2013-14 and the slow growth pattern of the steel consuming sectors prompted Fitch Ratings’ India unit to cut the outlook on local steel makers to negative from stable for the second half of 2013-14.

The downgrade followed muted demand for the alloy and the limited ability of producers to raise prices. India Ratings expects domestic steel demand to remain muted in the second half.

The negative outlook is in view of the higher-than-expected deterioration in the financial and liquidity profiles of the steel

8 Steel Insights, August 2013

Recent growth rates of production of selected steel consuming industry groups: 2008-09 to 2010-11 Item group

Steel products used

LPG Cylinder

HRC

Drums & Barrels

CR

Complete Tractors

HRC/Strls.

Refrigerators

CR

Power Transformers

CRGO

Commercial Vehicles

CR/Plate

Passenger Cars

HR/CR/Plate

Auto Ancillaries & Parts

HR/CR

Motor Cycles

CR

Agricultural Implements

HR/Plate

Material Handling Equipment

Plate/ HRS/ Strls.

Washing Machines

HR / CR

Diesel Engines

HR/ Plate / Strls.

Growth rates (%) 2008-09

2009-10

2010-11

5.7

55.0

13.9

(-)21.4

42.7

(-)2.5

(-)0.4

26.3

23.9

3.1

25.8

9.8

(-)1.9

16.5

13.4

(-)23.6

36.0

32.8

6.7

26.0

28.4

4.6

24.2

24.7

(-) 26.6

(-) 11.1

(-)28.2

(-)3.5

22.9

(-)8.4

8.1

26.4

(-)0.8

18.8

5.3

11.2

25.0

Source: Ministry of Commerce & Industry

mills. The continuous weak macro-economic environment in India has resulted in muted demand for steel products from the end-user industries, India Ratings said.

India Ratings said it expects steel producers’ profit margins in 2013-14 to remain broadly similar to the 2012-13 levels despite a fall in key raw material prices.

“Margins will remain under pressure due to the persistent high cost of steel production and steel producers’ limited ability to pass on higher costs. This has been due to the subdued demand from the end-user industries,” the ratings agency said.

The government’s proposed move to increase the iron ore royalty to 15 percent from 10 percent, if implemented, could further pressurise margins.

Steel producers’ ability to raise steel prices in India is also constrained by the global nature of the market, coupled with oversupply and weak demand in the international market.

The rupee depreciated by about 10 percent since January 2013 and the modest demand scenario has put pressure on the margins of companies producing steel through the blast furnace route.

This is because they import the bulk of their coking coal requirements. The margin pressures are being felt despite the import price parity of flat steel products. Prices of long steel products will continue to be driven by the domestic demand-supply scenario

given their limited imports, the rating agency said.

Lifting of mining ban to help

The domestic iron ore mining industry is undergoing a difficult phase given regulatory intervention in various states. This intervention bodes well for the industry in the long-term.

However, in the short-to-medium term, steel producers could face inadequate availability of domestic iron ore. The recent lifting of the Supreme Court’s ban on iron ore mining from category-B mines in Karnataka could alleviate some of the raw material concerns of steel producers in the state.

Slowdown analysis

At this juncture, it is important to understand and analyse the main reasons for the decline in steel consumption. An analysis of the different steel consumption points would give a clear idea of the slide in consumption in 2012-13 when compared to that in the 12th Plan targets.

Steel end-use segments

Last, but not the least, is the steel consuming sectors on which the demand for steel is dependent.

Sectoral growth in construction, automobiles, railway transport, transportation of oil and gas, ship building, capital goods (heavy machinery equipment), consumer

Tear along the dotted line

Tear along the dotted line

78 Steel Insights, August 2013