Steel Insights, August 2020

EDITORIAL Chief Editor Dr Mahul Brahma, Tel: +91 85840 08241, E-mail: mahul.brahma@mjunction.in Editor Tamajit Pain, Tel: +91 91633 48065, E-mail: tamajit.pain@mjunction.in Editorial Board Jayant Acharya, Director (Commercial & Marketing), JSW Steel Ltd K Ranganath, former CMD, KIOCL Rana Som, former CMD, NMDC Ltd S K Basak, former ED (Collieries Division), SAIL Sushim Banerjee, Director General, INSDAG Vikram Amin, former ED (Strategy and Business Development), Essar Steel Ltd Associate Editor Sumit Kumar Maitra, Tel +91 85840 08181, Email: Sumit.Maitra@mjunction.in Senior Correspondent Ritwik Sinha, Tel + 85840 08234, Email: ritwik.sinha@mjunction.in Balaka Ghosh Chatterjee, Tel + 85840 08190, Email: Balaka.Chatterjee@mjunction.in Analyst Sanjoy Bag, Tel +91 85840 08215, Email: sanjoy.bag@mjunction.in Business Lead Soumitra Bose, Tel: +91 92310 00232, Email: soumitra.bose@mjunction.in Advertising Soudipto Malakar, Tel: +91 91633 48243, Email: soudipto.malakar@mjunction.in Sumit Jalan, Tel: +91 83369 25981, Email: sumit.jalan@mjunction.in Subscription Niladri Kar, Tel: +91 83369 96510, Email: niladri.kar@mjunction.in Email: publication.vspl@mjunction.in Toll free number 1800 41 920 001, press 6 for publication.

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Dear Readers, The simulacrum is never what hides the truth – it is the truth that hides the fact that there is none.

The simulacrum is true.

– Ecclesiastes

So, is the revival of the steel industry real or is it a simulacrum? Even if the revival is a simulacrum, even if the shoots only appear green, even if the indicators are carefully chosen to nudge towards a growth story – as per the ancient wisdom, the simulacrum is always real.

After hitting an abyss of 3.13 million tons in April, crude steel production has touched 7.57 million tons in July, according to provisional data from steel ministry. Steel consumption has grown from a low of 0.97 million tons in April to 6.08 million tons in July.

State-run Steel Authority of India recorded highest-ever July sale of 15.83 lakh tons, a 50 percent growth year-on-year, while JSPL reported a 25 per cent year-on-year rise in sales to 7.62 lakh tons.

Prices rallied towards July-end and early August with a strong tailwind. Steel makers concentrated on bringing down inventory levels in April-June with major push in exports. They also avoided large-volume domestic bookings, courtesy frequent lock-downs. When the unlocking process commenced in several states, the steel makers witnessed a surge in fresh bookings, leading to lower of inventory. This low supply coupled with high export offers led to a surge in prices.

While now the order book is almost full, production is slow during monsoons due to low supply of raw materials such as coal and iron ore, which in turn are supporting the upward movement of prices. State-run iron ore miner NMDC has increased prices by 8-9 per cent in July end.

Offers of iron ore in Odisha has risen due to low supply because majority of auctioned mining leases are yet to resume production. Odisha’s iron ore output dropped 20 per cent in June.

From pure play economics of supply and demand there are also some structural changes the industry is witnessing. Product diversification seems to be order of the day with efficiency improvement initiatives being taken up in right earnest to drive growth.

Tata Steel’s Nest-In has developed Agronest, a smart warehouse solution with a unique structural design that maximizes airflow. It is spacious, making it conducive for longer and safer storage of onions, and provides a cost-effective environment control to ensure minimal wastage.

Domestic demand for structural steel products rose during lockdown as construction companies opted for the customisable building material for high-rise structures, apartments and quarantine facilities in the face of labour shortage. Some steel producers have also ramped up production to provide readymade steel structures to health sector.

So in this edition of Steel Insights we focus on the simulacra that are clearly visible and are expected to emerge stronger by the time monsoons make way to the next quarter.

Happy reading, stay safe!

Chief Editor Articles are invited from industry partners for publication in Steel Insights.

The selection of articles is subject to scrutiny by the editorial desk and its decision will be final and binding. The copyright of the published articles will be held by the publication.

Steel Insights, August 2020

3

CONTENTS 14 Imported scrap offers to India rise

6 | COVER STORY

15 Pig iron production down on year in June 16 June sponge iron production down 24.8% on year

Restarting Steel: Pricing power signals recovery

17 India June crude steel production down

Iron ore crunch remains key challenge

20 Moody’s sees 10% drop in demand for steel makers 23 Autoville gaining momentum in July 25 Railways freight handling rises as economy unlocks

18 | FEATURE

33 Seaborne coking coal prices decline in July

ArcelorMittal sees signs of recovery

34 Domestic iron ore prices rise on rising demand, tight supply

Lakshmi Mittal explores structural changes to stay competitive

35 Government Update

28 | FEATURE

37 Traffic handled by major ports down 20% in Q1 38 Indian Railways’ iron-ore handling down 22% in Q1

Commercial coal mining in India: Will the eagles dare?

39 Global crude steel output fell in June on month 40 Anglo American banks on India steel recovery 42 Commodity risk key concern for Aussie miners: KPMG 44 Nippon Steel sees slow demand recovery in H2 46 Rio Tinto shines on China recovery 49 JSPL surprises with Q1 PAT jump of 125%

Webinar explores key opportunities for prospective investors

47 | INTERNATIONAL

Vale sees steel recovery in H2 of 2020 China credit easing, infra spending to drive demand

52 Tata Metaliks jumps back to normalcy 53 Corporate Update 55 Import export data 59 Price data

50 | CORPORATE

60 Ferro-alloy data

JSW realisation drops 12%

61 Production data

Project execution ramping up slowly

63 Consumption data

4 Steel Insights, August 2020

COVER STORY

RESTARTING STEEL Pricing power signals recovery Sumit Maitra

6 Steel Insights, August 2020

COVER STORY

A

fter the first quarter of disrupted supply chains, sharp drop in demand, uncertainties in logistics and also liquidity constraints, Indian steel industry has regained pricing power.

Since the beginning of the lockdown and since the start of the current fiscal, Indian steel industry operated at a tad lower than half of its capacity during the quarter, churned out 41 percent less output compared to the previous quarter.

Between April-June, demand fell by 55 percent while production dropped by around

45 percent. Even then there is surplus production in India.

And without any domestic market for their output, Indian steel makers were forced to look elsewhere, for exports, mainly China and also several other non-traditional markets to sell their output.

Out of 5.5 million tons of steel exported from India during the first quarter of FY21, 41 percent were semi-finished most of which reached China.

China’s insatiable demand for construction and infrastructure is even using

Indian steel industry : Q1 FY21 major highlights

“India Inc is getting back to normalcy, as companies can mend supply chains, getting more workers back on the job, resulting in the increased domestic steel demand.” VR Sharma, Managing Director, JSPL up India’s semis creating opportunities for continued exports.

India’s internal demand is also rising now considering the steel inventory situation which has come down from beginning of April to end of June.

Rising steel prices

Source: JPC

World steel industry

Source: WSA/National Statistics Bureau/Morgan Stanley Research

Most of the time exports don’t happen at very attractive prices.

But the domestic market for steel, it now appears, is now getting back its mojo by raising prices, twice during July and over the first week of August, cumulatively by around 2,500 a ton across product variants on the back of rising demand from construction, infrastructure and Railways which has raised the hope for a turnaround of the steel sector.

“India Inc is getting back to normalcy, as companies can mend supply chains, getting more workers back on the job, resulting in the increased domestic steel demand” VR Sharma, Managing Director, Jindal Steel & Power Ltd (JSPL) said.

JSPL, one of the biggest beneficiaries of growth in export opportunities, has seen its July steel sales rising 29 percent on year with exports constituting 39 percent.

For steel maker like JSW, domestic sales gained momentum on month, with

Steel Insights, August 2020

7

FEATURE

Moody’s sees 10% drop in demand for top Indian steel makers in 2020 Steel Insights Bureau

G

lobal rating agency major Moody’s expects steel consumption falling by at least 10 percent for rated Indian steel-makers in FY21 with country’s economic growth likely to remain materially lower than in the past with real GDP contracting 3 percent in 2020 and risk of fresh wave of corona virus infections during the rest of the year.

“We assume that economic activity will begin to gradually pick up from July. However, given the possibility for second or third waves of virus infections or deeper economic costs than currently factored in, downside risk to these forecasts are significant,” Moody’s said in its outlook for the steel sector in the Asia Pacific region.

Export focus

Indian steel-makers Tata Steel and JSW Steel will bear the brunt of a projected 10 percent drop in steel consumption in the country, the first decline since the global financial crisis.

Even so, their competitive cost of production, use of domestic iron ore that is cheaper than imported ore, and their brand strength in India will help them to minimize volume decline and generate above-average profitability.

With India’s steel consumption declining, the steel-makers will seek to divert their surpluses to relatively open export destinations, such as Southeast Asia, Middle East, parts of Southern Europe and China.

However, export realizations will be lower than realizations on domestic sales, with the latter benefitting from import parity prices and anti-dumping duties.

Moody’s expects EBITDA per ton for

20 Steel Insights, August 2020

JSW’s and Tata Steel’s Indian operations to decline by a mid-single digit percentage in FY21, and for their debt/EBITDA leverage to remain elevated at around 6.0x-7.5x.

Consolidation in Indian capacity to continue

India will remain the world’s second-largest steel producer behind China after having overtaken Japan in 2018. But new capacity additions will take a back seat with weak steel consumption hurting free-cash-flow generation in the current year.

Moody’s does not expect new capacity until the industry’s profitability as well as cash-flow stability is restored to prepandemic levels.

Consolidation in the Indian steel sector that began in 2018 will continue in 2020, with five stressed steel companies accounting for 20 percent of the country’s steel-producing capacity operating under new ownership.

Capacity utilisation will widely vary across the industry.

The strongest steel-makers will likely increase utilization rates from 50 percent in April to more than 80 percent by the end of March 2021.

Industry leaders, Tata Steel and JSW Steel, have already announced reduction in their capital spending to conserve cash.

China to continue capacity reduction program

The Chinese government’s stance on capacity reduction remains firm. It has urged central state-owned enterprises to complete the capacity reductions outlined in the 13th Five-Year Plan by the end of 2020. China’s

Moody’s doesn’t expect new capacity until the industry’s profitability as well as cash-flow stability is restored to pre-pandemic levels.

Consolidation in the Indian steel sector that began in 2018 will continue in 2020. supply-side reform initiated in 2016-17 has materially improved supply and demand dynamics in the country, supporting steel prices at relatively high levels compared with 2015 and 2016.

The government had reduced steel capacity by 150 million tons during 201618, ahead of original schedule. The reduced capacity accounted for around 20 percent of total steel capacity of around 1.13 billion tons as of year-end 2015. At the same time, the government has forced steel mills that used illegal induction furnaces to shut down, removing capacity of around 230 million tons.

Steel-makers in Korea and Japan have no plans for significant capacity additions.

Japanese steel producers Nippon Steel and JFE Holdings will by March 2024 phase out around 5 million tons and 4 million tons of their domestic steel-producing capacities respectively, or about 10 percent of their capacity.

Input costs will remain high, keeping product spreads narrow

Prices of iron ore, the main steelmaking material, will stay high over the next 12 months.

FEATURE

Commercial coal mining in India: Will the eagles dare?

Sumit Maitra

I

ntroduction of commercial mining couldn’t have been timed better and has generated enough curiosity and also serious interest from investors and analysts’ community across the globe.

“There is interest also from nontraditional business companies who weren’t there in the mining sector previously. They are also showing interest,” said M Nagaraju, Joint Secretary and the nominated authority of Ministry of Coal.

“After the launch, we had few interactions with the business community, received number of queries so far and whatever interests we have received are also very unprecedented,” Nagaraju, the key ministry official working on the auction process, said.

The reasons behind such interest are not hard to find.

The current situation of over-supply and falling demand of coal is but a small blip.

And when the economy recovers from the current pandemic-induced slowdown, and stranded power plants get new lease of life

28 Steel Insights, August 2020

and begin generation, country would need coal much more than Coal India can manage to produce, believes PS Bhattacharyya, former chairman of Coal India Ltd. Commercial mining would also bring a sea-change to the way coal is handled and transacted in the country. In a duopoly situation, it’s a sellers’ market and the onesidedness of the transactions is seen in the Fuel Supply Agreements that Coal India and Singareni Collieries sign with its customers.

The FSAs would become a thing of the past, or at least get renegotiated while the coal market as a whole would largely depend upon short term transactions rather than long term transactions, believes Yogesh Daruka, Partner-Power & Utilities, Mining, PwC. “We are already seeing many companies pressurising Coal India to rework the terms of their FSAs and make them more evenly balanced,” he said. There would be more short-termed market-linked transactions on coal after commercial coal is available.

There would be impact on the socioeconomic aspects also as many of the blocks selected are in backward areas of the country.

“Auction of coal blocks for commercial use has attracted a great deal of attention from investors and also from non-traditional business companies who weren’t there in the mining sector. They are also showing interest.”

M Nagaraju, Joint Secretary, Ministry of Coal and the nominated authority

INTERNATIONAL

Vale sees steel recovery in second half of 2020 Steel Insights Bureau

G

lobal steel sector’s bottom seems to have been reached in June and demand is expected to slowly recover as from the lows, believes Brazilian iron ore major Vale.

“In China, the credit easing has been key to leverage the property market, while investments in new infrastructure projects will continue to positively impact the real economy, providing demand growth for steel and thus a healthy steel production in the second half of 2020,” Vale told investors after the second quarter earnings release.

Vale expects global automakers beyond China to post gradual recovery of production as plants reopen, supply chains are reestablished and consumers return. Despite the good signals, the perspective of improvements in 2H20 is not expected to offset 1H20 downturns, Vale, however, warned.

Stabilization of iron ore production

“We are moving in our path to de-risk the company even in a very complex second quarter of 2020, facing the challenging times brought by the Covid-19 pandemic with responsibility, discipline and sense of urgency. We continue to make progress on the reparation of Brumadinho, on the assurance of the safety of our dams and on the stabilization of our iron ore production. As another important step in the capital allocation front, we are also announcing the resumption of our dividend policy,” Eduardo Bartolomeo, Chief Executive Officer told investors.

Improved safety measures to fight the pandemic and reducing the contingent of workers at operation sites as much as necessary to allow for safe distancing are some of the steps the iron ore major has applied.

Q2 financial performance

In June quarter, adjusted EBITDA of the ferrous minerals business segment was $3.502 billion, 23 percent higher than in 1Q20, and the adjusted EBITDA per ton excluding manganese and ferroalloys, totaled $56.6/t, an increase of $ 8.3/t when compared to 1Q20.

Ferrous Minerals EBITDA growth of $655 million was mainly due to: i) higher realized prices, reflecting the healthy demand coming from China

ii) higher iron ore fines sales volumes, following a quarter of stronger production volume iii) positive effect of the Brazilian real

devaluation iv) lower freight costs, which were partially offset by higher iron ore fines C1 cash costs.

The share of premium products in total sales was 83 percent in 2Q20, slightly lower than 1Q20 mainly due to higher share of Southern System products in total sales.

Iron ore fines and pellets quality premiums reached $ 7.5/t in 2Q20 against $5.2/t in 1Q20, mainly due to seasonal dividends received and higher premiums for low alumina products.

In the first six months of 2020, the impact of Covid-19 pandemic in Vale’s costs and expenses was $112 million, of which $85 million in expenses with initiatives to fight the pandemic, such as donations of rapid test kits and personal protection equipment to the Brazilian and state governments and support of hospitals and local health units, and $27 million in the increase of costs in operations Vale’s realized price CFR/FOB totaled $88.9/t, an increase of $5.1/t compared with 1Q20, mainly due to higher 62 percent Fe reference price, higher forward price curve and higher premiums for Vale’s low alumina products The quarter-on-quarter devaluation of 21 percent of the average Brazilian real improved iron ore fines cost by $1.7/t. Nevertheless, iron ore fines cost increased to $17.1/t in 2Q20 from $16.2/t in 1Q20, mainly due to: ♦ consumption of inventories with higher average production costs from 1Q20 ($ 1.1/t) ♦ higher volumes and prices of third-party purchase ♦ Covid-19 additional employee benefits and operational safety measures

Price realization iron ore fines - US$/t, 2Q20

Steel Insights, August 2020

47

CORPORATE

JSW realisation drops 12% on low prices, poor product mix Steel Insights Bureau

J

SW Steel reported a net loss of `561 crore for the quarter ended June 30 against a net profit of `1,028 crore in the corresponding quarter last year.

Consolidated total income of the company declined 40.29 percent on year to `11,914 crore during the quarter.

Operations were impacted during the Covid-19 hit quarter, due to scaling down or suspending production across all plants due to supply chain constraints and shortage of workforce.

“Lower costs of iron ore and other operating expenses partially offset the drag on margins caused by weaker operating leverage and lower realisations,” JSW Steel said in a regulatory filing.

The company has commenced operations and the average capacity utilisation in the month of May and June reached 80 percent.

Workforce remobilisation and constrained liquidity remain key challenges for the core sectors of the economy, even though there are signs of returning labor force driven by aspirations of higher income, the company said.

Production and sales

JSW’s crude steel production was 2.96 million tons (mt), with average capacity utilisation of 66 percent for the quarter as compared to an average utilisation of 46 percent for the Indian steel industry. Saleable steel sales for the quarter was 2.80 mt and export sales accounted for 53 percent of total sales volume.

While decline in India’s crude steel production was 41 percent on quarter, JSW’s production declined by 25 percent.

As the domestic demand was subdued, the company focused on the export markets to liquidate inventory and generate cash flows.

Quarterly sales highlights – consolidated

50 Steel Insights, August 2020

Domestic sales volume continued to improve in the months of May and June, signaling a gradual revival of economic activities within the country.

Realisation

Average realisation during the quarter was impacted by lower steel prices and adverse product and market mix. Lower costs of iron ore and other operating expenses partially offset the drag on margins caused by weaker operating leverage and lower realisations.

“Net sales realisation decreased by 12 percent QoQ, driven by lower steel prices, higher proportion of semis and exports,” JSW said in a presention.

As a result, operating EBITDA for the quarter was `1,429 crores and EBITDA margin stood at 13.9 percent.

Subsidiaries’ performance

JSW Steel Coated Products During the quarter, JSW Steel Coated Products registered a production volume of 0.30 mt and sales of 0.33 mt.

Revenue from operations and Operating EBITDA for the quarter stood at `2,049 crores and `28 crores resulting in loss of `31 crores for the quarter.

US Plate and Pipe Mill The US based facility produced 57,035 tons of plates and 4,175 tons of pipes, reporting

66 Steel Insights, August 2020

Tear along the dotted line

Tear along the dotted line