Steel Insights, December 2019

Contents 19 Imported scrap market remained silent

6 | COVER STORY

20 Pig iron production down y-o-y, up m-o-m in October

Cost + Efficiency: Need of the hour

21 October sponge iron production up 5% on year

Steel companies fight low demand with low cost, operational efficiency

22 Crude steel production down 3.4% y-o-y 23 Indian steel players’ margins expected to shrink further 24 Per capita stainless steel consumption in India at 2.5 kg: ISSDA

33 | FEATURE

28 Post festivities Motown back on slowdown mode

Iron ore mine auction to cause short-term disruption: Study

30 Seaborne coking coal offers down in November

Rating Agency Acuite expects 25-30 percent iron ore supply disruption

45 | TECHNOLOGY

31 Steel makers fear iron ore supply disruption once lease expires in March 33 Iron ore mine auction to cause short-term disruption: Study

Thyssenkrupp fires blast furnace with hydrogen

35 JSW supplies high-quality TMT rebars for Metro Rail

German steel maker targets climate-neutral steel production by 2050

36 Raters paint gloomy 2020 outlook for steel cos 38 SAIL embarks on cost control drive 39 Global crude steel output remain flat in October m-o-m 40 Traffic handled by major ports up marginally till October 41 Indian Railway’s iron ore handling down 2% on year in October 42 Vale sees 2020 iron ore output rising by up to 14% on dam repair 44 Corporate Update 49 Steel industry seeing green shoots: Sajjan Jindal 53 Price data 54 Production data

4 Steel Insights, December 2019

47 | EVENT

Steel ministry proposes integrated steel hubs Draft policy proposes hubs around plants and markets, minister tells ISA Conclave

50 | INTERVIEW

“Arjas plans `200 crore investment to improve ops, expand capacity” S Krishnamoorthy, MD, Arjas Steel talks about company’s big plans for R&D

Cover Story

Tamajit Pain

6 Steel Insights, December 2019

Cover Story

C

onventionally, the economic impact of an industry is measured by its contribution to GDP (Gross Domestic Product), i.e. gross value addition from the industry - the difference between the value of output and intermediate inputs.

Another important indicator is the number of people working in the industry. These indicators help to describe the direct impact.

But the true magnitude of the steel industry’s impact on society and the economy can’t be measured without taking into consideration the impact it has on its value chain from the perspective of both input suppliers and output customers. This is enormous when we consider how important steel is to so many industries.

The supply chain impact is called ‘indirect impact’. In the case of suppliers, it refers to the impact of the steel industry on the economy due to its purchases of inputs from not only raw materials but also manufactured goods, energy and services.

Downstream, a wide range of steel using sectors, such as construction, automotive, mechanical machinery, transport, energy and others depend on steel for their production activities.

The overall impact of the steel industry is $2.9 trillion worth of value added, and creation of 96 million jobs globally, according to a World Steel Association study.

Meanwhile, the steel industry is taking to optimise resource efficiency and advance sustainable consumption and production.

In 2017, 96.3 percent of all steel industry raw materials were converted into useful materials: 63.6 percent were converted into steel products and 32.7 percent into coproducts.

These co-products are used in the industry itself or in other sectors. For example, slag is used to produce cement, process gases are used in heating, etc. Process gases now have the potential to be converted into fuel for aircrafts or other transport means. These are just a few of the many applications of steel industry co-products, according to another study. Thus the steel industry is moving towards the goal of 100 percent resource efficiency.

As the industry continues to find ways to drive efficiency in energy use and product design, short and medium-term process efficiency gains will provide important benefits to tackle climate change.

Recently World Steel Association members have agreed to join a new industry wide drive named step up. This multistep process covering raw materials, energy input, yield and maintenance can bring a mill operation up to the same efficiency levels as the steel industry top performers.

A 4-stage efficiency review process has been devised, based on leading practice, for all mill operators to follow, covering the following areas: 1. Optimal raw materials selection and use

The quality of iron ore and coking coal has a direct impact on energy intensity and CO2 emissions. Measures, such as beneficiation of ore and coal at the source, switching to carbon-lean or hydrogen containing fuels, and increasing scrap use in the basic oxygen furnace are just a few of the measures that can significantly improve operational performance.

2. Energy efficiency and minimising waste

Energy efficiency is a crucial component of resource efficiency and there are several tested and proven improvement measures available: heat or energy recovery from solid and gas streams, coke dry-quenching, cogeneration units, electricity savings (aiming toward selfsufficiency), and many more.

3. Improving yield

Improving yield leads to increased output from the steelmaking processes. It is directly linked to a reduction in energy intensity and raw material use.

4. Process reliability

Improving a steelmaking plant’s maintenance ensures process reliability, which reduces losses in quality and process time, thereby reducing energy use per ton of steel.

India on low demand roadmap in short term

India’s steel demand is forecast by analysts to grow at a slower pace of 5-6 percent in the 2019-20 fiscal year ending 31 March compared with 7.5 percent growth in 2018-19.

Steel demand will slow down on account of weak auto and manufacturing order, but will remain strongest in Asia, Moody’s Investors Service said.

India will remain the world’s secondlargest steel producer behind China after having overtaken Japan in 2018, it added.

The country’s steel output will increase on higher capacity utilisation as demand grows. “India’s strong demand will keep imports high, but protectionist measures such as import taxes and anti-dumping duties will safeguard domestic steel producers,” it said.

The US tariffs will have a limited impact on rated producers’ sales. But the prolonged US-China trade disputes will have a spill-over impact through weaker macro conditions, the agency said.

Soft demand from the property and manufacturing sectors will limit Chinese steel demand growth. Korean demand will soften because of the sluggish construction and auto sectors. Demand will weaken in Japan largely driven by the falling needs from the manufacturing sector, it said.

Research firm Icra Research, projected steel demand to rise by 5 percent from a year earlier in 2019-20, while Mumbai-based equities brokerage CGS CIMB Securities projected an increase of 6 percent.

India’s steel demand growth was 3.9 percent during April-October this year at 59.05 million tons.

“Moderation in steel demand is largely attributable to a slowdown in demand from the automobile and construction sectors,” said Icra.

India’s monthly steel consumption during September fell by 3 percent from the previous year to 8.08 million tons. October increased marginally by 2 percent to 8.55 million tons.

An increase in steel demand will largely depend on the scale and pace of infrastructure and construction sector spending by the government for the remainder of 2019-20, Icra added.

Demand for long steel products could increase from November onwards because of post-monsoon construction and infrastructure activity, said Mumbai-based India Ratings & Research, a Fitch group company. But overall steel demand growth for the second half of 2019-20 may still remain lower on a year-on-year basis, it said.

Margins set to shrink

The steel industry’s net leverage and interest coverage are likely to deteriorate in FY20 due to compressed EBITDA margins, due to a

Steel Insights, December 2019

7

FEATURE

Iron ore mine auction to cause short-term disruptions: study Pellet production to offset likely pressure on ore prices Steel Insights Bureau

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round one fourth of the country’s iron ore production is likely to witness an impact in the first half of FY21 given the process initiated for fresh mining auctions and the transition of operations to new lessees, says rating agency Acuité.

“India’s steel sector particularly the sponge iron and secondary steel producers may face a short-term disruption in their iron ore supplies with the leases of 232 merchant iron ore mines due to expire by March 2020,” the rating agency said in a recent study.

Acuité expects impact can be to the tune of 25-30 percent of the aggregate domestic iron ore supply. “However, such an impact will be partly offset due to the increasing availability and supply of the ore substitute,

iron pellets to the domestic sponge and steel producers,” it added.

Acuité Ratings estimates that iron ore pellet production in India will reach 68-73 million tons in FY20 of which around 85 percent is likely to be available to domestic sponge and steel units.

Indian Government has initiated the process to auction 329 mines including 232 iron ore mines where the leases are set to expire in March 2020.

This is a part of its initiative to address the issue of lower mine productivity, lack of adequate investment for mine development along with the need to bring in higher transparency in mine allotment.

Of this, 208 mines are currently nonoperative and transfer of the leases can lead to fresh investment and development, thereby

enhancing domestic iron ore production significantly beyond the current levels of 220 mt.

Acuité believes expediting the auctions and the subsequent approval processes for mining operations to be undertaken by new lessees will be critical to avoid any longer term supply shortages in the steel sector.

Any tightening of ore prices in the currently moderate demand environment clearly may put further pressure on the margins of secondary steel players, which continue to have an overhang of debt, it says.

Pellet supply uptick

Acuité sees significant increase of iron pellet capacity witnessed in India along with steps taken by the government helping to offset ore supply risks in the steel sector. The domestic

Steel Insights, December 2019

33

FEATURE

Raters paint gloomy 2020 outlook for steel cos Steel Insights Bureau

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ear 2020 would continue to be a difficult year for Indian steel makers for country-specific factors like “weak auto and manufacturing demand” while for Asia as a whole the outlook would also be negative reflecting weakening profitability for rated steelmakers amid softening demand, declining steel prices, and elevated iron ore prices, Moody’s Investors Service says its 2020 outlook for the Asian steel sector.

“India’s strong demand will keep imports high, but protectionist measures such as import taxes and anti-dumping duties will safeguard domestic steel producers,” it said.

India’s steel demand growth dropped to 3.9 percent in seven months of FY20 against much higher growth rates of 7.5 percent and 7.9 percent achieved in FY2019 and FY2018 respectively.

While the domestic steel consumption growth during Q1FY20 stood at 6.9 percent, the growth rate during July-October 2019 eased to 2.6 percent, with the consumption reporting a Y-o-Y contraction of 4 percent in September 2019.

“Across the region, soft demand from the property and manufacturing sectors will limit Chinese steel demand growth.

Over in Korea, demand will soften because of sluggish construction and auto sectors, while the falling needs of the manufacturing sector will be the main driver behind Japan’s softening steel demand. Similarly, demand will slow in India because of weak auto and manufacturing demand,” the report says.

Domestic Benchmark Hot Rolled Coil prices were down by `3,981/ ton in Q2 on a q-o-q basis. Q3 average prices are down by `2,584/t against Q2 average. The Q2 prices of TMT bars were down `4,586/t on q-o-q basis, with the Q3 averge down by `2,795/t against previous quarter.

Global scenario

China’s steel production growth moderated to 5.5 percent in Q3 of 2019 after growing

36 Steel Insights, December 2019

at the rate of 9.5 percent and 10.8 percent in Q1 and Q2 respectively, and the production growth in October 2019 remained in the negative territory. This was mainly on account of slowing Chinese economic growth with GDP growth falling to 6 percent in Q3 CY2019, the lowest in last 27 years.

Consequently, global steel production growth too softened to 3.2 percent in 10 months of 2019 from 4.6 percent in seven months of 2019 but remained higher than the growth rates reported by India, EU and the US during the same period. While the domestic demand in China, especially from the real estate sector, has remained healthy till 10 months of 2019, reducing growth in fixed asset investments and weak auto sales remain the key headwinds for its steel sector.

In addition to slowing demand, China’s production restrictions during winter months of November-March are likely to exert pressure on its overall production growth, which in turn would keep world steel production growth under check in the near-term. While China’s steel exports continued to shrink during 10M CY2019 (5.8 percent de-growth), expected easing in trade tensions between China and the US and recent recovery in international steel prices could result in a near-term spurt in China’s export volumes.

Rating agency ICRA believes that the global steel production growth in 2020 would take a cue from the World Steel Association’s forecast of 1 percent demand growth in China (2 percent forecast for 2019 adjusting for underreporting from illegal capacities).

Further downslide

Asian steel producers, particularly those being rated by Moody’s are coming out of a challenging 2019, with profitability – as measured by EBITDA per ton – down around 25 percent over the year.

“We expect the subdued operating environment will lead to another 5 percent drop in 2020,” says Kaustubh Chaubal, Moody’s Vice President and Senior Credit Officer.

Moody’s official added that with improved capital structures, the steelmakers are better placed this time around to weather weaker profitability.

“Fortunately, this follows strong growth in 2017-18, and at the current rate we expect profitability to return to levels seen during 2015-16,” adds Chaubal. Moody’s expects US tariffs to have a limited impact on rated producers’ sales, but the prolonged US-China trade disputes will have spillover effects through weaker macro conditions.

Industry outlooks reflect Moody’s view of fundamental business conditions for an industry over the next 12-18 months. Since outlooks represent Moody’s forward-looking view on business conditions that factor into its ratings, a negative (positive) outlook suggests that negative (positive) rating actions are more likely on average.

While the industry outlook is negative, reflecting the likely weakening in profitability, five out of the eight rated steel producers carry stable or positive rating outlooks, indicating that they are well-placed to manage the challenging operating environment.

“We expect Q3 topline numbers for ferrous companies be lower sequentially.

Winter production cuts in China and demand pick-up in Q4 should consequently help improve the pricing scenario in Q4.

Although raw material costs, especially of coking coal, have been trending down in the near term, the benefit of which will unlikely offset the selling price drop in Q3. Average coking coal prices in Q3 are lower by $30/t (`1854/t) against Q2 and have stabilized to sub-$150 levels,” brokerage house Emkay Global said in its report.

Drop in coking coal prices to provide relief

Price of premium hard coking coal, which represent 40-45 percent of the steelmaking cost for blast furnace operators, have declined sharply in the current fiscal, with average prices in FY2020 (April – November) ranging at around $178/ton (fob Australia basis) against $202/t in FY20.

Prices in October and November 2019 in fact were trading at $135–150/t (fob Australia basis), much lower than the long period average of $170/t. This decline in coking coal cost is expected to partly mitigate the impact of sliding margins for domestic blast furnace operators in Q3 FY20.

TECHNOLOGY

Thyssenkrupp fires blast furnace with hydrogen

NRW economics and digital minister Andreas Pinkwart hands funding approval to thyssenkrupp Steel, Air Liquide and BFI

Steel Insights Bureau

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erman steel maker Thyssenkrupp has been able to power one of its blast furnaces entirely with Hydrogen replacing coal.

“The Duisburg-based steel producer has launched a series of tests into the use of hydrogen in a working blast furnace. They are the first tests of their kind and are aimed at reducing significantly the CO2 emissions arising during steelmaking,” Thyssenkrupp has said.

This, the company said, marks a milestone in the transformation towards climate-neutral steel production by 2050.

30 percent emission cut by 2030

By 2030 emissions from the company’s production and processes as well as emissions from the purchase of energy are to be reduced by 30 percent.

“We’ve set ourselves a clear goal with our climate strategy,” said Klaus Keysberg, member of the Executive Board of thyssenkrupp AG responsible for the group’s materials businesses.

“Steel production will play an important part in reaching our climate targets because the potential for reducing emissions is huge.

That’s why we’re working flat out to drive the transition to hydrogen technology,” he said.

Water vapor instead of CO2

In the classic blast furnace process around 300 kilograms of coke and 200 kilograms of pulverized coal are needed to produce a ton of pig iron.

The coal is injected as an additional reducing agent into the bottom of the blast furnace shaft through 28 so-called tuyeres.

At the start of the tests today hydrogen was injected through one of these tuyeres into blast furnace 9.

It marks the start of a series of tests in which thyssenkrupp Steel plans to gradually extend the use of hydrogen to all 28 tuyeres on blast furnace 9 and then, from 2022, to all three further blast furnaces.

The advantage is that whereas injecting coal produces CO2 emissions, using hydrogen generates water vapor.

CO2 savings of up to 20 percent are therefore already possible at this point in the production process, the company claimed.

“Use of hydrogen is the key lever for climate-neutral steel production. Today’s test is another step in the transformation of our production which will culminate in green steel. At the same time, we see what is possible when business and government work together towards a common goal. We are very grateful to the state of North RhineWestphalia for supporting the project,” Premal Desai, Chairman of thyssenkrupp Steel Europe said.

Steel Insights, December 2019

45

EVENT

Steel Ministry proposes integrated steel hubs

Steel Insights Bureau

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he Ministry of Steel has proposed setting up integrated steel hubs similar to the ones in Korea, China and Germany. The hubs would support the growth of the steel sector.

According to a Draft Framework PolicyDevelopment of Steel Clusters in India, “The Ministry is proposing creation of ‘Integrated Steel Hubs’ based on the principle of availability of raw material, logistics support and/or proximity to demand centres. It will enable capacity expansion through provision of a cohesive ecosystem, with presence of effective forward and backward linkages, single-window mechanism for swift approval of clearances and best-in-class logistics infrastructure.” The draft, uploaded on the Steel Ministry’s Website on Tuesday, has sought comments on the proposed policy.

“A cluster will be a defined region

with co-located units across the steel value chain along with the provision of basic infrastructure facilities and other relevant value-added services. The clusters will primarily include units from secondary steel sector and ancillary industry,” the draft said.

The policy’s focus will be on two types of clusters, one around the Integrated Steel Plants (ISPs) and the other near the demand centres. The cluster around ISPs will be called ancillary and downstream cluster. It will primarily have a steel plant as its anchor plant, with focus on ancillary units and may also entail downstream units. It will help create an integrated ecosystem for the industry with enhanced linkage for both the ISPs as well as the tenant units.

In addition, it will facilitate growth of small and medium enterprise units. On the other hand, ‘value-added steel clusters’ are likely be set up near demand centres. It will enable capacity expansion of units producing

carbon steel, alloy (including stainless steel) as well as other high grade and special steel by improving their cost competitiveness through effective raw material linkages and other interventions such as reduced cost of power.

The Ministry of Steel can provide the initial push needed to develop these clusters.

A task force and a working group for setting up the clusters will also be formed.

The working group will define the metrics against which a Special Purpose Vehicle will implement the project. The Ministry of Steel will also monitor the SPV on a semiannual basis, post set-up of the cluster. A representative of the Ministry of Steel would be a part of the Board of the SPV, the policy said.

Meanwhile, Minister of Steel, Petroleum and Natural Gas, Dharmendra Pradhan said, Steel industry should focus on setting up common carrier facilities for steel projects.

Steel Insights, December 2019

47

INTERVIEW

Arjas plans `200 crore investment to improve ops, expand capacity

A The automotive steel sector is undergoing a lot of hardships because of the economic downturn. How do you see automotive sector demand in the next 1-2 years?

The long-term trend for automotive demand in India has been and will be positive. If we keep that in mind the fact that India has quite some potential left for growth in infrastructure, energy, commercial logistics and of course consumer spending, automotive demand should be good in the next 1-2 years.

It is true that starting end of Quarter 1 and through Quarter 2 of FY20, automotive demand has dipped significantly.

Commercial vehicles, passenger cars, two-wheelers, tractors, and construction equipment are down 15 percent to 40

50 Steel Insights, December 2019

n integrated special steel producer, Arjas Steel, formerly known as Gerdau Steel India Private Limited completed 1 year after Private equity firm, ADV Partners, acquired Arjas Steel from the Brazilian entity, Gerdau Steel for about $120 million. Arjas Steel is in the mode of production capacity expansion and planning to set up its own R&D centre to better customise its products to suit the market requirements. Being the only large steel plant in Andhra Pradesh in private sector, Arjas has big plans to develop and shape up the state economy. In a freewheeling interview to Tamajit Pain of Steel Insights, Sridhar Krishnamoorthy, Managing Director, Arjas Steel shares the industries challenges and prospects and how the company is helping local economy by providing livelihood.

percent in their monthly sales volume (yearon-year).

The slowdown has come about from a variety of factors most notably buildup in inventory of vehicles, financing of vehicle purchases as well as concerns in consumer minds on the economy and job security.

Now in the month of November we are seeing a modest pick-up in demand, partly caused by lower inventories in the supply chain. Many OEMs had reduced production in the July-Oct period.

India is expected to emerge as the world’s third-largest passenger-vehicle market by 2021. The Indian passenger car market is anticipated to register a CAGR of 9.5 percent during the period 20192024.

Therefore, the Indian automotive component industry is expected to witness healthy growth during the forecast period, owing to increasing domestic demand, rising exports, and the increasing flow of investments in the automotive components

62 Steel Insights, December 2019

Tear along the dotted line

Tear along the dotted line