Steel Insights, July 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 Reader, “…It was the season of light, it was the season of darkness; it was the spring of hope, it was the winter of despair.”

– A Tale of Two Cities These immortal lines capture the state of the steel industry today. The headwinds have been, unfortunately, far strong than the tailwinds. Be it consistent economic downturn since 2019 or Corona virus outbreak and the subsequent lockdown in India, these have adversely impacted the sector.

While the global demand for steel is expected to fall 6.4 percent due to the pandemic, India is staring at a fall of 18 percent in 2020, according to Worldsteel.

As the industrial operations as well as construction came to a halt due to lockdown, and migration of labourers remained slow, recovery of demand is likely to remain subdued. This slow demand recovery coupled with supply chain disruptions will hit the steel-using industries like the automotive and machinery sectors.

And in these challenging times, small and mid-sized steel players have been hit the most. Be it tight liquidity due to delays in the receipt of receivables or payment of fixed charges towards labour or electricity, this segment has faced the worst of both worlds. …But amid this winter of despair this year, 2021 brings in the spring of hope. The domestic is likely to rebound by 15 percent next year.

Even in 2020, there is a silverlining. The domestic steel industry has benefited from increase in exports. The government’s support to rural income and infrastructure, as well as expected rise in consumption in the upcoming festive season may help in recovery of demand for consumptiondriven manufacturing goods in the second half of the year.

So dear Reader, this edition examines the initiatives undertaken by the Ministry of Steel to promote usage of steel within India in this period of crisis. In a recently organized webinar in which Steel Insights participated, Union Minister of Steel Mr. Dharmendra Pradhan nudged the steel sector to contribute towards the growth of oil and gas sector.

And then, oil and gas sector, a major end-user of steel, is undergoing tremendous growth, in the forms of refineries, pipelines, gas terminals, storage capacity and even gas cylinders, all requiring steel for manufacturing.

And finally, we have analyzed for you domestic iron ore sector. This segment is in the midst of a major shift post mine auctions in Odisha as well as due to major changes in the country’s mining sector that will redraw the supply-demand dynamics.

Talking of mining sector, let me conclude with a thought on McKinsey’s 5Rs. The players in this sector should consider acting across 5 stages, leading from the crisis of today to the next normal that will emerge after the battle against the virus is won – Resolve, Resilience, Return, Reimagination and Reform.

Happy reading and please 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, July 2020

3

Contents 14 Imported scrap offers to India remain firm 15 Pig iron production down on year, up on month in May 16 May sponge iron output down 55% on year 17 May crude production down 39% on year 18 May steel imports value down 3% at $693 million 19 Oversupply to drive price correction in 2QFY21 20 Implied steel output loss seen at 14% in FY21: Analyst’s report 31 Seaborne coking coal offers remain rangebound in June 32 Government update 34 Traffic handled by major ports down 22% till April-May 35 Railways’ iron-ore handling down 10% in FY20 36 Global crude steel output up 9% in May on month 40 SAIL records highest ever June sales, monthly exports 42 NMDC sees sharp profit fall in March quarter, production 43 JSPL Oman stake sale to help deleverage business 44 ArcelorMittal Nippon Steel to invest `5,000 crore to expand Hazira plant 45 JSW set to fight Covid downturn with healthy margins 47 Graphite India sees demand in China rising 49 Corporate Update 50 Import export data 54 Price data 55 Ferro-alloy data 56 Production data 58 Consumption data

4 Steel Insights, July 2020

6 | COVER STORY

Iron Ore: A new paradigm From abundance to scarcity: steel makers are staring at a new normal.

22 | FEATURE

June sales promise hint of revival of Motown Amidst subdued demand, Q1 was marked by transition to BSVI.

24 | FEATURE

Coal blocks auction: Steel makers set to benefit Companies that rely on imports for coal would get supply assurance.

29 | FEATURE

Government nudges steel sector to raise usage, replace imports Atmanirbhar initiatives organised across sectors like construction, oil and gas.

37 | CORPORATE

Tata Steel to revisit capex plans in second half Upstream operations ramped up to 80% utilisation levels.

Cover Story

IRON ORE

A new paradigm Sumit Maitra & Tamajit Pain

6 Steel Insights, July 2020

Cover Story

I

ron ore sector is in the midst of a major shift post mine auctions in Odisha held earlier this year in January.

This was a landmark event as Odisha is the largest producer of iron ore followed

by Chhattisgarh, Karnataka, Jharkhand and Goa, which mostly exports its produce.

There were record bids for 21 merchant blocks offered for online auctions.

Steel producers like JSW Steel won four iron ore mines, ArcelorMittal won the Thakurani mine, with a premium of 107 percent. JSPL bagged the Guali mine after committing a premium of 144 percent.Most of the mines were won by steel producers leaving some mines for merchant miners.

Apart from the auction in January, demand for iron ore coming from the steel industry got impacted because of the pandemic. Then there is the recent rise in exports of low grade iron ore to China since the high grade ore from Brazil has turned expensive because of supply concerns, delegate present at the webinar, titled ‘Mine auctions – will it re-draw iron ore supply dynamics?’ organised by Steel Insights, said.

There is also offering of iron ore by Steel Authority of India which is influencing the market.

Aggressive bidding to harm merchant miners

The aggressive bidding that was witnessed in the iron ore auctions would put merchant

miners in a disadvantageous position compared with the integrated steel makers due to the blending that they use leading to relatively lower rise in their costs post auctioning, said Mohit Ratolikar Vice President -Marketing (Domestic & Exports) Essel Mining & Industries Ltd. Since 2015 about 43 iron ore mines have been auctioned off of which 22 are in Odisha having a reserve of 2330 million tons.

“This is a tectonic shift in the industry because of such big auction,” Ratolikar said.

There has been aggressive bidding and good response to the auctions with premium for the Odisha mines fluctuating in the range of 154 percent at the highest and 44 percent at the lowest he said.

Citing the results of the auction conducted in Karnataka, Ratolikar said post auction the integrated steel makers, who had own 12 bids worth 236 million tons of reserves would benefit more compared with the pellet makers who got 5 mines having 89 mt and the merchant miners who got just one mine with a reserve of 9 mt.

Despite the integrated steel makers putting in bid premium of 86 percent during the auction of Karnataka mines, the cost impact for them would be just 5-7 percent while for pellet players, the impact would be a high 25-30 percent putting in 122 percent premium.

Merchant miners, who had own just 1 mine put in bids at 40 percent premium but

“Price dynamics because of cost pressure and market scenarios particularly the premium that the bidders have played during the auction would be very crucial for different players – captive mine owners, the merchant miners, the MDOs – having different agendas of their platter. This will turn the sector very challenging going ahead.”

Mohit Ratolikar VP – Marketing, Essel Mining

Premium % trend in recent iron ore and mn auctions at Odisha (2019)

their cost impact would be in the range 1719 percent, he said citing a Crisil research findings.

High bidding at Karnataka auction sets precedent for Odisha

♦♦ Of the mines auctioned in Karnataka, JSW Steel won half. ♦♦ The weighted average bid premium for the 18 auctioned mines was 93 percent with bids ranging from 37 percent to as high as 130 percent. ♦♦ The average bid premium was the highest for pellet makers. This would

Steel Insights, July 2020

7

FEATURE

Implied steel output loss seen at 14% in FY21: Analyst’s report Margin squeeze likely only - industry data excludes semis - billets/ blooms) over April-June.

Steel Insights Bureau

I

ndia’s finished steel production loss stood at 53 percent till June (from 26.5 to 12.5 million tons), implying a full year loss of around 14 percent on last year base, research house JM Financial has said in its Metals and Mining sector report.

There was 12 percent loss for steel majors and 15 percent loss for secondary producers.

Consumption registered 57 percent decline over the same period, though up marginally on month from 4.5 mt in May to 5.1 mt in June.

India continued to be a net exporter of steel with exports of 3.3 mt (finished steel

Exports to get squeezed

Export prices of HRC continue to range at `2.5k+/ton discount to domestic prices.

Quality of exports remain inclined towards low value add billets/blooms/HRC. Avenues to export to come under pressure going forward as: 1) China steel demand is likely to wane due to seasonal rains/floods, slowing construction activity 2) EU modifies steel safeguard measures to country specific quarterly quotas as

India finished steel production and consumption Particulars (’000 tons)

June 2020

MoM (%)

Y0Y (%)

1QFY21

QoQ (%)

YoY (%)

5.889

16%

-33%

12,544

-51%

-53%

Import

265

-51%

-58%

1,211

-3%

-33%

Export

1,552

21%

335%

3,266

78%

145%

Production

Change in Inventory

487

Apparent steel consumption

5,089

13%

-41%

10,694

-57%

-57%

Finished steel inventory

13,482

-3%

-11%

13482

2%

-11 %

India finished steel production by key players Particulars (’000 tons)

June 2020

MoM (%)

Y0Y (%)

1QFY21

QoQ (%)

YoY (%)

621

24%

-39%

1,435

-57%

-53%

1,017

9%

-38%

2,395

-30%

47%

104

112%

-70%

214

-77%

-80%

JSW Steel + JSPL + Essar Steel

2,088

15%

-7%

4,518

-32%

-34%

Others

2,058

15%

-43%

3,982

-65%

-64%

SAIL Tata Steel RINL

Source: JPC, JM Financial

20 Steel Insights, July 2020

“Steel majors are eyeing a `500-750/t hike in prices for the month of July on a low base (7 month low), counting on a marginal recovery in domestic demand.” countries exhausted full year quotas in first few months.

India exported over 2 mt in 2019 to EU; Russia, Turkey, South Korea are other key exporters to EU which will likely re-direct material to other importing nations.

Domestic steel demand recovered marginally in June with domestic sales mix increasing to 50 percent from 40 percent in May with the recovery in rural markets like tractors, motorcycles and roofing sheets.

Domestic inventory levels in the industry increased marginally from 13.2 mt in March to 13.5 mt in June.

Margins to be under pressure

Gross margins are likely to face a squeeze sequentially as lower blended realisations (export price down `4.5k+/t on quarter) is unlikely to be offset significantly by lower NMDC iron ore prices with its average prices down by `740k/t).

Benefits of lower coking coal with average prices down $35/t on quarter, is likely to kick-in only by second quarter.

“Steel majors are eyeing a `500-750/t hike in prices for the month of July on a low base (7 month low), counting on a marginal recovery in domestic demand,” the report said.

Domestic demand recovery remains the key to sustainable profitability for steel majors and continues to hinge on pick-up in construction/automotive sectors.

FEATURE

Coal blocks auction: Steel makers set to benefit Sumit Maitra

S

teel companies that rely on imports to meet their coal requirements stands to benefit from the auction of commercial mines. Of the total 41 mines being offered, 37 are non-coking, two are coking while two are combo mines i.e. coking plus non-coking mines are put up for sale.

Aluminium, steel, cement and power companies have been buying coal at a premium in auctions. Aluminium industry stands to benefit from the joint auction of

bauxite and coal blocks and it will help in bringing down electricity cost of aluminium smelters.

“However, the planned commitment to build evacuation infrastructure will take some time to build. The material impact of the reforms in terms of import substitution, state revenue generation and employment generation can be observed in 1 to 1.5 years’ time. Having said that, the Schedule 2 mines should be productive at an earlier timeline,” Saurabh Bhatnagar, Partner and National Leader, Metals & Mining, EY India said.

Key technical features of bidding process ♦♦ ♦♦ ♦♦ ♦♦ ♦♦ ♦♦ ♦♦ ♦♦ ♦♦

Migration to percentage revenue share from rupee per ton No technical and financial eligibility criteria Minimum number of bidders require in the first attempt reduced to 2 from earlier 3 Floor price is 4% of revenue share Bids in multiples of 0.5% of revenue till it reaches 10% and thereafter in multiples of 0.25% No affiliate of bidder allowed to bid for the same mine If there are 2/3 Technically Qualified Bidders, all shall be qualified If there are 4/6 TQB, lowest ranker shall be eliminated No TQB shall be eliminated if number of qualified bidders after elimination is less than 3

Key favourable features for bidders ♦♦ Bidding terms allow unified regime – along with coal, minerals such as CBM and minor minerals can be extracted ♦♦ Coal ministry to share responsibility of getting statutory approvals. Agency hired to liaise with states/regulatory authorities ♦♦ Greater flexibility in coal production schedule: at least 65% of scheduled production every year and 75% in a block of 3 years ♦♦ Incentive for early coal production and utilisation of coal in gasification and liquefaction: 50% rebate in revenue share for early production ♦♦ Relaxed payment structure ♦♦ Reduced financial burdens and liberal financial terms ♦♦ 20% upfront amount, bidders can mortgage mines ♦♦ Upfront amount is 0.25% of value of estimated geological but capped at `500 crore

24 Steel Insights, July 2020

“Atmanirbhar Bharat means India doesn’t need to import coal and can use that money to spend on social welfare.

Whatever we import now, we would be exporting them.”

Prime Minister Narendra Modi Apart from the auction, Prime Minister’s announcement to gasify 100 million tons of coal by 2030 will be a big boost to coal gasification in India and fulfill vision of ‘Atmanirbhar Bharat’ using clean coal technology, Naveen Jindal said.

JSPL had built country’s first coal gasification plant and the first in the world to produce direct reduced iron (DRI) using domestic coal.

Aim to reduce imports

The auctioning is part of the series of announcements made under the Atmanirbhar Bharat initiative with an aim that India is expected to save around `30,000 crore annually on import bill of thermal coal once commercial mining from these mines pick up.

“Atmanirbhar Bharat means India doesn’t need to import coal and can use that money to spend on social welfare. Whatever we import now, we would be exporting them. We will take each and every product and service and work holistically to make India self-reliant on every such sector,” the Prime Minister Narendra Modi said during the event.

“We are also taking coal sector out of the impact of the lockdown as well. A country which is part of the largest producers of coal with fourth largest coal reserve should be the largest exporter as well,” he added.

FEATURE

Government nudges steel sector to raise usage, replace imports Sumit Maitra

D

emand from the oil and gas sector including in upstream exploration, extraction, refining and transportation through pipeline would trigger significant demand for domestic steel in coming years, said top management of steel state-owned public sector enterprises who attended a steel ministry’s webinar under the Atmanirbhar initiative.

Oil and gas sector, which flows through pipelines, is a major end user of steel and the sector is undergoing tremendous growth, in the forms of refineries, pipelines, gas terminals, storage capacity and even gas cylinders, all requiring steel to manufacture, Minister of Petroleum and Natural Gas & Steel, Dharmendra Pradhan said.

Expansion of city gas distribution network will cover 70 percent of nation’s

population while there would be 10,000 CNG stations.

Also, refining and exploration activities all will drive steel demand in the sector, he added.

Steel in pipelines

GAIL is laying around 9,000 kilometers of natural gas pipelines with an investment of `40,000 crore which will require 14 lakh tons of steel.

Out of this 8 lakh tons was procured in last 2 years while the balance 6 lakh tons would be bought next 3 years for completion of the Urja Ganga pipeline.

“We are looking at entire domestic manufacturing for this helping the Atmanirbhar Bharat initiative,” Manoj Jain, chairman and managing director of GAIL, said.

GAIL is constantly engaged with various

manufacturers are pipe makers’ associations for better synergy and better realisations of the goals under the Atmanirbhar Bharat initiative, Jain said.

Supplier or large diameter steel pipes of over 24 inches in India have gone up manifolds and Gail is sourcing from them.

GAIL CMD also highlighted some challenges including meeting cashflow requirement of steel pipe makers, logistics cost and capacities, fast-tracking qualification requirements, third party quality inspections.

According to a senior official of Engineers India Ltd, the refining sector would require 15 million tons of steel while the petrochemical sector would need another 4 million tons in the next 15 years.

Need to produce more API-grade pipes

The country need to produce higher API (American Petroleum Institute) grade steel to cater to the need of the oil and gas’ upstream and midstream sectors including pipelines.

For this the country need to emulate the success of the collaboration achieved between the primary steel makers and the user industry in the case of the automobile sector which has achieved 90 percent level of indigenisation, said several industry captains who attended the meeting.

While the auto sector is now sourcing most of its steel within the country, the oil and gas sector, which requires 1.2 lakh tons of steel of various grades, imports 45 percent of the requirement, said a senior official of L&T’s Hydrocarbon division.

The imports are more in the offshore oil sector at 60 percent where there is more requirement of ‘high chemistry’ steel, the L&T official said.

Lack of scale, uneven quality in the secondary sector, high logistics costs are some of the key challenges, several top sector officials said.

Some progress in manufacturing higher API grade steel is being undertaken in the country.

According to Jain, API 5L grade which was earlier being imported to the full extent is largely being sourced from within

Steel Insights, July 2020

29

Corporate

Tata Steel to revisit capex plans in second half Capacity utilization touches 80% Steel Insights Bureau

G

iven the uncertain business environment, Tata Steel’s capex is being curtailed sharply and restricted to safety and sustenance projects and the group would revisited capex plans in H2 or when business conditions normalize,” the company has said.

“With the phased removal of the lockdown restrictions in India, our upstream steel making operations have been ramped up and are currently operating at about 80

percent utilisation levels. Our downstream units have reopened and are steadily ramping up,” Tata Steel said in the release post declaration of its earnings details for FY20.

Tata Steel sees early signs of a recovery in steel demand on the back of increased spending on infrastructure projects as well as rural demand. “While there will be a sharp drop in volumes in 1QFY21, we are seeing early signs of recovery and remain poised to leverage our position on normalization of business conditions,” T V Narendran, CEO & Managing Director, Tata Steel said.

“With the phased removal of the lockdown restrictions in India, our upstream steel making operations have been ramped up and are currently operating at about 80 percent utilisation levels. Our downstream units have reopened and are steadily ramping up.”

Tata Steel Business Environment

Note: Growth of key steel consuming sector in India is calculated by removing sub-segments which do not consume steel Source: Tata Steel

With the Covid outbreak disrupting economic activities and global trade while weighing on consumer sentiment, global steel demand is expected to be sharply lower in 2020 before a meaningful recovery in 2021.

Steel demand was affected as key steel consuming sectors struggled to operate amidst weakening economic activities, working capital constraints, shortage of manpower and logistical issues.

In Europe, the outbreak of Covid-19 has further accentuated the sustained weak steel demand. Share of steel imports to total consumption in EU continues to remain at elevated levels which is a cause of concern.

After witnessing a decline in steel demand growth in 2019, EU expects a steel demand recovery only in 2021.

In Europe, Tata Steel Europe continues to operate at about 70 percent utilisation level. Key steel consuming sectors such

Steel Insights, July 2020

37

62 Steel Insights, July 2020

Tear along the dotted line

Tear along the dotted line