Steel Insights, March 2016

Contents 21 Infra spend may not boost steel demand: Fitch 22 Infra not to do well in FY17: India Ratings 23 India’s FY16 engineering exports may decline 15% 24 Lack of steel demand can negate MIP impact 28 Coking coal offers marginally up in February 29 2-wheekers outpace 4-wheelers in Feb 30 Real estate market sees some rebound 32 Ferro alloy offers volatile in uncertain market 33 Green energy cess makes Chhattisgarh sponge iron industry see red 41 Mechel starts 100-meter rail supplies to Russian railways 42 Severstal orders ladle furnace from Primetals 43 India to grow at 7-7.75% in 2016-17: Economic Survey 44 Rail budget positive for steel sector: ISA 45 Budget’s infra focus may lead to increased steel demand 47 Infra focus, housing sops to benefit cement cos: CRISIL 48 Iron ore handling by major ports fall 32.47% in Apr-Jan 49 Railways’ January iron ore handling up 9.78% m-o-m 50 Global crude steel output marginally up in Jan m-o-m 51 Global steelmakers see some light 53 Domestic steel prices rise on import fall hopes

6 | COVER STORY Tripping on MIP

MIP makes steel mills happy, downstream mills unhappy but demand key to market recovery.

26 | FEATURE

Govt proposes iron ore export duty cut Govt has proposed to remove export duty on low grade iron ore fines and lumps.

34 | FEATURE

Govt examining steel bailout demand

35 | INTERVIEW

Steel Min working with banks, top policy advisors to consider feasibility of bailout package.

‘IEEMA cautiously optimistic about 2016’ Industry expects larger infrastructure spend that need electrical equipment.

37 | INTERVIEW

Safety is first priority in gas transportation In gas and cylinder transportation space, safety and quality tackle half of the logistics issues Publisher’s Statement

Statement about ownership and other particulars about Steel Insights required to be published under Rule 8 of the Registration of Newspapers (Central) Rule, 1956.

FORM IV (See Rule 8) 5. Editor’s Name : Rakesh Dubey 1. Place of publication : Kolkata Whether citizen of India : Yes 2. Periodicity of publication : Monthly Address : Tata Centre, 43 J L Nehru Road 3. Printer’s Name : CDC Printers Kolkata 700071 Whether citizen of India : Yes 6. Names and addresses of : mjunction services ltd 4. Publisher’s Name : Rajarshi Chattopadhyay individuals who own the Tata Centre, 43 J L Nehru Road Whether citizen of India : Yes newspaper and partners or Kolkata 700071 Address : Tata Centre, 43 J L Nehru Road shareholders holding more Kolkata 700071 than one per cent of the total capital I, Rajarshi Chattopadhyay, hereby declare that the particulars given above are true to the best of my knowledge and belief.

Sd/ Rajarshi Chattopadhyay Dated: March 2016 Publisher

4 Steel Insights, March 2016

Cover Story

Tripping on MIP

T

he recently announced and much-awaited minimum import price (MIP) on certain categories of steel has stirred up a hornet’s nest.

Major manufacturers of the commodity are a happy lot and have already effected price increases though demand is certainly nothing to write home about. But you can’t please everybody. Downstream producers, exporters, sponge iron makers and several other players in the MSME space are miffed. Madhumita Mookerji & Tamajit Pain of Steel Insights attempt to map the ire over MIP.

6 Steel Insights, March 2016

Cover Story

M

arket rumours in February turned out to be true as the Indian government finally announced imposition of the minimum import price (MIP), giving relief to India steel producers against the onslaught of cheap imports, albeit for a period of 6 months.

The MIP, however, was exempted for imports under the Advance Authorisation Scheme and API grade steel conforming to 52 and higher grades. The notification also gives exemption to import shipments for which letters of credit (LCs) have already been opened.

The MIP ranged between US$341US$362 on semi-finished steel, US$445500 on hot rolled products, US$560 for cold rolled products and up to US$752 on some coated or treated products.

Needless to say, the move came as a big relief for Indian steel-makers whose profits have been hammered badly in the last 1012 months while domestic demand growth for the commodity has remained negligible.

Surplus domestic capacity amidst the cheap imports brought down the steel mills’ realisation below their costs.

Sources said the MIP would help Indian steel mills arrest the continuous slide in their realisations.

But is everything hunky-dory? The market sentiment has improved in the short term, arresting the consistent slide in the prices of flat products in the process. The final long-term impact would, however, depend primarily on the domestic demandsupply conditions as more capacities are likely to be added in the coming months, creating further glut in the material.

The Indian secondary sector-led long products market dynamics are primarily governed by demand and domestic supply and not imports, barring small volumes for some items like wire rods. Prices of long products also showed an upward movement riding the positive sentiments following the MIP announcement.

Earlier, in September 2015, the government had imposed a safeguard duty on a few hot rolled products, a move which failed to provide the desired relief.

A combination of further fall in prices and workaround by importers by making minor modifications to the product specifications were the cause. This time around, given its larger scope, India Ratings (Ind-Ra) believes

that the action would be more effective in providing relief to the steel industry.

By now, it is common knowledge that a combination of lower domestic demand and increasing supply in China have resulted in the dumping of the excess production from the dragon country in the international market. Chinese export prices for the benchmark HRC have fallen by more than 40 percent in CY2015. Consequently, the intense competition in India from imports led to a collapse in domestic prices in India.

This resulted in a significant erosion in profitability for corporates in the Indian steel sector during Q3FY16.

The Directorate General of Foreign Trade (DGFT), in a notification No 38/2015-20, dated February 5, amended the import policy conditions for 173 HS codes under Chapter 72, saying that now imports would be subject to the MIP on CIF basis per ton in US$.

While the Indian steel-makers had initially proposed linking of the MIP with an index to collect the difference with the

former while clearing imported steel, latest reports outline that the MIP would be used only to collect import duties, thus limiting the pains for the user industry.

Steel prices edge up 4% post-MIP

Soon after the MIP imposition, India Ratings and Research (Ind-Ra), said the restrictions on imports of steel products below a prescribed price will give steel companies the scope to increase hot rolled coil (HRC) and cold rolled coil prices by around US$ 50/ton, while prices for products under the safeguard duty may rise

by US$ 60/ton and for some steel products the impact may be much more.

Indeed, the MIP came as an advantageous tool for the domestic steel companies who had been selling products at distressed prices owing to cheap imports that flooded the market and domestic primary steel producers such as JSW Steel, Essar Steel and Jindal Steel & Power raised product prices by up to 4 percent effective February 8, as per information available with Steel Insights.

Amended import policy conditions for 173 HS codes Count

4 Digit HS Code

1 to 15

15

7207

Semi-Finished Products of Iron or Non Alloy Steel

Ingots/Billets - 362 Blooms - 352 Slabs - 341

16 to 22

7

7224

Other Alloy Steed in Ingot or Other Primary Form, Semi Finished Products of Alloy Steel

Ingots/Billets - 362 Blooms - 352 Slabs - 341

23 to 84

61

7208

Flat Rolled Products of Iron or Non Alloy Steel of Width More than 600mm, Hot Rolled, Not Clad, Coated or Plated

HR - 445 Plates - 500

85 to 117

33

7209

Flat Rolled Products of Iron or Non Alloy Steel of Width More than 600mm, Cold Rolled or Cold Reduced, Not Clad, Coated or Plated

CR - 560

118 to 126

9

7210

Flat Rolled Products of Iron or Non Alloy Steel of Width More than 600mm, Clad, Coated or Plated

HDG - 643 PPGI 752

127 to 140

14

7225

Flat Rolled Products of Other Alloy Steel of a Width 600mm or more

HR - 445 Plates - 500 HDG - 643 PPGI - 752

141 to 151

11

7212

Flat Rolled Products of Iron or Non Alloy Steel, of a Width less than 600mm, Clad, Plated or Coated

HDG - 643 PPGI - 752

152 to 161

10

7213

Bars & Rods, Hot Rolled, in Irregularly Bound Coils of Iron or Non Alloy Steel

Bars & Rods - 449-451

162 to 166

5

7214

Other Bars & Rods of Iron or Non Alloy Steel, Not Further Worked than Forged, Hot Rolled, Hot Drawn or Hot Extruded, But Including those Twisted after Rolling

Bars & Rods - 449-451

167 to 173

7

7227

Bars & Rods, Hot Rolled, In Irregularly Wound Coils of Other Alloys

Bars & Rods - 451-455

Sl Range

Description

MIP (US$)

Steel Insights, March 2016

7

feature

Lack of steel demand can negate MIP impact Rakesh Dubey

T

he long-pending demand of domestic steel-makers for imposition of the minimum import price (MIP), to prevent low-priced imports, was accepted by the government on February 5. However, that has led to a moderate increase in the prices of majority of the products in the domestic markets.

But many in the industry feel that the impact of the MIP might be negated if there is no real increase in demand for steel in the country in the coming days and which will not come through either unless there is a positive change in the market sentiment.

“Till now, there has been no indication that actual steel demand will increase at a much higher pace of say 10 percent compared to the current growth of around 4 percent till January 2016. Any higher growth in demand is unlikely until and unless the government announces major infrastructure projects to boost sentiment and encourage private sector investment,” said an official from a steel company.

“Our demand from the government

24 Steel Insights, March 2016

was to ensure increase in steel demand by announcing or speeding up infra projects but, since it was difficult to spell this out directly, it was felt that the industry should push for MIP, which the government has accepted,” the official from a Kolkata-based steel company said.

“Imposition of the MIP may effectively reduce imports by 50-60 percent. These are currently averaging around 1 million tons (mt) per month or 12 mt per annum but may decline to 5-7 mt provided the MIP is extended for a year from the current tenure of 6 months and to that extent domestic steel sales may rise,” he said.

“If there is growth in steel demand then, probably, it can be said that there has been an impact of the MIP,” he said.

The official expected Budget proposals for 2016-17 to have some confidence-building announcements that would lead to a spurt in steel demand and also an improvement in market sentiment, which subsequently did happen with the government announcing total targeted infrastructure spend in FY17 which was higher by 28 percent over FY16.

“However, only government spending will not lead to growth in steel demand as actual demand growth will come through private investment, which is not likely to happen unless there is improvement in sentiment,” said an official from another steel company.

“Today, the situation is such that nobody is willing to invest in view of the uncertain environment. The confidence of investors was severely impacted after what happened in the case of coal blocks. At present, there is lack of confidence in the environment, because investors are not sure whether any decision taken by the government will not be changed by the judiciary in the future or not,” the official said.

Elaborating, the official said, “Investors feel that it is the government which should take a call on policy decisions. If the Supreme Court intervenes on policy matters such as coal blocks then, naturally, investor confidence will not be boosted.”

“See what happened with the coal blocks.

The previous allottees, who had spent huge amounts of money on developing the blocks, found the same subsequently de-allocated, and are not even getting the returns on their investment and matters have moved to court,” said an official.

High inventories

A spurt in steel prices, triggered by the recent announcement of the MIP for a host of steel products, except on API grade conforming to X-52 and higher grades, may not sustain

Interview

‘IEEMA cautiously optimistic about 2016’

T

he poor financial health of power distribution companies (discoms) has adversely impacted the Indian electrical and related electronics industry for the past several years. The Indian Electrical & Electronics Manufacturers’ Association (IEEMA), however, is pinning hopes on UDAY, the government scheme for bailing out discoms, though it feels it would be important to have the right people and processes in place for its correct implementation. China’s share in Indian imports of electrical equipment has dramatically increased in the last few years and stands at 44.92 percent of the total in 2012-13, from 15.26 percent in 2005-06.

On a more positive note, after years of low offtake across the industry, a few IEEMA product divisions have recently seen an uptick in orders, Babu Babel, President, IEEMA, informs Tamajit Pain of Steel Insights.

The industry expects larger infrastructural spend and also a revival in industrial activities that need electrical equipment.

Excerpts: What is the current scenario in the Indian electrical equipment industry? What is the outlook on the power sector?

After years of low offtake across the industry, a few Indian Electrical & Electronics Manufacturers’ Association (IEEMA) product divisions have recently seen some uptick in orders. The industry is cautiously optimistic about 2016 and expects larger infrastructural spend and also revival in industrial activities that need electrical equipment.

As regards the power sector outlook, the government has addressed fuel shortage issues effectively. This will further improve in 2016. With lower coal and gas prices as well as cheaper renewable energy equipment, the overall cost of generation should reduce.

Demand supply has reduced from around 9 percent to around 3 percent. However, evacuation and inter-regional transmission constraints remain.

Several discoms are unable to pay for the purchased power and, therefore, resorting to power cuts in spite of adequate availability.

This will mean under-utilisation of generation assets and cheaper power on the exchanges. Discoms with effective revenue management and collection systems and low AT&C losses will benefit.

Tariff revisions are imminent in many states to reflect the true cost of power and delivery.

The ailing discoms seem to be holding back power sector growth. Do you think UDAY, launched by the government for reviving discoms, would deliver on its promises?

It is a very positive step as this programme would focus on increasing productivity, decreasing costs and enhancing fiscal discipline by directly involving the states.

UDAY will also help the banks, as they too cannot hold such large non-performing loans. The industry is determined to support the government. However, the key factor would be to tackle losses as a consequence of power theft and unsustainable direct subsidies.

IEEMA already has a programme to reach out to the distribution companies and aid them with technical solutions for complex problems related to mitigating losses and enhancing revenues.

UDAY is, overall, a very positive move, but it would be important to have the right people and processes in place for its correct implementation. As a result of this scheme, losses will be transferred to the states and they should be able to sustain it.

How would the discom reforms benefit the electrical equipment makers?

Poor financial health of discoms has adversely impacted the Indian electrical and related electronics industry for the past several years. UDAY is an innovative scheme. It transfers 75 percent of the participating state discom’s liability to the state government, reducing the interest burden on the state and helping improve the discom’s balance sheet. Prudent power purchase will help reduce input costs.

The key to the success of UDAY, however, is reduction of the AT&C losses by state discoms. The elephant in the room is rampant power theft. The industry fully supports UDAY and is optimistic that the improved financial health and the IPDA and DDUGJY will generate significant business growth.

Steel Insights, March 2016

35

GOVERNMENT

Budget’s infra focus may lead to increased steel demand

industry which has been under tremendous pressure from large volumes of cheap imports. The minimum import price on steel products announced by the government at the beginning of February this year will give some relief to the steel industry.

The government’s focus on infrastructure is evident with the total targeted spending in FY17 increasing 28 percent over FY16. This, along with a number of benefits provided on affordable housing, would aid recovery in cement demand, CRISIL Research said in its analysis of Budget 2016-17.

Commenting on the Union Budget, Dilip Oommen, CEO & MD, Essar Steel India Limited, said: “The Union Budget clearly seeks to achieve fiscal consolidation while giving boost to the rural sector in terms of investments, employment generation and social benefits. This will strengthen longterm fiscal regime for the country. The stable tax regime reflects consistency of government policies. The emphasis on rural electrification, cooking gas connection to BPL families, infrastructure development has significant potential to drive steel demand. However, the steel industry will have a cost push on account of the increased cess on coal.”

Housing sops to benefit cement cos

Steel Insights Bureau

M

ajor steel companies like Tata Steel, SAIL and JSW Steel are expected to gain with Finance Minister Arun Jaitley’s announcements of higher spend on infrastructure.

The FM’s announcements on infra growth are likely to generate the muchneeded demand for the steel industry which is reeling under competition from imports and poor domestic demand.

Jaitley said, spend on infra would be over `2.21 lakh crore during 2016-17.

Additionally, the government’s focus on rural-urban is also likely to create steel demand.

The FM’s Budget proposals on infrastructure meet a long-standing demand from core sector industries like cement and steel. In the run-up to the Budget, Tata Steel had said the government’s procurement from the domestic steel sector can act as a major stimulus for demand creation. The past one

year has been one of the most difficult for the domestic steel industry.

While the government set a target of producing 300 million tons (mt) by 2030, the industry is suffering from low capacity utilisation. According to the steel ministry, production of crude steel during April – January, 2015-16 has grown 0.7 percent to 74.49 mt, compared to the same period last year. The industry has also been facing a surge in imports which grew nearly 24.1 percent.

The Union Budget 2016-17 has a strong focus on infrastructure and the social, rural and financial sectors and the large infrastructure outlay of ` 2.21 lakh crore is expected to result in higher steel consumption in India, Dr Sanak Mishra, Secretary General of the Indian Steel Association (ISA) said.

ISA hopes that much of that consumption would be from domestically produced steel, Mishra said. Over the last year, the Indian Steel Association has asked the government for several measures to boost the steel

Tax incentives for home buyers and developers are aimed at lifting housing demand. This will not only have a spillover effect on the cement and metal sectors, but is also a positive for job creation given the high labour intensity of the construction sector.

CRISIL Research said the deduction for interest enhanced for first-time home buyers to `250,000 from `200,000 per annum, 100 percent deduction for profits of companies undertaking specific housing projects (only for flats up to 30 sq m in 4 metro cities and 60 sq m in others) and service tax exemptions on construction of affordable houses (up to 60 sq m under any scheme of the central or state government), will also be a positive for the cement sector.

Further, investment towards national highways have been increased by 49 percent to ` 1,032 billion (budgetary +internal and extra budgetary resources).

“Growth is gradually looking up, inflation is within the Reserve Bank of India’s comfort band and the current account deficit is firmly under control. De-bottlenecking steps by the government are improving ease of doing

Steel Insights, March 2016

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62 Steel Insights, March 2016

Tear along the dotted line

Tear along the dotted line