Steel Insights, May 2021

FROM THE CHIEF EDITOR 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 Associate Editor Sumit Kumar Maitra, Tel +91 85840 08181, Email: Sumit.Maitra@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 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, Indian steel industry had never faced a challenge quite like this.

Even as it doubles up as the provider of lifesaving Oxygen to all those hapless victims of the pandemic all over the country, it struggles to keep up with the rising costs particularly of iron ore.

Iron ore prices continue to turn costlier with NMDC just announcing a hike in prices of lumps by `700 a ton and by `1,500 a ton for fines.

Global iron ore prices are now trading at record high level of $228 at Qingdao partly in response to the rising geopolitical tension between China and Australia, which were once close trading partners.

This would soon translate into higher steel prices unless steel makers realise that further hike in prices, which have already jumped by 45 percent, would be hurting sales. The impact of the pandemic-induced lockdown and mobility restrictions has already started playing out with steel consumption declining 26 percent and crude steel production dropping 21 percent in April from March levels.

May might see higher drop in consumption as secondary steel processors, those who use Oxygen, shutting down for want of industrial gas.

If the Oxygen crisis lingers on beyond May, we could see significant impact on industrial activities and sharp from in primary steel production.

The only solace is the vibrant economic recovery in China and in most of the advanced economies which has triggered export demand for steel.

And with China deciding not to turn aggressive in the export market, it has opened up opportunities to Indian steel makers.

Our cover story takes an in-depth look at all these issues to get a sense of what in store for the sector in coming days.

The month saw Tata Steel coming out with its fourth quarter’s financial performance with operating profit going up 205 percent year on year, a record for the domestic steel major.

The primary steel makers are using this lifetime high profit levels to retire part of their debt.

But they need to conserve cash to some degree as the days ahead appear uncertain.

Stay safe.

Regards Dr Mahul Brahma

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Steel Insights, May 2021

3

CONTENTS

6 | COVER STORY

15 India imported scrap offers remain firm 16 India pig iron production up 78% 18 March crude steel production up 24%

Can Covid comeback derail steel upcycle?

22 Worldsteel sees steel demand growth at 5.8% in 2021

A detailed look at the challenges and opportunities facing the sector.

17 March sponge iron production up 28%

26 Real estate sales likely to slow down 28 Subdued auto demand in April as pandemic hits hard

19 | FEATURE

31 Seaborne coking coal prices stable in April

Steel sector rises up to Covid challenge

32 Traffic handled by major ports down 4.6% in FY21

Primary steel makers supplying close to 4500 tpd of oxygen.

29 Iron ore offers remain firm

33 Indian Railways’ iron-ore handling up 4% in FY21

35 | INTERNATIONAL

34 Global crude steel output up12.65%in March

ArcelorMittal sees strongest quarter in a decade

37 China pushes domestic production with duty tweak

Inventory level falls as demand improves.

41 AMNS India EBITDA up 187% 44 JSW, JFE eye opportunities for steel in power sector 46 Andhra selects Essar for Kadapa steel project 47 Corporate update 49 Government update

39 | CORPORATE

Tata Steel sees better margins in Q1 Realisation to go up by `6,000-7,000 per ton.

51 Import export data 55 Price trend 56 Ferro alloy data 57 Production data 59 Consumption data 60 Import data 61 Export data

4 Steel Insights, May 2021

42 | CORPORATE

JSPL becomes pure play steel maker To divest coal-fired power biz to promoter arm.

COVER STORY

Can Covid comeback derail steel upcycle?

Sumit Maitra & Tamajit Pain

T

he Covid pandemic has returned in a mutated and deadlier form and is now testing the resilience of stupendous recovery of the steel sector across the globe. Till end of April, it was being widely believed that the upcycle in the international steel prices would continue well into FY22 following sharp revival in demand in India and other parts of the globe, particularly in China on the back of stimulus package.

This resulted in firm global steel prices which in India appreciated by close to 50 percent and even more in international markets since February 2020.

Steel sector honchos believe there is some steam still left in steel prices despite the devastations being unleashed by the second wave of the Covid-19 pandemic.

But that assumption is largely based on the dry fact that domestic prices are still ruling at a discount to global prices and

6 Steel Insights, May 2021

elevated iron ore prices might continue to support steel prices.

A very real threat to the steel sector comes from the lockdowns and disruptions, planned and intermittent, across the country forcing shopfloors to close down in several sectors beginning May. From being seen as the superstructure on which India’s growth story is being built, steel sector has now turned into a key lifeline supporting the country’s sudden surging need for medical oxygen.

The oxygen in its liquid form which is usually kept in store at every primary steel maker’s facility is being diverted to hospitals and medical facilities.

While primary steel makers are keeping their furnaces running with the gaseous oxygen, the secondary steel plants, the fabricators and other steel processing facilities are being forced to close down with a ban on use of industrial oxygen.

Closure of showrooms and logistical disruptions have forced most of the auto companies to keep their factories shut for most part of May. This would undoubtedly impact steel overall steel consumptions in coming days.

The macro story

The global economy is exhibiting incipient signs of recovery as countries renew their tryst with growth, supported by monetary and fiscal stimulus, Reserve Bank of India (RBI) governor Shaktikanta Das said recently but added that economic activities remain uneven across countries and sectors and the outlook is highly uncertain and clouded with downside risks.

According to RBI’s assessment as on May 5, aggregate demand conditions, particularly in contact-intensive services, are likely to see a temporary dip, depending on how the pandemic situation unfolds.

COVER STORY With restrictions and containment measures being localised and targeted, businesses and households are learning to adapt. Consequently, the dent to aggregate demand is expected by RBI to be moderate in comparison to a year ago. Consumption demand is holding up while growth average daily electricity generation till April instill confidence.

Rail freight registered growth of over 76 percent year-on-year and toll collections in April suggest that mobility has declined but quite unlike the abrupt halt in mobility during April last year.

Also, registration of automobiles in April 2021 showed moderation compared to March while tractor segment continued its robust pace.

The Purchasing managers’ index (PMI) for manufacturing continued in expansion mode at 55.5 in April 2021 compared to 55.4 in the preceding month. Overall, the high frequency indicators are emitting mixed signals. Several rating agencies and economy watchers believe the return of the pandemic might derail India’s recovery process.

S&P, the global rating agency believes the second wave could chuck out as much as 2.8 percentage points from India’s GDP growth in FY22, derailing a promising recovery in the economy due to limited vaccination while loclised lockdowns, exposure to more infectious Covid variants might delay the current wave peaking not before June leading to significant dent to credit availability.

“India’s second Covid wave may derail a strong recovery in the economy and credit conditions. The country’s rate of daily new infections keeps spiraling upward, accounting for almost half of the world’s cases, overwhelming the Indian health system,” S&P Global Ratings said.

Global banker Barclays has warned that India’s GDP growth this year could drop to 8.8 percent if the pandemic is not brought under control soon which might force local governments to continue with lockdowns and other restrictions till August.

Barclays has put a bill of $38 billion loss to the economy if such a scenario plays out.

“The country’s economy is estimated to contract by 7.6 percent in FY21 as the pandemic-induced lockdowns led to chilling of economic activity, hurt jobs and demand.

The lower base is set to help the economy in posting a faster growth in FY22, but the ongoing second wave and resultant localised lockdowns have led many analysts to review down their forecasts,” said RBI. The RBI is maintaining that the economy will grow at 10.5 per cent this fiscal.

“As India’s second Covid-19 wave continues, there is growing uncertainty around the number of cases and fatalities.

Slowing vaccinations are also hurting India’s recovery prospects. We lower our FY 202122 GDP growth forecast by 1 percent to 10.0 per cent to reflect this uncertainty,” analysts at Barclays wrote in a report.

India is in an “unwelcome position” with

Comparison of the key components of GDP with changes to mobility levels

“Economic activities remain uneven across countries and sectors and the outlook is highly uncertain and clouded with downside risks.”

Reserve Bank of India infections rising at over 4 lakh a day and geographical area of infections is widening with positivity rates surging in many states.

Slowing vaccination programme due to lack of adequate supplies is adding to challenges, it said. Rating agency Crisil pointed out that infection cases are rising in rural India with nearly a third of new infections coming from the smaller towns and rural areas.

Impact of oxygen diversion

The steel sector has, so far, bucked the pessimism hitting other sectors with prices set to move up even further though there is uncertainty creeping in considering that lockdown measures are starting to have their impact felt on the sector. Also, operations at many of the steel plants across the country have been impacted by rising cases of infections among the workers.

All primary steel makers are supplying their liquid oxygen for medical use, although primary steel output has not been affected as liquid oxygen form only a small portion of the requirement.

Steel companies in India are now supplying over 4000 metric tons a day of Liquid Medical Oxygen (LMO) various states across the nation yesterday against average LMO production of 1,500/1,700 metric tons a day in mid-April 2021.

This was achieved by reducing the production of Nitrogen and Argon and by boosting the production of LMO by the steel companies at their Air Separation Plants.

Steel Insights, May 2021

7

FEATURE

Steel sector rises up to Covid challenge Steel Insights Bureau

C

ountry’s primary steel sector has overwhelmingly acted upon the clarion call to provide life-saving medical oxygen supplies along with setting up hospital care facilities on an urgent basis to mitigate the second wave of the Covid pandemic.

Around 30 oxygen plants located in the steel plants of both public and private sectors are supplying medical oxygen every day.

Medical oxygen supply per day from steel plants doubled to 3390 tons on April 30 from 1,500 tons on April 16.

According to sources, steel companies are keeping only half a day’s stock of Oxygen as buffer, giving away rest for medical purpose.

Prime Minister Narendra Modi on April 23, held a meeting with leading oxygen manufacturers across the country via video conferencing to provide solutions in a very short time. PM Modi stressed on the need

“Saving lives is more important than producing steel and production can suffer for as long as the country is in need of any resource available with the company.”

Sajjan Jindal, Chairman & MD, JSW Steel to maintain good co-ordination between the government and the oxygen producers.

The steel sector was asked to utilise the full potential of the industry to meet the demand of oxygen in the coming days. It was noted that there is a need to increase the availability of oxygen cylinders as well as upgrade the logistics facilities for transportation of oxygen. The option of utilisation of tankers meant to transport other gases for oxygen supply was also explored.

Primary steel makers mostly use oxygen in gaseous state for steel making while a small portion is made in liquid form.

Following intervention by the Government, liquid oxygen production was augmented. To meet the crisis, even oxygen in gaseous form from steel plants and oil refineries are now being supplied.

Linde and Praxair – two major companies that collectively manage and operate several air separation and manufacturing plants of more than 2,000 tons per day capacity mostly for the steel sector - are also converting their Liquid Nitrogen and Liquid Argon tankers to augment oxygen transportation capacities.

Another meeting was held with the Prime Minister exploring innovative ways to ramp up supply and availability of oxygen.

“The strategy being used is to identify

Steel Insights, May 2021

19

FEATURE

Worldsteel sees steel demand growth at 5.8% in 2021 Steel Insights Bureau

S

teel demand will grow by 5.8 percent in 2021 to reach 1,874 million tons (mt), after declining by 0.2 percent in 2020. In 2022, steel demand will see further growth of 2.7 percent to reach 1,924.6 mt, according to World Steel Association (worldsteel), which released its Short Range Outlook (SRO) for 2021 and 2022.

The forecast assumes that the ongoing second or third waves of infections will stabilise in the second quarter and that steady progress on vaccinations will be made, allowing a gradual return to normality in major steel-using countries.

Despite the disastrous impact of the pandemic on lives and livelihoods, the global steel industry was fortunate enough to end

2020 with only a minor contraction in steel demand. This was due to a surprisingly robust recovery in China, with growth of 9.1 percent. In the rest of the world, steel demand contracted by 10 percent.

“In the coming years, steel demand will recover firmly, both in the developed and developing economies, supported by pentup demand and governments’ recovery programmes. However, for most developed economies, a return to the pre-pandemic levels of steel demand will take a few years,” Al Remeithi, Chairman of the worldsteel Economics Committee, said.

While it is hoped that the worst of the pandemic is passing, there is still considerable uncertainty for the rest of 2021.

The evolution of the virus and progress of vaccinations, withdrawal of supportive

“In the coming years, steel demand will recover firmly, both in the developed and developing economies, supported by pentup demand and governments’ recovery programmes. However, for most developed economies, a return to the pre-pandemic levels of steel demand will take a few years.”

Al Remeithi, Chairman, worldsteel Economics Committee 22 Steel Insights, May 2021

fiscal and monetary policies, geopolitics and trade tensions could all affect the recovery envisaged in this forecast.

For the future, structural changes in a post-pandemic world will bring about shifts in steel demand shape. The steel industry will see exciting opportunities from rapid developments through digitisation and automation, infrastructure initiatives, reorganisation of urban centres, and energy transformation. All at the same time as the industry is responding to the need to produce low-carbon steel.”

China

China’s economy quickly rebounded from the lockdown in late February, and almost all economic activity except retailing resumed full productivity by May. Since then, despite sporadic small localised waves of Covid-19, economic activity has not been affected by the pandemic, unlike the rest of the world.

The Chinese economy benefited from the government’s implementation of various measures to stimulate the economy. From several new infrastructure projects and accelerating existing projects, to relaxing control over the real estate sector and tax reduction to boost household consumption.

On top of this, the economy benefited

INTERNATIONAL

China pushes domestic production with duty tweak

Steel Insights Bureau

C

hina has removed Value Added Tax (VAT) rebates on exports of 146 steel products effective May 1, a move that was being widely anticipated.

Country’s Finance Ministry, in a separate announcement, slashed the import duty on pig iron, crude steel and ferrous scrap– to zero.

Starting on May 1, China will apply a provisional zero import tax rate on pig iron, crude steel, recycled steel raw materials, and ferrochrome, the Customs Tariff Commission of the State Council said in a circular.

Export tariffs on ferrosilicon, ferrochrome, and high-purity pig iron would be raised to 25 percent, 20 percent, and 15 percent, respectively.

The adjustment is aimed at reducing import costs, expanding steel imports, supporting domestic producers to cut crude steel output, guiding the industry to cut energy consumption, and pushing industrial upgrading and high-quality development in the sector, according to the circular.

“The move comes as China is intensifying efforts to transform the energy-consuming steel industry for greener and high-quality

growth. The country plans to cut crude steel output to ensure it falls year on year in 2021,” Chinese state agency said.

China previously announced that it would strive to peak carbon dioxide emissions by 2030 and achieve carbon neutrality by 2060.

While removal of the VAT rebates will discourage exports helping cooling down domestic prices, it will also help other steel producers like India to raise their exports.

The products that would be impacted include hot rolled coil (HRC), wire rod and re-bar as well as cold rolled and galvanized sheets.

Slashing import duty on pig iron, crude steel and ferrous scrap to zero will reduce the cost of importing, expand the import of iron and steel resources and lend downward pressure on domestic crude steel output, sources said.

“The measures will reduce the cost of importing, expand the import of iron and steel resources and lend downward pressure to domestic crude steel output, guiding the steel industry towards the reduction of overall energy consumption, promoting the transformation and high-quality development of the steel industry,” the ministry said in a statement.

The move was being anticipated, which

“The measures will reduce the cost of importing, expand the import of iron and steel resources and lend downward pressure to domestic crude steel output, guiding the steel industry towards the reduction of overall energy consumption, promoting the transformation and high-quality development of the steel industry.”

Chinese Finance Ministry is why the announcement had little impact on prices, said T V Narendran, CEO & Managing Director of Tata Steel while interacting with the media over post-earnings conference call.

In order to guard against possible losses, many Chinese mills had factored in the export rebate cut while floating HRC export offers in the span of a month or so during which global prices had risen steadily.

Current HRC offers from China stood at $944 per ton FOB. The rebate for cold rolled coil and hotdip galvanized coil was not removed, likely because they were deemed higher value-

Steel Insights, May 2021

37

CORPORATE

Tata Steel sees better margins in Q1 a strong Q4 of FY21 on the back of higher prices,” an analyst’s report said.

Steel Insights Bureau

T

ata Steel management expects realisation going up by `6,000-7,000 per ton during the April-June quarter.

This comes after its consolidated EBITDA went up 205 percent year on year, its highest ever, during the fourth quarter of FY21.

Domestic operating profit or EBITDA however, is likely to go up by `4,000-5,000 per ton in Q1 of FY22 as the increase in realisation would be offset by `2,000 per ton rise in cost, the company management has told analysts.

The management has guided at incremental volumes of 1 million ton (mt) each in India and Europe over 17.3 mt and 8.8 mt achieved respectively in FY21.

Capex guidance for FY22 stands at `11,000 crore, of which `7500 crore is for its India operations, analysts said.

“Tata Steel has been a key beneficiary of rising steel prices. As expected, it reported

Highest-ever quarterly crude output in Q4 of FY21

Tata Steel India achieved highest ever quarterly crude steel production of 4.75 mt with a 3 percent q-o-q growth in Q4 of FY21 despite Covid disruption. Full year FY21 production was lower by 7 percent y-o-y primarily due to the disruption caused

by Covid-19 pandemic in first half of FY21.

India delivery volume increased by 16 percent y-o-y to 4.67 mt in Q4 of FY21; domestic deliveries increased 22 percent y-o-y to 4.17 mt on the back of company’s robust marketing network and improved market conditions. Exports were at 11 percent of overall deliveries.

Domestic operations achieved highest ever annual delivery volume of 17.30 mt in FY21, despite pandemic induced disruption in H1 of FY21.

Highest ever consolidated EBITDA (All figures are in `crores unless stated otherwise) Production (mn tons)

1

Deliveries (mn tons)

4QFY21

3QFY21

4QFY20

FY21

FY20

8.02

7.74

7.90

28.54

30.63

7.83

7.41

7.06

28.50

28.88

Total revenue from operations

49,977

41,902

36,009

1,56,294

1,48,972

Raw material cost2

16,758

15,227

14,739

55,423

64,097

Change in inventories

(1,642)

(842)

(1,519)

1,517

(490)

EBITDA

14,290

9,652

4,824

30,892

18,103 17,427

Adjusted EBITDA3

13,933

8,394

5,024

28,926

EBITDA per ton (`)

18,253

13,021

6,838

10,838

6,267

Pre exceptional PBT from continuing operations

10,348

5,747

1,983

14,887

3,549

Exceptional items4

(991)

(154)

(3,854)

(1,043)

(4,930)

Tax expenses

2,195

1,582

(255)

5,654

(2,553)

Reported profit after tax

7,162

4,011

(1,615)

8,190

1,172

1. Production Numbers: Standalone, Tata Steel BSL & Tata Steel Long Products - Crude Steel Production, Europe - Liquid Steel Production; SEA - Saleable Steel Production 2. Raw material cost includes raw material consumed, and purchases of finished and semi-finished products 3. Adjusted for fair value changes on account of revaluation gain/loss on external/ internal company debts/ receivables at TS Global Holdings and FX rate movement on investments in T Steel Holdings 4. Exceptional items primarily includes net impairment charge of assets at overseas operating entities

“The quarterly consolidated EBITDA of `14,290 crores and free cash flows after capex of `8,800 crores demonstrates strength of the India business which had an EBITDA margin of 41%.”

Koushik Chatterjee, Executive Director and Chief Financial Officer “The quarterly consolidated EBITDA of `14,290 crores and free cash flows after capex of about `8,800 crores demonstrates the strength of the India business which had an EBITDA margin of 41 percent,” Koushik Chatterjee, Executive Director and CFO said.

With disciplined capital allocation and tight working capital management through the year, Tata Steel’s full year free cash flow after capex was around ` 24,000 crores.

“We have reduced our gross debt by over `20,000 crores during the quarter and full year de-leveraging was about `28,000 crores.

In the current financial year, we will reduce the debt levels by more than a billion dollars and also enhance the capital allocation to our strategic capex program in India to complete the 5mtpa expansion in Kalinganagar,” Chatterjee said.

Automotive and special products segment deliveries grew by 13 percent q-o-q and 57 percent y-o-y to 0.78 mt in Q4.

Full year FY21 sales volume crossed 2 mt mark, registering a 7 percent YoY growth.

Steel Insights, May 2021

39

62 Steel Insights, May 2021

Tear along the dotted line

Tear along the dotted line