Steel Insights, October 2016

Contents

6 | COVER STORY

21 India’s August steel consumption, exports rise 22 India’s steel demand to grow by 5.3% in FY17: ISA 23 Anti-dumping duty likely on wire rods from China

Steel mills fight low demand with cost-cuts, new products

26 JSW, Vedanta, NMDC, others eye Karnataka mines

Mills are banking on twin strategies of cost control, new products to fight low demand.

27 Car makers brace for fireworks this festive season 28 Metallurgical coal a star performer; correction likely going ahead

24 | FEATURE

30 Coking coal offers register sharp rise in September

DSP to supply high-speed wheels to Indian Railways

31 Steel props up infrastructure sector growth in August

The plant plans to supply these wheels to Railways by 2017.

32 5 emerging trends to impact Indian realty: JLL India

48 | EXPERT SPEAK

33 SAIL aims for 20% more production, sales this year

The cost effective system for iron ore handling

35 Tata Steel Kalinganagar achieves milestone 36 JSPL enters elite club with ‘head hardened rails’

Iron ore cos looking for ways to be more efficient in bulk material handling.

37 Corporate snippets 38 Primetals to supply continuous caster, secondary metallurgy facilities for MMKI 40 Steel Min doubles steel consumption target by 2020 41 Iron ore handling by major ports falls sharply in Aug m-o-m 42 Indian Railways’ Aug iron ore handling marginally 43 Last mile connectivity, mechanization: keys to success of coastal shipping 44 Global crude steel output marginally up in Aug m-o-m

50 | INTERVIEW

Essar Vizag terminals aiming for 8,000 TPH by FY18 EVTL terminal is loading around 3,000 TPH currently.

51 | INTERVIEW

45 Steel companies headed for second consecutive price hike in October

Wire rod industry seeks duty rationalisation

46 Indonesia riding Kalimantan coal to global markets

Wire industry has potential to be net exporter but reeling under duty structure.

4 Steel Insights, October 2016

Cover Story

Steel Steel mills mills fight fight low low demand demand with with costcostcuts, cuts, new new products products Tamajit Pain

6 Steel Insights, October 2016

Cover Story

T

he steel sector is facing an uncertain future as declining demand and high debt loads place considerable stress on the sector. As it stands, the top 30 steel companies have more than $150 billion in borrowings, while estimates place the Chinese steel sector’s debt at more than $500 billion. Excess capacity, according to a new report, stands at around 700 million tons, with little short term outlook for market recovery as China shifts its economic focus and the world economy plods along.

Steel, an alloy of iron and other elements, is predominantly used as a construction material in varying quantities across a range of projects. The material is versatile, strong, durable and relatively cheap, making it an ideal material for the building skeleton, for bridges or for the reinforcing within concrete structures. In recent times, the material has been in increasing demand as the global economy enjoyed steady growth and China boomed.

Following the global economic crisis and the more recent transformation attempts of China from an investment-led to a consumption-led economy, the demand for steel slowed and its prices began to plummet.

This has forced the steel mills to resort to cost reduction, rationalisation of production through inefficient routes, adoption of newer technologies and extension to new product lines to increase gross realisation levels.

As rightly pointed out by Steel Authority of India Chairman P K Singh, “In present market conditions, the company is following a strategy of concentrating on customer, competition and change to attain its targets.”

debt across the 30 top steel companies stands at $150 billion, and has continued to rise as demand falls and prices remain depressed.

The steel sector continues to face headwinds. Lower prices and weaker demand over the last year has prevented steel-makers from reaping the benefits of the ongoing debt restructuring and cost and efficiency measures. As a result, debt in the sector is now sitting at a record high and many steelmakers are in some form of distress or the other with some teetering on the verge of bankruptcy.

Raising debt

China’s seemingly never-ending appetite for steel, as well as competition to secure market share, has led to large capex investments. In China for instance, since 2000, around 1,075 mt of capacity has been added. Last year, there was a gap of 419 mt between production and capacity. Globally, there is currently around 700 mt in excess production capacity, with utilisation rates standing at 70 percent.

According to analysts, this represents $300$350 billion in excesses capacity (15 percent of total) that could be closed.

Weaker global growth and transformation of the Chinese economy have resulted in decreased global demand, at -3 percent and -5.4 percent respectively. Increased historical

capex in production, mixed with recent squeezes in margins as it becomes a buyer’s market, mean that companies have begun leveraging loans to finance their operations.

Recent increases in short-term loans suggest that companies are often increasingly using loans to finance daily operation or are unable to access adequate conditions on long term finance – highlighting the stress in which the industry finds itself. Short-term loans tend to make companies more vulnerable in market downturns.

Regional outlook & protection

India, China and Brazil stand out, in each country debt levels remain high, while EBITDA has fallen significantly. In India this is the result of companies investing to capture new demand, while in China excess production continues to pressure the market.

Japan and Russia stand out as countries that have managed to reduce debt significantly in recent years, largely on the back of their depreciated currencies that made exports more valuable.

The situation points to a mixed mid-term picture, as continued low demand from the global economy and China mean that prices may stay relatively low. Governments around the world are trying to identify ways in which to protect their domestic firms.

Falling steel prices

At the start of 2015, prices of steel began to plummet, falling within a few months from $450 per ton to $300. While prices recovered slightly from the start of 2016, they again fell sharply mid-ways through the year. Over the past two months, prices have recovered to around $400 per ton. The price of iron ore, the main constituent material in steel, fell considerably between the start of 2014 and the start of 2016.

According to analyses of the health of the top 30 steel companies, average debt relative to EBITDA has been on the increase since the financial crisis of 2008, dipping slightly in 2014 on the back of improved margins from the reduction in iron prices. Today, the

Steel Insights, October 2016

7

feature

India’s August steel consumption, exports rise Steel Insights Bureau

I

ndia steel consumption rose 10.3 percent in August 2016 to 7.29 million tons (mt) from 6.61 mt in July 2016, latest provisional steel ministry data showed.

In August 2015, steel consumption was at 6.90 mt. This shows steel consumption rose by 5.7 percent year-on-year.

In April-August, 2016-17, steel consumption rose 1.6 percent to 33.83 mt, up from 33.30 mt in the same period last year.

The country’s steel exports rose 44.8 percent in August 2016 to 679,000 tons from 469,000 tons in July 2016, the data showed.

In August 2016, steel exports stood at 363,000 tons. This shows steel exports increased 87.1 percent year-on-year.

In April-August, 2016-17, steel exports rose 23.5 percent to 2.37 mt, up from 1.92 million tons in the same period last year. The world’s third producer’s steel imports rose 5.2 percent in August 2016 to 590,000 tons from 561,000 tons in July 2016, the data showed.

In August 2015, steel imports stood at 974,000 mt. This shows that steel imports decreased 39.4 percent year-on-year.

In April-August, 2016-17, steel imports fell 35.1 percent to 2.98 mt, down from 4.59 mt in the same period last year.

India’s crude steel production in August 2016 rose 0.7 percent to 8.14 mt over the July 2016 production level of 8.08 mt, latest provisional steel ministry data showed.

In August 2015, crude steel production was at 7.44 mt. This shows that crude steel production rose 9.4 percent year-on-year.

In April-August, production by integrated steel producers like SAIL, RINL, Tata Steel, JSW, Essar and JSPL stood at 22.21 mt.

Production by other steel producers rose 0.9 percent to 17.72 mt in April-August.

Total crude steel production in the AprilAugust period of 2016-17 was up 6.9 percent to 39.94 mt as against 37.36 mt in the same period last year.

Steel production data based on latest provisional steel ministry data (in ‘000 tons) (provisional) Aug-16

Jul-16

Aug-15

Apr-August 2016-17

Apr-August 2015-16

Crude steel production

8141

8082

7443

39942

37361

Finished steel production

8779

7524

7356

40804

37547

Steel consumption

7291

6613

6901

33830

33301

Steel Import

590

561

974

2983

4599

Steel Export

679

469

363

2375

1923

Pig iron production

799

791

827

3944

4034

Sponge iron production

1235

1228

1177

6325

6964

Particulars

Source: Steel Ministry

India’s finished steel production in August 2016 rose 16.7 percent to 8.77 mt over the July 2016 production figure of 7.52 mt, the data showed.

In August 2015, finished steel production was at 7.35 mt. This shows that finished steel production rose 19.3 percent year-on-year.

In April-August, 2016-17, finished steel production rose 8.7 percent to 40.80 mt from 37.54 mt a year ago. Production by SAIL, RINL, Tata Steel, JSW, Essar and JSPL stood at 22.61 mt. Production by other steel producers fell 1.4 percent to 22.25 mt in April-August, 2016.

Pig iron output up

India’s pig iron production increased 1 percent in August 2016 to 799,000 tons from 791,000 tons in July 2016, latest provisional steel ministry data showed.

In August 2015, pig iron production was at 827,000 tons. This shows pig iron production fell 3.4 percent year-on-year.

In April-August, 2016-17, pig iron production fell 2.2 percent to 3.94 mt, down from 4.03 mt in the same period last year.

Sponge iron production up

India’s sponge iron production rose 0.6 percent to 1.23 mt in August 2016 from 1.22 mt in July 2016, the data showed.

In August 2015, sponge iron production stood at 1.17 mt. This shows sponge iron production rose 4.9 percent year-on-year.

In April-August, 2016-17, sponge iron production fell 9.2 percent to 6.32 mt, down from 6.96 mt in the same period last year.

Steel Insights, October 2016

21

FEATURE

Metallurgical coal a star performer; correction likely, going ahead Steel Insights Bureau

M

etallurgical coal has been the starperforming commodity of the year so far. The premium hard coking coal spot price reached $205 per ton, FOB Australia, in September, up sharply since the start of the year.

The rally has been fuelled by a shortage of Chinese and constrained seaborne supplies, as well as strong demand, particularly in China and India. A number of players in the industry have suggested that higher price levels are here to stay, while others expect a sharp downward correction if/when Chinese steel production eases and if domestic coal output controls are relaxed.

Chinese supply crunch

The Chinese government’s implementation of the 276 working day production controls has been extremely effective in reducing oversupply and the policy continues, not only to be stringently enforced at a national level, but has been also broadly accepted by the coal producers, as they are now operating profitably. In the near-term, the supply tightness has been further exacerbated by transportation issues arising from heavy rainfall in July and August, which damaged a number of the major road networks that are used to transport metallurgical coal and metallurgical coke. As a result, many steel-

28 Steel Insights, October 2016

makers have been unable to source their entire domestic metallurgical coal requirements at a time when they have been looking to ramp up production in response to strong steel prices.

There is currently a differential of over $50 per ton, indicating that coastal steel mills have been caught short and have been forced to buy metallurgical coal from the seaborne market to meet requirements. However, availability of spot material on the seaborne market is low.

Seaborne producers do not have spot material to offer

While Chinese enquiries have increased,

there is limited spot volume availability.

Metallurgical coal producers have locked in production schedules and cannot quickly reopen idled operations or ramp up additional production to take advantage of higher prices, limiting the potential for additional output to move into the spot market.

More importantly, particularly in the short-term, there have been a handful of operational issues at seaborne mines over the last few weeks and months. In Australia, Vale’s Carborough Downs mine declared force majeure after a roof collapse and is currently operating below full capacity, while there have been production problems at Anglo American’s Moranbah North and

Interview

Wire rods industry seeks duty rationalisation The government recently imposed several measures to protect the domestic steel industry from unfair competition from cheap imports. These included an antidumping duty on certain cold-rolled flat steel products from four nations, including China and South Korea; extension of the MIP for 66 products for two months and an anti-dumping duty on flat products from 6 countries. How do all these measures impact wire manufacturers in India?

All the steps initiated by the government to protect the big guys of the steel industry

have adversely affected all downstream industries, including our wire industry.

More particularly in the case of the wire industry, there is gap of 1 million tons (mt) in supply and demand, which we have been highlighting to the steel minister from time to time. The anomaly is that the government gives a very patient hearing and raises hopes that it will address our issues, but our efforts have not yielded any positive results so far.

We have even appealed to the government that if it wants to protect the

T

he wire industry in India has travelled a long way since Independence.

It has grown in terms of technology and is at par with that in many of the advanced countries and can even be a net exporter. However, at present, it is reeling under an inverted duty structure and government indifference, Vijay Vedmutha, Chairman, Steel Wire Manufacturers Association of India (SWMAI), tells Madhumita Mookerji. Excerpts:

big steel mills, we don’t have objection to that but it should also extend protection to us. But these hopes have not been fulfilled despite the government giving positive signals at the meetings.

Since the government has imposed the minimum import price (MIP) and has now moved for an anti-dumping duty which it will impose on wire rods, this has resulted in

Steel Insights, October 2016

51

62 Steel Insights, October 2016

Tear along the dotted line

Tear along the dotted line