JSW Steel Ltd, India?s third biggest steel producer, swung to a profit in the third quarter of FY 2010 from a loss a year ago, boosted by demand from the automobile sector. Seshagiri Rao MVS, joint managing director & group CFO of the company, says he expects demand from the construction and real estate spaces to pick up. In a conversation with Smita Joshi Saha and Shobhana Subramanian of FE, Rao says demand will sustain in the Indian market even if steel prices go up following the increase in the prices of both iron ore and coal. Excerpts:

How much has your cost of production increased due to rising raw material prices? Will you be able to pass on the entire price hike?

Iron ore prices, which were expected to rise 40-50%, have now risen by 100%, Australian ore prices are now $120 per tonne from $60 per tonne earlier. A $60 per tonne increase in iron ore will translate into a $100 per tonne increase in the cost of production of steel. The same is true for coking coal, whose average price is $220 per tonne against $130 per tonne last year and will translate into a $65 per tonne increase in the cost of steel. The price hike in these two key raw materials will increase the cost of production by $165 per tonne. Prices have inched up to $700 per tonne from $600 lately. This is an indicator that prices will move up further.

So, will demand sustain?

When prices went up from $450 to $600 per tonne, China produced 52 million tonnes of steel. When demand corrected and prices came off from $600 per tonne to $500 per tonne, China reduced production from 52 to 46 million tonne. The adjustment in China supply was 70 million tonnes in a matter of two to three months. The steel price cycle has shortened; supply demand adjustments are happening very quickly. When the prices fell to $500 per tonne, they did not stay at $500 per tonne; they again went up. Now, adjustments will continue to take place because of the quarterly pricing system. There can be corrections which can happen when the prices go up, neutralising the impact of the cost. If I look at a longer period of more than two quarters, the demand will come back and the prices will again correct.

Will the demand stay at 8.5% this year even if prices move up by $165 per tonne?

The $165 per tonne number is for non-integrated players located in developed countries in the US or Europe. In India, there may not be much pressure for integrated players, but would vary from company to company. If we take our company, we have become more efficient, thanks to the beneficiation plant because of which our costs may rise by about $70-80 per tonne.

Do you see a demand-supply imbalance?

In the first 11 months of FY2010, India’s steel imports have gone up by 22%. As much as 6.6 million tonnes of imports have taken place this period, making the country a net importer of steel. Exports have fallen and imports have gone up and, therefore, I do not think we will undergo a dramatic change in FY11. India will continue to be a net importer of steel and I don’t expect any surplus situation in FY11.

In the December quarter, your volumes dipped due to floods in Karnataka, impacting production at your plant there. What volumes do you expect in the March 2010 quarter?

JSW Steel had given a guidance of 72% growth in 2009-10 and said it will produce 6.4 million tonnes of steel. Our production was down in Q3 mainly due to the floods in southern India and we fell short of our projected production figures by about 4 lakh tonne. We will be closing the year with around 6 million tonnes of total production, which is a growth of 62% over the previous year.

How do you see volumes growing in 2010-11 and 2011-12 thereafter? With steel majors increasing capacities, do you read any demand-supply imbalances?

India?s production of steel grew 4.5% last year and consumption was a strong 8.5% whereas at the beginning of the year, the estimate was only 2%. Moreover, not everyone could show this growth. Only players who have the advantage of product mix and lower cost of production could show a significant growth. There are some producers who could not continue production because of high costs and lower realisations.

If I look at 2011, the estimated steel consumption will be 12% against 8.5% last year. JSW Steel, we believe, will grow by 18% in 2010-11. So, we will be producing 7 million tonnes against 6 million tonnes in 2010. We are also seeing a good rebound in sectors like real estate, infrastructure and construction. These are the sectors that did not do well in FY2010 when the entire consumption was contributed by automobiles, consumer durables and government-aided projects which helped keep steel consumption growing. At the same time, 2010-11 will be taken over by infrastructure, real estate and construction, where the capex cycle is restarting with a number of projects getting restarted, and credit offtake is increasing, giving rise to robust demand.

What is the net debt on company’s books now and how much have you borrowed recently?

On a consolidated basis, we have a net debt of Rs 16,500 crore as at the end of December 2009.

In FY11, our debt in absolute numbers will go up because we will be spending close to Rs 7,000 crore to complete the next phase of expansion. We are increasing our capacity by another 3 million tonnes and so, we will be drawing down new debt of Rs 4,800 crore. We have taken on rupee debt and have got part of our loan set at an interest rate of 11.25% and part of it is at 10.75%. Both are ten-year loans with a two-year resets linked to PLR of banks. Our lead bankers are State Bank of India, IDBI and ICICI.

Could you give us an update on your US operations?

The US is looking better relative to what it was. Plate prices have moved up. In the last few weeks, short-term plate prices have gone up by $35 per tonne. We are seeing plate prices in the range of $840-850. Similarly, pipe prices have gone up and hence, realisations are improving. The US, which used to produce 1 million tonnes a week, is now producing 1.5 million tonne. There is a 50% growth in steel production in the US; as consumption is increasing and the economy is looking better than what it was. Taking this into consideration, our capacity utilisations in that country are going up and in FY11. We expect to be Ebidta positive as we had lost money at the Ebidta level in FY10. Though not sufficient enough to cover full interest and depreciation, we are still confident that we may be able to cover interest and partly the depreciation. We would increase our capacity utlisation to 40% from 25% currently.

How much stake will JFE pick up in JSW Bengal?

JSW has a strategic agreement with JFE. We have identified areas of collaboration and teams are working from both the companies, but nothing has been finalised yet.

Will JFE pick up stake in the parent company?

That also is not clear today. The areas identified as of now are whether they will come at parent level or participate in the Bengal project. These are various options available and are under discussion right now.

What is the arrangement with JSW Energy for Mozambique coal mines?

It?s a long-term arrangement with JSW Energy for supply of coal from Mozambique mines. We are looking at the option of getting a valuation done of this mine and transferring that to JSW Energy. They will make the investment and get coal from there.

Have you shortlisted any region for acquisition of mines?

There are several proposals that the company is looking at, but nothing has been finalised yet.