FE 500: 'Steel prices will improve with demand'

Written by fe Bureau | Updated: Feb 29 2012, 23:49pm hrs
Its been a double whammy for Indian steel makers with demand in the home market flagging and the supply of key inputs being disrupted. The slowdown in the economy has meant that construction and auto firms are consuming less steel. On the other hand, the availability of key inputs like iron ore has been disrupted while the price of coking coal has risen sharply. Indias third largest steel maker, JSW Steel,was compelled to cut production to just 30% of capacity at its Vijayanagar plant for a brief period after the Supreme Court banned iron ore mining in Karnataka.

JSW, however, doesnt want to look back and is moving on. The companys joint MD and group CFO, Seshagiri Rao, tells Debabrata Das that the situation is on the mend with demand picking up and supplies of iron ore almost back on track.

The demand for steel has been growing rather slowly over the past ten months or so. Are you seeing an uptick

In the last few months there was a steep fall in price of steel,from $720-730 per tonne to $600 per tonne, and because of this several marginal-cost producers shut down operations. That is why the peak international production of 120 million tonnes in May came down to 115 million tonnes in December. The stock with both producers and users is low and thats why there has been a slight uptick in international steel prices.

Back home, apparent consumption of steel grew slowly, at less than 2% in the June quarter and has seen a rebound in the December quarter according to the JPC (Joint Plant Committee) numbers.

But the industry also has to keep an independent watch. There has been some revival, some buyers are coming back. So we expect demand growth in India for the fiscal to be at around 5%.

Costs of iron ore and cooking coal, the two key inputs, have risen sharply. Cheap raw material is a thing of the past. Do you see any improvement in steel prices

Steel prices will improve with demand. There are good signs coming from the US, Japan is back in reconstruction mode and China, despite a slowdown, is doing relatively well.

So we expect the second half of 2012 to be better in terms of both demand and prices.

Since demand is seeing a little uptick, have you increased steel prices

In terms of prices,we are following a wait and watch approach. International prices have improved slightly and that is why steel prices were increased by 2%. Things are looking slightly better but not that much. Demand is still not very high though the oversupply has reduced.Therefore, a wait and watch approach is best in terms of steel pricing.

Has the fall in steel prices and slowdown in demand brought down raw material prices

When steel prices are low, the effect on raw materials comes with a lag.That impact we have started to see with coking coal coming down to $200-230 in the spot market; iron ore prices got corrected to $120-125 per tonne but they have again gone back to $140-145 per tonne levels.

Steel makers cut production last calendar year. How different will this year be

We expect iron ore supplies will get normalised in the next financial year.

We have 11 million tonnes of installed capacity.So, if you take even 90% capacity utilisation, then 9.5-10 million tonnes are very realistic figures.

The Supreme Court ban on iron ore mines has added to your woes. How will it hurt you long term

As far as the current mining ban is concerned, the industry nearly came to a complete halt. The industry then approached the Supreme Court and it gave us some relief, permitting NMDC to mine upto 1 million tonnes a month and supply to the industry exclusively and not export. But the total iron ore requirement for the region is 2-3 million tonnes.When even 1 million tonnes was not adequate the Supreme Court eauctioned 25 million tonnes of stockpiles, which helped the steel industry to function. But stockpiles are getting exhausted and there is no option but to start at least the clean mines. It is not possible to get ore from other states in large quantities on a sustainable basis,

only small quantities are possible. If the mining ban is not lifted, at least on clean mines, then producing steel will be very difficult. If the clean mines start, then at least the iron from the stockpile will be replenished.

There were some hurdles relating to the supply of auctioned iron-ore. Has this been resolved Do you expect more relief from the Supreme Court

After the e-auctions started, there were several constraints in the movement of iron ore in terms of logistics and procedural delays. These we have represented and they have been partially resolved.

With that there was an improvement in December. This helped us to run at 84% capacity in December. Now, we have been anxiously waiting relief from the Supreme Court by lifting the ban on mining at least on clean mines, which will increase iron ore availability. The existing iron ore stocks are getting exhausted and within three to four months they will completely be over. Even if the clean mines are allowed to begin production, they will take some time to be operational.

Therefore, to continue sustainable production, it is essential to get some relief from the Supreme Court immediately.

Given the current state of the economy, are foreign companies, in your case JFE, shy of investing more in India

As per our current agreement, JFE can keep up to 14.99%. They are interested to increase this but we havent taken a call yet on diluting our stake further as we dont see any further need to raise money.They have some options to convert global depository receipts into equity shares. If they exercise that, then their stake will go slightly above 15%.That is how we see the situation to be in terms of investor confidence.