I do not see steel prices going up, but there may not be a big correction downwards. The reasons for that are few. The supplies are expected to go up from countries like Japan, Korea, Russia, which was not the case in 2020. So, there could be some pressure on the pricing.
JSW Steel posted a robust set of numbers in Q3FY21 backed by a strong recovery in steel demand. Seshagiri Rao MVS, joint MD and group CFO, JSW Steel, told Shubhra Tandon that the financial year 2021-2022 will be far better for the steel industry in India and globally as governments across the world roll out stimulus packages to boost the economy and infuse liquidity in the system. Edited excerpts:
How is the aggregate demand for steel globally and what is the outlook?
Steel demand in 2020 fell by 2.3% or 42 million tonne (mt). The total demand has been 1,725 mt in 2020, which was 1,767 mt in 2019. As far as the rest of the world is concerned, it consumed 114 million less steel in 2020, which is 13.3% lower against 2019. India also contributed to this fall as steel consumption in India stood at 65 mt in the last 9 months of this financial year against 76 mt in the 9 months of FY20, with Covid-19 hitting us in March. However, the outlook for 2021 is positive because of the huge fiscal stimulus by the governments across Europe, the US, Japan, Korea, Russia and China. A part of it is going towards building infrastructure which requires steel. Also, the central banks around the globe are supporting by way of pumping liquidity into the markets. As a result, in 2021, the steel demand is expected to go up by 4% which means 71 mt of incremental demand.
What is the steel demand in China looking like?
As far as China is concerned, it consumed 980 mt in 2020 against 908 mt in 2019, so it consumed 72 mt or 8% more of steel in 2020. This indicates it recovered much faster after the Covid-19 crisis. They could raise the production, there was $550-billion stimulus announced that led to a huge amount of recovery in the economy and steel demand. But China’s demand has started tapering from December. So, the kind of growth which we have seen in China is unlikely in 2021. This is why steel demand in China is expected to remain flat and not go up over 980 mt in the coming year.
How is the steel demand in India?
Indian steel consumption is expected to be 93 mt at the end of FY21, which is 7% lower than last year, whereas in FY22 it is expected to grow by 10%, which means another 9-10 mt of incremental demand over 93 mt taking it to 103-105 mt. If we cross 10%, we will close the next financial year with 110 mt of steel demand. Most of this will be led by government spending on infrastructure which is driving almost 50-60% of incremental demand. Also, automobiles, white goods, bearing and forging industry, piping industries, drums and barrels and packaging industries are doing well in India which is leading to higher steel off-taking, and also demand in rural India. Additionally, the mining sector is expected to do better than last year, which means demand for commercial vehicles will go up. So, next year would be far better and we will pick up the demand that we lost last year.
Since JSW Steel’s volumes were lower on a year-on-year basis as well as sequentially, the sharp improvement in revenues this quarter can be attributed to higher prices?
There were four reasons. One is that integration of iron ore has gone up from 26% in the previous quarter to 49%, so iron ore supplies have gone up. In Q2 we suffered because of that. This also led to our capacity utilisation improving from 86% in Q2 to 91%, and with that our fixed cost came down. Secondly, our export sales were 28% of the sales in Q2, while those have come down to 12% because as the steel demand picked up in the domestic market, we focused more here, changing our geographical mix. Also, the product mix has improved. We had 57% of our sales coming in from high-value grade steel. This is up from 50% seen in Q3FY20 and 51% in Q2FY21. The benefit of lower coal cost also gave the benefit to us, and then also the higher net sales realisation which was a result of prices for auto sector getting reset in October.
How are the current HRC and CRC prices in India and how much have they risen y-o-y and sequentially? How does it compare with global prices?
For us, on a blended basis prices went up by 20% sequentially and 26% y-o-y in the last quarter. If you were to compare India prices with global prices, in April-December prices in China went up by 80% from $394 to $710, in the US they were up 119% from $507 to $1112, in Europe 84% from $438 to $807, whereas in India it went up from Rs 35,000 to Rs 53,000 which is 51%. The price rise is much steeper in other countries. So, while we may not be out of tune with global markets, we haven’t increased the steel business in India the way it has gone up globally.
What is the outlook on steel prices for the coming year?
I do not see steel prices going up, but there may not be a big correction downwards. The reasons for that are few. The supplies are expected to go up from countries like Japan, Korea, Russia, which was not the case in 2020. So, there could be some pressure on the pricing. Also, in the last few days prices in China have come down by about $30 which corroborates that the Chinese economy is slowing down.
However, from a cost perspective, the coking coal prices went up from $102 to $135 per tonne. Iron ore in December was $159, today, it is $168. So, cost escalations could push steel prices higher. Then there is the factor of demand, whether it will remain robust or not. So far indications are it will remain strong, which will drive prices. Also, we don’t see the US dollar becoming stronger shortly, so no downward pressure on commodity prices expected.