Domestic demand in China is quite strong that got reflected in the improvement in FOB prices which have gone up from $400 in April to $480 per tonne at present.
As Indo-China tensions continue to simmer, JSW Steel is evaluating other options for sourcing certain items. Seshagiri Rao MVS, joint managing director and group chief financial officer, JSW Steel, tells Shubhra Tandon that the company will make its sourcing zero from China in the next two years. Rao also says FY22 will be a transformational year for JSW Steel with capacity touching 27 MTPA versus 18 MTPA at present. Edited excerpts:
What will be the impact of anti-China sentiment on the steel sector and how are you viewing this at JSW Steel?
Today, majority of the steel sector highly depends on China for products like refractories and rolls. However, for other products like ferroalloys, electrodes, consumables, etc., we need not rely on China so much. In the current environment, where anti-China perception is there, all around the world, and not just in India, as a company, we have evaluated options. There are alternatives available for these two products starting from South Korea to Brazil, Turkey, Norway, Australia and Europe. We have already started our exercise and in the next two years, we will make the sourcing zero from China.
How will this change impact your costs?
Prices depend largely on scale. Even if the costs are higher they would be transient and would come down to levels that we are currently buying. For instance, today, if I say that 90% of the order will be given to Chinese and only 10% to Europeans, automatically the latter’s prices will be higher. But, once I give 100% order to them (Europeans), then things will be different. They may not have capacity immediately, but once I say I am committing 100% they will make more investments and capacity will go up. I believe, more capacities will be created either in India or overseas and there will be re-alignment of supply chains.
JSW Steel has reported loss this quarter. How is the rest of FY21 looking like?
The rest of the year is brighter compared to the last quarter. Last quarter was only a two-month quarter as April was a complete washout with work done only for 10 days. The plant capacity utilisation was only 38% in April, that is why fixed cost could not be recovered in the month of April and it turned out to be negative for the overall quarter. However, there was no cash loss, we were able to cover our full interest and also a part of depreciation. Generally, every quarter we produce 4 million tonne of steel and sell around 3.7-3.8 million tonne, but in Q1 there was 0.92 million tonne of lower volumes. Now, normalcy is restored in all our production sites, so we expect change in volumes. Operating with full capacity a million tonne of extra volume will come, which itself will contribute substantially to the bottom line. Also, coking coal prices have fallen $40 per tonne globally, so part of that benefit will come on the cost side. With that things will improve in the following quarters.
What is the outlook on demand?
Demand fell 91% in the month of April but in June, the fall in demand was 45%. So, there has been quite a substantial improvement from April to June. Though Covid-19 impact is there, it is not uniform across. Rural areas were less affected. We expect domestic demand recovery to improve further in Q2. The second half of the year looks much better.
What is the outlook on steel and raw material prices?
Domestic demand in China is quite strong that got reflected in the improvement in FOB prices which have gone up from $400 in April to $480 per tonne at present. If I take the landed cost of steel into India based on $480, our domestic prices are at a discount. So with that, we expect some improvement in price realisation. However, if we look at US, Europe, Japan, those economies are not doing well, that is why there is 14% drop in steel production other than China. So, China is producing more, while others are reducing supply. So there is a rebalancing which is happening and we are not seeing a downside in steel prices. However, supply side adjustments that are being done by Koreans, Japanese and Europeans they are buying lesser coking coal, that is why coking coal prices are falling. So, India is getting advantage of lower coking coal prices. However, as China is a big importer of iron ore and they are producing more iron ore, prices are going up. That is a trend seen even in India where the iron ore prices have gone up in the month of July. Whereas the balance costs that of ferroalloys, rolls, refractories, electrodes, etc., are also coming down. So, overall costs will be under control while on steel pricing side, there could be an upside.
What is the your next step in Bhushan Power and Steel matter as the banks deadline of two weeks for payment has lapsed?
As per our understanding of the Supreme Court order, we are not obligated to implement the resolution plan. The encumbrance which is there by the Enforcement Directorate is required to be discussed. So, we expect the Supreme Court will hear the case and it will get disposed of and will get adjudicated and then we will implement the plan. We are ready to implement the plan.
Why did you seek more time for making payments from CoC?
It is not that we are seeking time, but we want the SC to adjudicate the matter as early as possible. That is taking time due to Covid-19-related issues as hearings are not happening. It may take time is what we expect.
Are you still interested in acquiring BPSL?
Yes, we are very keen, very keen to complete it.
With FY21 almost a washout, how will FY22 look like for JSW Steel?
From this year to next year, there will be a huge transformation that will happen in JSW Steel. In the next six months, we will complete our expansion plans. In FY22, we expect our total capacity to go up from 18 MTPA to 23 MTPA organically, another 3.5 million tonne coming from Bhushan Power and Steel, will take us close to 27 million tonne. Also, the integration of iron ore mines in Odisha and Karnataka will be a huge game changer for us.
What is the plan with the Rs 10,000-crore planned fund raise?
It is to complete our project capex programme plus some refinancing. We will not raise the full amount but around Rs 5,000 crore in the next six months.