ICRA RESEARCH SERVICES

Corporate Ratings

INDIAN STEEL INDUSTRY

Near term weakness to persist amidst demand slowdown and planned capacity additions

Anjan Deb Ghosh

+91 22 3047 0006
aghosh@icraindia.com
Contacts:
Jayanta Roy
+91 33 2287 6617
jayanta@icraindia.com
Priyesh Ruparelia
+91 22 3048 1072
priyesh.ruparelia@icraindia.com
Soumyo Roy
+91 33 7150 1110
soumyo.roy@icraindia.com
Shankhadeep Mukherjee
+91 33 7150 1108
shankhadeep.mukherjee@icraind
ia.com

October 2012

Steel Feature October 2012

Table of contents
Executive Summary ................................................................................................................................................................................................................................. 3
Indias Finished Steel Production and Consumption Trends ..................................................................................................................................................................... 5
Demand Side Scenario ............................................................................................................................................................................................................................. 6
Supply Side Scenario ................................................................................................................................................................................................................................ 8
Steel Production Routes ........................................................................................................................................................................................................................ 10
Capacity Addition Trends ....................................................................................................................................................................................................................... 11
Steel Price Movements .......................................................................................................................................................................................................................... 12
Raw Material Scenario ........................................................................................................................................................................................................................... 15
Margin Outlook for Indian Steel Players ................................................................................................................................................................................................ 23

Company Section
JSW Steel Limited (JSW) .................................................................................................................................................................................................................................... 27
Steel Authority of India Limited (SAIL) .............................................................................................................................................................................................................. 30
NMDC Limited (NMDC) ..................................................................................................................................................................................................................................... 33
Monnet Ispat & Energy Limited (MIEL) ............................................................................................................................................................................................................ 36
Jayaswal Neco Industries Limited (JNIL) ........................................................................................................................................................................................................... 39
Kalyani Steels Limited (KSL) .............................................................................................................................................................................................................................. 42
Jindal Steel & Power Limited (JSPL) .................................................................................................................................................................................................................. 45
Tata Steel Limited (TSL) .................................................................................................................................................................................................................................... 48
Tata Sponge Iron Limited (TSIL) ........................................................................................................................................................................................................................ 51
Bhushan Steel Limited (BSL) ............................................................................................................................................................................................................................. 54
Indian Metals & Ferro Alloys Limited (IMFA).................................................................................................................................................................................................... 57

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Executive Summary
Surging imports amidst slowing domestic demand: After registering growth rates of 13.3% and 9.9% in FY 10 and FY 11, Indian steel consumption grew at only
5.5% during FY 12 on the back of a slowdown in demand from its key consuming industries namely construction, capital goods and automobiles. Regulatory
issues, moderation in industrial activity and hardening of interest rates have adversely impacted the growth in these sectors respectively. While apparent steel
consumption growth has improved somewhat in the current financial year in contrast to other major macroeconomic indicators remaining weak, most of it has
been fuelled by surging imports, which grew by 41.2% YoY in first quarter, keeping domestic production growth at low levels. Growth in steel imports was driven
largely by the fact that the landed cost of imported steel was still cheaper than domestic steel despite increased import duty on hot rolled coils and continuing
rupee depreciation. This also indicates rising steel inventory levels in the current year. Although ICRA believes that the long term demand outlook for the
domestic steel industry is positive, favourable policy initiatives to kick-start investments and a moderation in interest rates would remain critical for the growth in
the steel demand going frward.
Large capacity additions are likely to create a supply overhang: Indian finished steel production grew by a moderate 6.6% in FY12, after having grown at 8.8% in
FY11. Supply side issues like low availability of iron ore, besides weakness in demand conditions, led to this moderation, which resulted in the domestic industry
witnessing a capacity utilization of around 79%. However, a glut of steel capacity is expected in the country in the next 2-3 years, given the large capacity addition
plans of most of the steel majors in the country. With the prospect of a sharp upturn in demand growth remaining weak, at least in the near to medium term,
such excess supply is likely to weigh down on the steel prices going forward.
Non-integrated players significantly affected by the lack of domestic availability of key raw materials: Despite international iron ore prices declining during
most of FY12 and the first half of FY13, domestic iron ore prices saw a sharp rise due to the lack of availability. Low production in Karnataka and Orissa led to a
significant cut in domestic iron ore production, which declined by around 17% in FY12 over FY11, which in turn affected the operations of many non-integrated
steel players, especially those dependent on the iron ore being mined in Karnataka. The situation not only hampered the capacity utilization of various steel
players, but also led to significant rise in the cost of iron ore in the domestic market, as supply for lump ore was limited, which further forced some steelmakers to
import ore. However, blast furnace operators benefited from falling coking coal prices, although a significant part of the upside was curtailed by a depreciating
Indian currency. On the other hand, despite India being one of the largest thermal coal producers in the world, only 4% of the total domestic production finds its
way into the sponge iron industry and, hence, a number of such players have to resort to imports or market purchases, both of which are costlier propositions.
Financial performance of domestic steel players likely to suffer in the near term: International steel prices are on a downward journey in the current year,
reflecting the weakness in major steel consuming regions, viz. China, the USA and the Euro-zone. Consequently, a surge in cheaper imports into India in the
current financial year have put significant pressure on domestic steel prices, which are expected to remain under check in the near term. Besides this, both limited

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Steel Feature October 2012

iron ore availability and a weak rupee offsetting the easing of international coking coal prices, have kept the prices of raw material at relatively elevated levels,
despite a fall in domestic iron ore prices in September and October 2012. This makes ICRA believe that the margins of steel players are likely to remain under
pressure for the near term at least. Vertically integrated steel producers with large scale of operations are likely to maintain a competitive cost structure, but their
overall return on capital employed may suffer following commissioning of their ongoing projects. The higher capital charges arising out of expansion projects
currently being commissioned would also add to the pressures on the net margins of the steelmakers concerned, especially in a scenario of high interest rates, as
is currently prevailing in the country. On the other hand, higher working capital requirements to operate expanded capacities, along with the contractual
obligation to service project debt following the commissioning of expansion projects, are expected to exert some pressure on the liquidity profile of such
companies. Many secondary steel producers, apart from facing raw material risks, may also face more intense price based competition from the larger companies,
which would reduce their margins.

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Steel Feature October 2012

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MUMBAI
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3rd Floor, Electric Mansion,
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Mumbai - 400 025
Ph : +91-22-30470000,
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KOLKATA
Mr. Jayanta Roy
Mobile: 9903394664
A-10 & 11, 3rd Floor, FMC Fortuna,
234/ 3A, A.J.C. Bose Road,
Kolkata-700020.
Tel: +91-33-22876617/ 8839,
22800008, 22831411
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E-mail: jayanta@icraindia.com

PUNE
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5A, 5th Floor, Symphony,
S. No. 210, CTS 3202,
Range Hills Road, Shivajinagar,
Pune-411 020
Tel : +91- 20- 25561194,
25560195/196,
Fax : +91- 20- 2553 9231
E-mail: shivakumar@icraindia.com

GURGAON
Mr. Vivek Mathur
Mobile: 9871221122
Building No. 8, 2nd Floor,
Tower A, DLF Cyber City, Phase II,
Gurgaon 122002
Ph: +91-124-4545300, 4545800
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E-mail: vivek@icraindia.com

AHMEDABAD
Mr. Animesh Bhabhalia
Mobile: 9824029432
907 & 908 Sakar -II, Ellisbridge,
Ahmedabad- 380006
Tel: +91-79-26585049/2008/5494,
Fax:+91-79- 2648 4924
E-mail: animesh@icraindia.com

BANGALORE
Mr. Jayanta Chatterjee
Mobile: 9845022459
'The Millenia', Tower B,
Unit No. 1004, 10th Floor,
Level 2, 12-14, 1 & 2, Murphy Road,
Bangalore - 560 008
Tel: +91-80-43326400,
Fax: +91-80-43326409
E-mail: jayantac@icraindia.com

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Steel Feature October 2012

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