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

................................................................................................................................................................................................................................................................................................................................................................................................................................................................... 27 Steel Authority of India Limited (SAIL) ............................................................................................................................................................................................................................................................. 39 Kalyani Steels Limited (KSL) ........................................................................................................................................................................................................................................ 5 Demand Side Scenario .......... 11 Steel Price Movements ................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................ 30 NMDC Limited (NMDC) .................................................................................................................................................................................................................... 6 Supply Side Scenario .................................................................................................................................................................................................................................................... 3 India’s Finished Steel Production and Consumption Trends ... 15 Margin Outlook for Indian Steel Players ................................................................................................................................................... 51 Bhushan Steel Limited (BSL) .................................................................................................................................................................................................................................................................................................................................... 57 ICRA LIMITED Page 2 .............................................................................. 36 Jayaswal Neco Industries Limited (JNIL) ...................Steel Feature – October 2012 Table of contents Executive Summary ..................................................................................................................................................................................................................................................................... 33 Monnet Ispat & Energy Limited (MIEL) ............................................................................................................................................................................................... 54 Indian Metals & Ferro Alloys Limited (IMFA)............................................................................................................................................................................................................................................................................................................................................................................. 23 Company Section JSW Steel Limited (JSW) ..................................................................................... 45 Tata Steel Limited (TSL) ...................................................................................................................................................................................... 48 Tata Sponge Iron Limited (TSIL) ........................................................................................................................................................ 12 Raw Material Scenario .................................................................................................................................................................................................................................................................................................................................................................................................................... 10 Capacity Addition Trends .......................... 8 Steel Production Routes ......................................................................................... 42 Jindal Steel & Power Limited (JSPL) ...................

a surge in cheaper imports into India in the current financial year have put significant pressure on domestic steel prices. While apparent steel consumption growth has improved somewhat in the current financial year in contrast to other major macroeconomic indicators remaining weak. besides weakness in demand conditions. at least in the near to medium term.5% during FY 12 on the back of a slowdown in demand from its key consuming industries namely construction. led to this moderation. China. 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. which resulted in the domestic industry witnessing a capacity utilization of around 79%.Steel Feature – October 2012 Executive Summary Surging imports amidst slowing domestic demand: After registering growth rates of 13. Indian steel consumption grew at only 5. 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. hence. after having grown at 8. blast furnace operators benefited from falling coking coal prices. This also indicates rising steel inventory levels in the current year. viz. reflecting the weakness in major steel consuming regions. With the prospect of a sharp upturn in demand growth remaining weak. which in turn affected the operations of many non-integrated steel players. 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. a glut of steel capacity is expected in the country in the next 2-3 years. Consequently.6% in FY12. a number of such players have to resort to imports or market purchases. However. Low production in Karnataka and Orissa led to a significant cut in domestic iron ore production. However. but also led to significant rise in the cost of iron ore in the domestic market. domestic iron ore prices saw a sharp rise due to the lack of availability.2% YoY in first quarter. both of which are costlier propositions. Besides this. which declined by around 17% in FY12 over FY11. Large capacity additions are likely to create a supply overhang: Indian finished steel production grew by a moderate 6. only 4% of the total domestic production finds its way into the sponge iron industry and. Regulatory issues. most of it has been fuelled by surging imports. given the large capacity addition plans of most of the steel majors in the country. although a significant part of the upside was curtailed by a depreciating Indian currency. despite India being one of the largest thermal coal producers in the world. both limited ICRA LIMITED Page 3 . the USA and the Euro-zone. On the other hand. moderation in industrial activity and hardening of interest rates have adversely impacted the growth in these sectors respectively. which are expected to remain under check in the near term. 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. as supply for lump ore was limited. keeping domestic production growth at low levels.9% in FY 10 and FY 11.3% and 9. which grew by 41. which further forced some steelmakers to import ore. such excess supply is likely to weigh down on the steel prices going forward. especially those dependent on the iron ore being mined in Karnataka. capital goods and automobiles. Supply side issues like low availability of iron ore.8% in FY11. Although ICRA believes that the long term demand outlook for the domestic steel industry is positive. The situation not only hampered the capacity utilization of various steel players.

as is currently prevailing in the country. especially in a scenario of high interest rates.Steel Feature – October 2012 iron ore availability and a weak rupee offsetting the easing of international coking coal prices. which would reduce their margins. ICRA LIMITED Page 4 . On the other hand. despite a fall in domestic iron ore prices in September and October 2012. but their overall return on capital employed may suffer following commissioning of their ongoing projects. higher working capital requirements to operate expanded capacities. are expected to exert some pressure on the liquidity profile of such companies. along with the contractual obligation to service project debt following the commissioning of expansion projects. apart from facing raw material risks. Many secondary steel producers. Vertically integrated steel producers with large scale of operations are likely to maintain a competitive cost structure. This makes ICRA believe that the margins of steel players are likely to remain under pressure for the near term at least. 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. have kept the prices of raw material at relatively elevated levels. may also face more intense price based competition from the larger companies.

C. CTS 3202.com AHMEDABAD Mr.2553 9231 E-mail: shivakumar@icraindia. Pune-411 020 Tel : +91. Kolkata-700020. 210. Prabhadevi. 2nd Floor.com BANGALORE Mr. Unit No. 26. 234/ 3A. Fax: +91-80-43326409 E-mail: jayantac@icraindia. 1004.com ICRA LIMITED Page 5 . Phase II. 11 Floor. Kasturba Gandhi Marg.J. Tower A. D. 12-14. Gurgaon 122002 Ph: +91-124-4545300.com d. Bose Road.2373 5152 E-mail: adityamsk@icraindia. M.com KOLKATA Mr. Ahmedabad. L. Aditya Mobile: 9963253777 301. Karumuttu Centre. DLF Cyber City. 24340043/9659/8080 Fax:91-44-24343663 E-mail: jayantac@icraindia. Tel: +91-40-23735061.com HYDERABAD Mr. Gurgaon 122002 Ph: +91-124-4545300. Ellisbridge.20. 4545800 Fax. Symphony. 5th Floor. Phase II. S. Fax : +91. CONCOURSE. +91-124-4545350 E-mail: vivek@icraindia. 4545800 Fax. Nandanam. 22800008. Bangalore . 10th Floor.560 008 Tel: +91-80-43326400. Jayanta Chatterjee Mobile: 9845022459 Mr. Electric Mansion. 3rd Floor. Ameerpet. 2nd Floor. Shivajinagar. Chennai-600035. Murphy Road. 498 Anna Salai.Steel Feature – October 2012 Please contact ICRA to get a copy of the full report CORPORATE OFFICE Building No. Mumbai . Appasaheb Marathe Marg. New Delhi – 110 001 Tel: +91-11-23357940-50 Fax: +91-11-23357014 CHENNAI Mr. Shivakumar Mobile: 9821086490 3rd Floor.S. No.com MUMBAI Mr. Hyderabad 500 016. Level 2. 8. Range Hills Road.K. No.com GURGAON Mr. Jayanta Chatterjee Mobile: 9845022459 'The Millenia'. 1 & 2. 25560195/196. L. 24331046/53/62/74/86/87 Fax : +91-22-2433 1390 E-mail: shivakumar@icraindia. 22831411 Fax: +91-33-2287 0728 E-mail: jayanta@icraindia. 23737251 Fax: +91-40. 7-1-58. Vinod Mobile: 9940648006 5th Floor.25561194. Animesh Bhabhalia Mobile: 9824029432 907 & 908 Sakar -II. +91-124-4545350 REGISTERED OFFICE th 1105. Kailash Building. 3rd Floor.20. Jayanta Roy Mobile: 9903394664 A-10 & 11.vinod@icraindia. Tower A. Vivek Mathur Mobile: 9871221122 Building No. Shivakumar Mobile: 9821086490 5A. Tower B.400 025 Ph : +91-22-30470000. 8. Fax:+91-79. FMC Fortuna. A. Tel: +91-33-22876617/ 8839.com PUNE Mr.380006 Tel: +91-79-26585049/2008/5494. Tel: +91-44-45964300. DLF Cyber City.2648 4924 E-mail: animesh@icraindia.

Fax + (91 44) 2434 3663 Kolkata: Tel + (91 33) 2287 8839 /2287 6617/ 2283 1411/ 2280 0008. All Rights Reserved. makes no representation or warranty. DLF Cyber City. Website: www. Phase II. Fax + (91 20) 553 9231 © Copyright.: + (91 22) 24331046/53/62/74/86/87. 26 Kasturba Gandhi Marg. Fax + (91 40) 2373 5152 Pune: Tel + (91 20) 2552 0194/95/96. All information contained herein has been obtained by ICRA from sources believed by it to be accurate and reliable. such information is provided 'as is' without any warranty of any kind. 2433 0724/ 3293/3294.Steel Feature – October 2012 ICRA Limited An Associate of Moody's Investors Service CORPORATE OFFICE Building No. 2nd Floor. timeliness or completeness of any such information. express or implied. Fax: +91 11 23357014 Branches: Mumbai: Tel.icra. New Delhi 110001 Tel: +91 11 23357940-50. 2012 ICRA Limited. and ICRA in particular. Fax + (91 33) 2287 0728 Bangalore: Tel + (91 80) 2559 7401/4049 Fax + (91 80) 559 4065 Ahmedabad: Tel + (91 79) 2658 4924/5049/2008. Gurgaon 122 002 Tel: +91 124 4545300. Fax: + (91 22) 2433 1390 Chennai: Tel + (91 44) 2434 0043/9659/8080.in REGISTERED OFFICE 1105. and ICRA shall not be liable for any losses incurred by users from any use of this publication or its contents. Fax + (91 79) 2658 4924 Hyderabad: Tel +(91 40) 2373 5061/7251. Fax: +91 124 4545350 Email: info@icraindia. Although reasonable care has been taken to ensure that the information herein is true. ICRA LIMITED Page 6 . 8. as to the accuracy. Tower A.com. Kailash Building. 11th Floor. All information contained herein must be construed solely as statements of opinion.

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