THE INDIAN COMMODITY POLYMERS INDUSTRY

POLYMER PRICE WATCH

METALS

ICRA Sector Research

The Indian Steel Industry: Performance Review
During Q1 2003-2004
August 2003

Sector Watch Service

INGRES
(ICRA Information, Grading & Research Service)
A Division of ICRA Limited

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TABLE OF CONTENTS

PERFORMANCE DURING Q1 2003 – 2004..................................................................................... 2

OUTLOOK............................................................................................................................................ 5

Analyst : Rajeev Thakur

Dated : August 2003

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P E R F O R M AN C E DURING Q1 2003 – 2004

The recovery of the steel sector witnessed in 2002-2003 was carried forward in Q1 2003-2004. Production
and apparent consumption were higher by 7.8% and 1.6% respectively. Production growth was 9.4% in the
Flats segment as against 5.7% in the non-Flat segment. Apparent consumption growth in the Flat and non-
Flat segments were –1.5% and 5.1% respectively. The apparent consumption growth in the Flat segment
was negative despite a positive production growth, due to sharp rise in exports coupled with a poor
domestic offtake largely due to the transporters strike in April 2003. Export performance was remarkable
with a growth of 38.6% during the period. Imports were higher by 26.8%. Export growth was higher for Flat
products (41.8%) as against Non-Flat products (21.8%). Import growth was higher for Non-Flat products
(42.9%) as against Flat products (25.7%). The capacity utilisation (Primary and Secondary producers) of
crude steel production improved from 86.3% in Q1 2002-2003 to 92.0% in Q1 2003-2004.

Steel Production and Consumption

(‘000 tonnes)

Q1 2003-2004 Q1 2002-2003
Growth in
Apparent Apparent Growth in Apparent
Production Consumption Production Consumption Production Consumption
Pig Iron 1367 1206 1304 1153 4.8% 4.6%
Semis 2094 1922 1914 1856 9.4% 3.6%
Finished Steel
Bars & Rods 2635 2474 2634 2533 0.0% -2.3%
Structurals 781 763 597 557 30.8% 37.0%
Rly. Materials 219 220 208 199 5.3% 10.6%
Non-Flats 3635 3457 3439 3289 5.7% 5.1%
Plates 468 391 387 429 20.9% -8.9%
HR Coils/Skelp 2122 1799 1889 1653 12.3% 8.8%
HR sheets 114 112 127 136 -10.2% -17.6%
CR Sheets/coils 1182 740 1135 789 4.1% -6.2%
GP/GC sheets 635 369 615 468 3.3% -21.2%
Elec. Sheets 41 55 39 51 5.1% 7.8%
Tinplate 38 40 37 55 2.7% -27.3%
Tin Mill Black
Plate (TMBP) 7 6 6 4 16.7% 50.0%
Pipes (Large
Dia) 140 143 105 119 33.3% 20.2%
Tin free steel 0 8 0 14 NA -42.9%
Flats 4747 3663 4340 3718 9.4% -1.5%
Total finished
steel 8382 7120 7779 7007 7.8% 1.6%
Compiled by INGRES; NA- Not Applicable

Domestic prices of steel products have followed global trend and have witnessed a rise since rise since the
beginning of 2002-2003. This is largely because of the production cut affected by the OECD (Organisation
for Economic Co-operation and Development) nations, growth in steel demand in China and the tariffs
induced in several parts of the world.

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Steel Prices at Mumbai (during Q1 2003-2004)

(Rs./tonne)
Q1 Q1 2002-2003 Growth over Growth over
2003-2004 2002-2003 Q1 2002-2003 2002-2003
Billets 14500 11600 12992 25.0% 11.6%
Wire Rods, 8 mm 18067 15533 16400 16.3% 10.2%
Rounds, 12 mm 17167 15400 15909 11.5% 7.9%
Plates, 6 mm 21500 17000 19992 26.5% 7.5%
HR Coils, 3.15 mm 23033 16733 20092 37.7% 14.6%
CR Coils, 0.63 mm 26333 20500 23500 28.5% 12.1%
GP Sheets, 0.63 mm 30667 25333 27625 21.1% 11.0%
Compiled by INGRES

Growth in exports coupled with significant improvement in steel prices and adoption of cost cutting
measures have had a large positive impact on the profitability of the steel companies in India. The key
financial figures for the two steel majors (TISCO and SAIL) are presented in the following section. SAIL has
in fact shown profits in Q1 2003-2004. This is the second consecutive quarter in which SAIL has shown
profits.

TISCO

Financial Performance of TISCO

(Rs.mn.)
Q1 2003-2004 Q1 2002-2003 Growth

Sales 22571.0 17649.3 27.9%

Other Income 180.8 109.7 64.8%
Total Exp. 15820.0 14176.7 11.6%
Operating profit 6751.0 3472.6 94.4%
Interest 764.6 853.1 -10.4%
Depreciation 1445.9 1385.5 4.4%
Extraordinary items -710.4 -623.4 14.0%
Tax 1340.2 78.2 1613.8%
Net Profit 2670.7 642.1 315.9%
Source: TISCO

Highlights of TISCO’s performance include:

• Steel exports increased by 72% from Rs. 1.65 bn. to Rs. 2.83 bn. Volume exports of steel products
was higher by 54%.
• Tisco bagged first export order for direct supplies of CRCA coils to the Malaysian Auto manufacturer,
PROTON.
• Market share increased across different product segments- HR (Auto): 50% to 67%; CRCA (Auto):
20% to 35%; CRCA (Auto Ancillaries): 22% to 36%; CRCA (Appliances): 16% to 27%; GC Sheets:
16% to 20%; HCWR: 40% to 55%; LCWR: 37% to 40%.
• Share of branded products in total turnover increased from 16% to 22%
• Labour productivity improved by 21% from 209 tonnes of saleable steel (tss)/man-year to 254 tss/man-
year.
• Raw material consumption decreased by 7% from 3.38 tonnes / tss to 3.16 tonnes/tss.
• Specific energy consumption decreased by 3% from 7.15 Gcal / tss to 6.97 Gcal / tss.
• Interest decreased by 10% from Rs. 853.1 mn. To Rs. 764.6 mn. Due to restructuring / pre-payment
(25 million Euro loan) of high interest bearing loans.

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SAIL

Financial Performance of SAIL

(Rs. mn.)
Q1 2003-2004 Q1 2002-2003 Growth
Net Sales 42748.7 38118.8 12.1%
Other Income 38.0 53.0 -28.3%
Total Exp. 34791.7 34706.0 0.2%
Operating profit 7957.0 3412.8 133.2%
Interest 2631.8 3681.5 -28.5%
Depreciation 2816.3 2872.9 -2.0%
Tax 0.0 0.0 NA
Net Profit 2546.9 -3088.6 NA
Source: SAIL; NA- Not Applicable

Highlights of SAIL’s performance are as follows:

• SAIL exported 0.33 mn. ones of steel during Q1 2003-2004, as against a target of 1 mn. ones for
the entire financial year 2003-2004. The growth of 162% in exports over the corresponding period last
year was not only due to resumption of good demand from China after a short interval in the beginning
of the quarter, but also due to improved orders from countries like Korea, Thailand, EU, etc.
• The four main integrated plants of SAIL (Bhilai, Durgapur, Rourkela and Bokaro) together produced
2.56 MT (million ones) of saleable steel during the first quarter of 2003-04, which was 8.6% higher
than the 2.36 MT produced by them in Q1 2002-2003.
• SAIL produced approximately 60% of crude steel (or 1.7 MT) through the energy-efficient Continuous
Casting route. There was a jump in production of high-value items like plates (40%), tinplates (15%)
and CRNO (7%) over the corresponding period last year.
• The SAIL plants continued to focus on improving operational efficiencies to counter input cost
escalations during the period. Accordingly, Blast Furnace productivity improved by 7% and energy
consumption was lower by 1.8%.
• A saving of Rs. 1.05 bn. In interest was achieved through debt reduction.

On perusing the segmental results, we make the following observations.

• Barring Rourkela, Bokaro and Alloy steel plant, all plants have shown revenue growth during Q1 2003-
2004. Bhilai Steel Plant recorded highest revenue growth.
• Growth in profit/reduction in losses was reported by all plants. Highest growth in profitability in absolute
terms was reported by Bhilai Steel Plant, which in turn had the highest ROCE.
• For Q1 2003-2004, apart from Bhilai and Bokaro Steel Plants, Durgapur Steel Plant also reported a
modest profit of Rs. 316.7 mn.

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Profit Growth / Loss ROCE

Revenue Growth Reduction (Rs. Million)
Q1 FY2004 Q4FY2003 Q1 FY2004 Q4FY2003 Q1 FY2004 Q4FY2003
Bhilai Steel Plant 36.0% 26.2% 1759.40 1189.5 15.4% 17.0%
Durgapur Steel Plant 34.9% 25.3% 650.90 28.7 0.9% -0.4%
Rourkela Steel Plant -5.1% 43.8% 784.40 1560.1 -0.3% 0.3%
Bokaro Steel Plant -4.3% 28.2% 1150.80 3865.5 5.7% 8.4%
Alloy Steel Plant -4.1% 46.8% 8.60 -245.4 -15.4% -30.2%
Salem Steel Plant 14.3% 91.9% 69.10 107.0 -0.9% -1.4%
Visvesvaraya Iron & Steel Plant 16.7% 20.6% 76.20 -292.4 -5.7% -26.5%
Others 21.1% 28.5% 86.40 -228.5 1.1% -3.8%
Total 13.8% 30.7% 4585.80 5984.5 3.4% 3.3%
Source: SAIL

OUTLOOK

The positive prospect for the steel industry is expected to be sustained in the medium term. While, world
steel demand has stagnated, China is emerging as an attractive high growth market, largely driven by
construction activities related to the 2008 Olympics. The incremental steel demand in China during 2002
was about 25 million tonnes (about the size of the Indian market). This is expected to increase further by
about 20 million tonnes in the year 2003. The global consumption (excluding China) increased by about 7
million tonnes in 2002 and is expected to increase by a relatively better 20 million tonnes in 2003. Thus,
China is expected to play a major role in influencing world demand growth for steel in the near to medium
term. However, during April-May 2003, global steel prices have fallen by about $30/tonne due to stock pile-
up at China ports on account of expiry of import quotas in April coupled with poor offtake because of SARS.
However, the trend is likely to be corrected as China has re-issued quotas from May 26th and SARS has
phased out.

Shortage in metallics globally (due to closure of coke ovens and coal fields in China because of safety and
environmental factors) in addition to duties imposed by CIS nations on scrap exports is likely to negatively
impact the performance of non-integrated steel manufacturers and Electric Arc Furnace units. This is likely
to result in rationalisation of steel capacity with a positive impact on the demand supply position and hence
the steel prices. This trend is likely to be sustained in the short to medium term, as there is still a lead time
of a couple of years before greenfield capacities are added in China. Also, reconstruction activities in Iraq
are likely to impact the steel prices positively. The overcapacity in the industry (about 70 mn. tonnes in
2002) is expected to reduce but will persist in the near future. The capacity utilisation of the steel firms is
likely to increase resulting in improved profitability. The Indian Steel firms are expected to follow the global
trends broadly.

On the demand front in the domestic market, consumption of steel would be a function of the growth
prospects in the end-user sectors like construction/infrastructure, white goods and automobiles. These
sectors have recorded sluggish growth in the past but are showing signs of pick-up. However, in the
medium term, with the revival of the economy, the performance of these sectors are likely to improve
further and would improve the market prospects of the steel industry. Unlike the global industry, the Indian
steel industry continues to remain fragmented and has a massive financial burden of over Rs. 400 bn.
Recently, the FIs have restructured debt amounting to about Rs. 200 bn. so as to improve the repayment
prospects.

While global demand growth and increasing prices spell good news for the Indian steel manufacturers,
there is an imperative need to improve operating profitability so as to withstand all phases of steel price
cycle. This is expected through varied measures such as - implementing cost control measures,
enhancement of capacity utilisation, improvement of operational efficiencies, altering the product mix for
maximising share of value-added products and targeting niche markets.

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