Global and Indian Trends in Metal Industry

8 February 2012

CRISIL Limited

About CRISIL Research
CRISIL Research is India¶s largest independent research house and is a 100 per cent subsidiary of CRISIL Ltd. CRISIL Research¶s research offering includes
EcoView Periodic review of macroeconomic fundamentals in India Industry Information Service Continuous research coverage on 45 industries in India across the manufacturing and services sectors A service presently used by 90% of the banks operating in India ± both Indian and foreign CrisilViews Public Information based credit reports on 150-200 leading Indian companies Syndicated research Customised research that applies our unique understanding of cross sectoral and macro-micro linkages to specific client needs

2

About CRISIL Research
CRISIL Research¶s offering in the metals sector includes
Industry Information Service Reports on steel, steel intermediates, aluminum and copper. CrisilViews Tata Steel Steel Authority of India Limited Jindal South West Limited Hindalco Nalco Sterlite and many others Syndicated research Global Aluminum company Large Indian Automobile company

3

SAIL.2005-06: Beginning of the meltdown 140000 120000 100000 25 80000 (Rs. million) 60000 40000 20000 0 2001-02 -20000 -40000 PAT OPM (RHS) NPM (RHS) 2002-03 2003-04 2004-05 9M 2004-05 9M 2005-06 -5 -10 -15 20 15 10 5 0 (Per cent) 40 35 30 Note: Players considered are: Tata Steel. Essar Steel and JSW Steel Source: CRIS INFAC 4 . Ispat.

Ap rM 04 ay -0 Ju 4 n0 Ju 4 lAu 04 gSe 04 p0 O 4 ct -0 No 4 vDe 04 c0 Ja 4 n0 Fe 5 bM 05 ar -0 Ap 5 rM 05 ay -0 Ju 5 n0 Ju 5 lAu 05 gSe 05 p0 O 5 ct -0 No 5 vDe 05 c0 Ja 5 nFe 0 6 bM 06 ar -0 Ap 6 rM 06 ay -0 Ju 6 n06 Domestic prices International prices (RHS) 5 . averaging Rs 28.444 per tonne in April-December 2005.000 (Rs per tonne) 31.Decline in steel prices 35.000 23.000 19.778 per tonne in April-December 2004.000 21.000 33.000 17.000 27. Domestic HR prices mirrored the trend in global prices.000 450 400 350 300 650 600 ($ per tonne) 550 500 Note: International prices are CIS ± Black Sea (FoB) prices Source: Metal Bulletin and CRIS INFAC The average international price of hot-rolled coils (HRC) was $460 per tonne (FOB) during the first 9 months of FY 2005-06.000 29. down from an average of Rs 28. 16 per cent lower than the $549 per tonne (FOB) reported during the corresponding period of 2004-05.000 25.000 15.

09 per cent (addition of 39.6 million tonnes) Reasons Slowdown of demand from the US and the EU.12 per cent. while its production grew by a CAGR of 25. The regions met most of their consumption needs from their inventories leading to reduced buying China becomes net exporter in 2005 from net importer in 2004.07 per cent (addition of 59.5 940 Finished Steel production Finished Steel Consumption Consumption/production ratio (RHS) Source: IISI 6 .8 million tonnes) during 2005 over 2004. rose by 4.Incremental supplies grew higher than incremental demand While the apparent consumption.5 1040 (Million tonnes) 1020 1013 98 (Per cent) 1000 982 980 974 97 960 97 96.34 per cent over the same period. supplies increased by 6. 1060 99 1041 99.5 96 2004 2005 97.5 99 98. China's consumption of finished steel increased at a CAGR of 16. Over the past 3 years (between 2003 and 2005).

players with captive mines such as Tata Steel. NMDC increased the domestic contracted price to Rs 1. The decline in prices can be attributed to increased exports from China. Coke During the first 9 months of FY2005-06. it has sold iron ore at an average price of Rs 1. Natural gas Natural gas prices in the domestic market have ruled at a substantial premium during April-December 2005 (Rs 8.450 per tonne (inclusive of freight) to align it with international prices.72 per thousand cubic metres . SAIL and JSW (to some extent) are insulated from the price hikes. having captive coke ovens ± like Tata Steel and SAIL ±did not really benefit from the fall in coke prices. a rise of almost 70 per cent from average of around $47 per tonne in 2004. Strong demand from China led to the increase. as per NMDC's annual results.066.Higher raw material prices in 2005-06 Iron ore Average international spot iron ore prices increased in 2005 to about $80 per tonne. In FY 2005-06. In April 2005.tcm) over the corresponding period of the previous year (Rs 5. Hence players.022.62 per tcm) leading to a heavy erosion in margins of gas-based steel makers such as Ispat and Essar. However.944 per tonne. 7 . coke prices averaged $199 CFR. Coking coal The contracted price of coking coal during CY 2005 was $125 per tonne (FOB) as against $57 (FOB) in CY 2004 [source: Tata Steel Analyst Meet presentation].

5 24277 3320 6.4 6.2 7 6.4 7.8 7.4 22477.2 6 5.6 (Per cent) Note: The YoY growth is calculated based on results of corresponding period of previous year Source: CRIS INFAC 8 .8 5.Volumes helped achieving stable revenues 40000 7.64 35000 4375 30000 ('000 tonnes) 25000 20000 15000 10000 5000 0 2004-05 12M Domestic Demand 2004-05 9M Exports YOY Growth ( RHS ) 2005-06 9M 29970 6.6 6.8 6.6 7.89 3162 7.

Looking into the crystal ball Margins of the domestic industry to remain stable during 2006-07 as compared to 2005-06 Prices to increase marginally. 9 . However rise in Input costs to keep margins stable.

mostly expected in China  Hence Global operating rates to remain stable The Increase in the domestic prices will be lower due to unfavorable demand-supply Scenario 10 .Realization to increase marginally The International average prices of steel will be around $500 per tonne in CY 2006 as compared to $490 per tonnes in 2005 Global demand to remain healthy Capacity additions.

1 per cent (addition of 39.Global Demand growth to remain stable The demand for finished steel which grew by 4. Demand from US and European Union also to pick up.5 per cent (addition of 45 million tonnes) in CY 2006 Chinese demand is expected to grow at a healthy rate of around 10 per cent in CY 2006.8 million tonnes) in CY 2005 is likely to grow by 4. 11 .

storage and post Construction 2004* 198 192 71 9 2005 255 252 92 6 Inc/(Dec) Per cent 27.8 36.6 73 Note:* The data for each year is cumulative figure for the period January to March of that year Source: National Bureau of Statistics of China 12 .China the key to Demand CHINA: Going strong Units Investments in Fixed Assets Production of : Motor Vehicles Civil Steel Boats and Ships Large and medium Tractors Washing machines Refrigerators 10.4 -39 2006 303 344 119 10 Inc/(Dec) Per cent 18.485 939 949 8 19 32 24 17 263 334 83.8 25.000 Sets 1.828 993 1289 30 8 69 6 36 Billion RMB 2004* 706 2005 904 Inc/(Dec) Per cent 28 2006 1161 Inc/(Dec) Per cent 28 China¶s investments in Fixed Assets: Key elements (Billion RMB) Real Estate Manufacturing Transportation.3 29.595 758 810 202 208 49.6 28.000 Sets 188 260 37.000 Sets 10.000 tons Sets 10.

The balance 16 million tonnes will be added by the rest of the world (RoW) excluding China Demand (Million Tonnes) Global China RoW 2004 1084 302 782 2005 1128 353 776 2006 1179 388 791 Capacity (Million. Tonnes) Global China RoW 1227 340 887 1326 425 901 1386 466 920 Demand capacity ratio (Percent) Global China RoW 88 89 85 83 85 83 13 Source: IISI & CRIS INFAC . 54 Million tonnes of finished steel capacity is expected globally Chinese capacity to add 38 million tonnes of the global incremental capacity.Capacity additions mostly in China During CY 2006.

14 .200 87 1.400 88 1.Global operating rates to remain stable Global demand capacity scenario 1.000 Mn tonnes 800 600 400 84 200 0 2004 Demand Capacity 2005 2006 Demand capacity ratio (RHS) 83 86 Per cent 89 85 Source: IISI & CRIS INFAC Average global operating rates to remain stable at around 86 per cent.600 1.

Pipes & tubes and automobiles will continue to drive the demand for flat products Healthy growth in construction to drive long products demand.Domestic demand-supply scenario Demand to grow at a CAGR of 8 percent during 2006-07. However demand to capacity ratio will remain low. 15 .

Passenger cars to keep riding on favourable demographics Passenger Cars 1600000 1400000 1200000 1000000 CAGR 15 % Units 800000 600000 400000 200000 0 2004-05 Mini 2005-06E Compact 2006-07F Midsize A4-A6 2007-08F Source : CRIS INFAC 16 .

3% CAGR 300000 250000 Units 200000 265956 150000 285408 324066 100000 50000 0 2005-06E 2006-07F 2007-08F Source : CRIS INFAC 17 .Growing trend of personal utility vehicles to help demand Utility Vehicles 350000 10.

Commercial vehicle demand to grow at a healthy rate Commercial Vehicles 500000 450000 400000 350000 51910 300000 Units 250000 114913 200000 150000 100000 50000 0 2004-05 2005-06E 2006-07F 2007-08F 181751 196588 207595 201113 140368 161573 170897 56800 61092 65541 HCV LCV Buses Source : CRIS INFAC 18 .

Pipes for water supply. drainage and sewage have not been considered 19 .Pipes & tubes: Significant investments planned over the next 5 years 14000 39% 12000 10000 Pipe line KMs 8000 6000 4000 2000 0 2001-05 2006-10 Source: CRIS INFAC Note: Pipes for only crude oil. LNG and Petroleum products has been considered.

Buoyant activity seen in pipes and tubes segment 2006 Kms DUPL Jagoti-Indore-Pithampur Kelaras-Malanpur Vijaypur-Kota Thulendi-Phulpur GSPL HPCL .'Pune-Pakni ('Mumbai-Pune pipeline extension) HPCL .Mumbai-Rewari-Bahadurgarh BPCL 'Numaligarh-Siliguri1 BPCL Manglia-Piyala-Bijwasan Pipeline Koyali-Dahej Koyali-Ratlam Jamnagar-Patiala pipeline Jamnagar-Kanpur pipeline 675 774 112 274 1580 2540 85 2007 Kms 475 190 2008 Kms 192 139 767 343 1048 Note: Pipes for only crude oil. drainage and sewage have not been considered Source : CRIS INFAC 20 . LNG and Petroleum products has been considered. Pipes for water supply.

and power Industrial investments To remain buoyant Oil and gas and metals (steel and aluminium) 21 .Infra investments to drive construction Real estate investments Favourable demographics Rising affordability Low interest rates Favourable govt. irrigation and water supply. policies Private participation Roads. policies (FDI) Growth in IT/ITES Infrastructural investments To grow by 8 per cent Favourable govt.

21 Growth 313% 442% Source: CRIS INFAC 22 .63 FY06FY10 7.Commercial construction: IT/ITES sector is the driver Real estate construction: Investments over the next 5 years Sector Volume (mn Sq ft) USD billion FY03FY05 Commercial ±Office spaceIT/ITES 61 FY06FY10 252 Growth FY03FY05 1.

Additional space required by 2010 Cost of construction Total construction activity Units USD billion USD billion USD per sq ft Mn sq ft 2003E 3.57 2010P 24.66 2004E 6.83 225.61 217.26 2005P 7.12 2.54 222.Mall construction set to grow Mall construction: Investments over the next 5 years Rs billion Organised retail industry Increase in revenue Revenue per sq. ft.53 Source: CRIS INFAC 23 .63 USD per sq ft USD billion 33.88 2.89 75 206.73 16.79 1.

Expected Construction Investments in the next two years 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Rs 1310 bn 15 % 19 % 18 % 19 % 29 % FY05-FY06 Roads Source: CRIS INFAC Rs 1516 bn 14 % 12 % 8% growth 20 % 19 % 35 % FY07-FY08 Urban infra Power Others Irrigation 24 .

Industrial Investments FY02-FY06 (Rs billion) (Rs 2111 bn) 0% FY07-FY11 (Rs 6406 bn) 1% 7% 13% 2% 57% 12% 4% 4% Aluminium Petrochemicals Others Steel Textiles Oil & gas 7% 37% 26% 6% 2% Automobiles Cement 16% 3% Source CRIS INFAC 3% 25 .

Assumptions of growth rates End-user sectors Growth rate (FY2006-07) (Per cent) 12. Industrial machinery & equipment Construction White goods Cycles Wire drawing units Others 26 .5 12 10 12 8 -8 3.5 5-7 Auto Pipes and tubes Engineering.

Demand to capacity ratio for flat products will only marginally improve 25 74 20 (Million tonnes) 19 19 15 16 69 22 23 76 74 72 71 70 68 66 (Per cent) 15 12 10 64 5 14 64 62 60 0 2003-04 2004-05 Demand Capacity 2005-06 Dem .Cap ratio ( RHS ) 2006-07 58 Source: CRIS INFAC 27 .

Operating cost to remain firm Coke cost Average Operating Costs of the players to increase from $367 to $ 375 per tonne (an increase by around $8 over the same period previous year). Coal and Natural gas will continue to remain in short supply. Contracted iron ore prices to increase by around 19 per cent in CY06. Prices will also depend upon coking coal prices.3 182 25 207 Source: CRIS INFAC 28 . Average coke prices have declined significantly from the average levels of $395 per tonne in CY04 to levels of $180-200 per tonne in CY05. $/tonne Coking coal Freight Total cost I/O norm Material cost Conversion cost Total cost 2005 125 2006 115 25 150 1. Prices will remain stable in CY 2006.3 195 25 220 25 140 1.

Steel tolling margins CRISIL Research defines ³steel tolling margins´ as the difference between the average international steel prices per tonne and the operating cost of manufacturing steel 29 .

Margins to remain stable $/tonne I/O (Times) 2005 $/tonne of itself $/tonne of steel 87 121 160 367 492 125 25.6 0.39 2006 $/tonne of itself 64 187 $/tonne of steel 103 112 160 375 500 125 24.6 54 201 30 .99 Iron ore Coke Other operating cost Total operating cost Average steel prices Tolling profit Tolling margin Source: CRIS INFAC 1.

Thank You CRISIL Limited .