Indian Steel Industry

Transcription

1 ICRA RESEARCH SERVICES Corporate Ratings Jayanta Roy Indian Steel Industry Safeguard duty likely to have a limited impact on domestic prices Priyesh Ruparelia priyesh.ruparelia@icraindia.com Ritabrata Ghosh ritabrata.ghosh@icraindia.com Shubhra Baid shubhra.baid@icraindia.com Vandana Agarwal vandana.agarwal@icraindia.com October 2015 ICRA LIMITED P a g e 1

2 Table of Contents Overview... 4 Trends: Steel Consumption & Production... 7 Pricing Trends: Domestic and International Raw Material Scenario: Iron Ore and Coal Profitability Analysis Industry trends: Steel Tubes and Pipes Restructured Debt: Iron and Steel Sector Outlook: Indian Steel Industry COMPANY SECTION TATA STEEL LIMITED (TSL) JSW STEEL LIMITED (JSW) STEEL AUTHORITY OF INDIA LIMITED (SAIL) JINDAL STEEL & POWER LIMITED (JSPL) BHUSHAN STEEL LIMITED (BSL) NMDC LIMITED (NMDC) MONNET ISPAT & ENERGY LIMITED (MIEL) KALYANI STEELS LIMITED (KSL) TATA SPONGE IRON LIMITED (TSIL) INDIAN METALS & FERRO ALLOYS LIMITED (IMFA) JINDAL SAW LIMITED (JSL) MAHARASHTRA SEAMLESS LIMITED (MSL) ELECTROSTEEL CASTINGS LIMITED (ECL) ICRA LIMITED P a g e 2

3 WHAT S INSIDE? 1. Overview 2. Trends: Steel Consumption and Production Recent developments in China and its impact on other economies including India Domestic scenario and update on steel imports/exports Have some of the demand drivers bottomed out? 3. Pricing trends: Domestic and International Impact of safeguard duty on domestic steel prices 4. Raw material trends: Iron ore and coal 5. Iron ore mine auctions: Status of iron ore mine auctions in key producing states 6. Proposed coal linkage auctions: Impact on steel players 7. Profitability analysis Gross contribution analysis Trend in industry financials 8. Industry trends: Steel Tubes and Pipes 9. Restructuring of debt : Iron and Steel Sector 10. Outlook: Indian Steel Industry 11. Quarterly performance trend of listed steel companies Tata Steel Limited JSW Steel Limited Steel Authority of India Limited Jindal Steel & Power Limited Bhushan Steel Limited NMDC Limited Electrosteel Castings Limited Monnet Ispat & Energy Limited Kalyani Steels Limited Tata Sponge Iron Limited Indian Metals & Ferro Alloys Limited Jindal Saw Limited Maharashtra Seamless Limited ICRA LIMITED P a g e 3

4 October 2015 Overview Weakness in China to keep global demand on a weak footing Safeguard duty provides a temporary relief World steel capacity utilization falls to 68.4% in July 2015 due to a fall in Chinese production levels; capacity utilization levels to remain lower in CY2015 than the previous year China s apparent steel consumption contracted by 4.7% in the first half of CY2015 due to a slump in its real estate market and slowing investments in infrastructure. While the crude steel production in China also de-grew by 1.8% during Jan-Jul 2015, a significant overcapacity situation still persists. This resulted in an export push by Chinese steel companies, leading to a 27% growth in China s steel exports during the same period, adversely affecting steel markets in other countries. Recent de-valuation of Yuan by the People s Bank of China is expected to support such exports further. World steel production too contracted by 2.1% yoy during Jan-Jul As a result, industry capacity utilization, which fell to 76.7% in CY2014 from 78.4% in CY2013, has fallen further in the current calendar year, and the same stood at 68.4% in July Utilization rates in CY2015 are expected to remain lower than the previous year, given the unfavourable demand outlook in China, which is also corroborated by World Steel Association s forecast of a Chinese demand de-growth of 0.5% each in CY2015 and CY2016. Limited impact of safeguard duty on domestic steel prices; extent of cheaper imports however likely to come down in the near term China s hot-rolled coil (HRC) prices have fallen by almost 25% in the current financial year, but the extent of decline in domestic HRC prices in India has been lower at around 15%, which led to a wide differential in international and domestic prices. As a result, growth in steel imports continued unabated in the current fiscal and grew by 58% during the period Apr-Jul Although the Government of India hiked the import duty on steel products by 2.5 percentage points each in June and August 2015, these duty hikes did not have any significant impact on imports from countries which were covered under free trade agreements (FTA) with India, such as Japan and South Korea. In September 2015, the Government imposed an additional 20% safeguard duty on certain category of hot-rolled flat products for a period of 200 days. As a result, ICRA expects the extent of cheaper imports to reduce in the near term, since the share of the items covered under the safeguard duty in India s steel imports was close to 50% in the first quarter of FY16. Post the imposition of safeguard duty, the differential between domestic and international prices reduced significantly, and the domestic prices now are largely aligned with imported steel prices. However, international HRC prices have declined further by 2.5% after the duty was imposed which, along with prospects of further capacity additions in India in the near to medium term, is likely to keep domestic prices under check. Nevertheless, in the absence of the large price differential that existed earlier, the extent of further declines, if any, in domestic steel prices would be limited. India s steel consumption growth improved to 5.4% during Apr-Jul 2015 from 3.1% in FY15, largely driven by automobile and construction sectors. While the growth remained steady at upwards of 6% during the first three months, it declined to 0.5% only in July 2015, indicating that the sustainability of demand improvement is still uncertain. Domestic steel production growth, on the other hand, declined to 1.3% during Apr-Jul 2015 from 3.3% registered in FY15. Despite this, there was a wide gap between total steel availability (production plus imports) and total steel usage (exports plus consumption), which points to a further pile-up of inventory in the above period. ICRA LIMITED P a g e 4

5 NMDC Ltd. has revised the prices of fines by 54% and lumps by 43% in the last 9 months Auction of iron ore mining leases, having estimated reserves of 560 mt, to be rolled out from Q3 FY16 onwards Q4 CY2015 quarterly contract price for benchmark premium coking coal declines by 5% q-o-q Outlook on iron ore price remains weak During the first week of July, 2015, seaborne price of iron ore fines further slid down to USD per dry metric tonne (dmt), cfr China, breaching its previous decade low of USD per dmt recorded on April 02, In the last one year, international iron ore prices have corrected sharply by around 40%. Given the current slowdown in Chinese crude steel production, coupled with large upcoming low cost iron ore supplies in the next few years, ICRA does not expect any significant recovery in international iron ore prices in the near term. Given the headwinds in the seaborne market, NMDC Ltd. (NMDC) has continued to cut domestic iron ore prices in Q2 FY16 as well, further revising price of fines by 15% and lumps by 3% in July 2015, and again in September'15, when lump prices were reduced by 3%. Moreover, towards the beginning of Q3 FY16, prices of both lump and fines were again cut by a steep 12% in October 15. The October 15 correction marks the 8 th rate cut initiated by NMDC since November'14, with price of fines declining by 54%, and lumps by 43% during the period. In fact, with the reopening of closed iron ore mines post the enactment of the The Mines And Minerals (Development And Regulation) Amendment Act, 2015 (MMDRA Act, 2015), and with the proposed auction of iron ore mining leases in Odisha and Karnataka in October 2015, ICRA expects iron ore supplies in India to increase going forward, which will continue to exert pressure on domestic iron ore prices. Government has notified a DMF contribution of 30% of royalty for existing iron ore miners In a relief to the steel industry in India, the Union Government has notified a rate of 30% of royalty payments as contribution to the District Mineral Foundation (DMF) for iron ore mining leases signed before January This is significantly lower than the ceiling of 100% of royalty that was allowed to be imposed on existing mines under the MMDRA Act, ICRA estimates that this revised rate will increase the cost of steel production by around Rs. 215/MT of steel (~0.8% of domestic HRC realizations at present). For mining leases that would be granted through auctions in future, the rate of DMF contribution has been restricted to only 10% of royalty. Coking coal prices are yet to bottom out, benefitting blast furnace players; however, proposed coal linkage auction expected to increase fuel costs for sponge iron manufacturers International prices of benchmark low vol. premium hard coking coal contract in Q4 CY2015 have been settled at USD 89.0/MT, showing a 5% q-o-q decline from USD 93.5/MT in Q3 CY2015. The major Australian miners are undertaking cost cutting initiatives, helped by the weaker Australian dollar. Moreover, though no major fresh coking coal supplies are expected to hit the seaborne market in the near term, an increasing share of low cost Mongolian coking coal supplies to China in 2015, along with the rise in Chinese coking coal production, would continue to exert pressure on international coking coal prices. Given that India s domestic coking coal supplies used in steelmaking has remained stagnant between mtpa, dependence on imported coal has seen a steady rise and, at present, around 70% of domestic coking coal demand for steel making is met from imports. Thus, the weak international coking coal price environment would continue to provide a relief to domestic blast furnace players. ICRA LIMITED P a g e 5

6 Proposed coal linkage auction to adversely impact ~30% of coal supplies to the sponge iron industry, which is currently met from FSAs In June 2015, the Ministry of Coal released a draft paper for the auction of coal linkages for public consultation, whereby it proposed that future coal linkages to the non-regulated sectors would be distributed only through auctions, where prices would be discovered through the 'Supplier Controlled Ascending Market Clearing' mechanism. This progression towards a market based pricing mechanism for coal linkages is likely to lead to an escalation in coal cost of sponge iron manufacturers, which are currently meeting a part of their overall requirement from cheaper linkage coal from Coal India. Almost 30% of the industry s requirement was met from linkage coal in FY15. If this has to be replaced by imported coal/domestic coal at imported parity basis, margins of players can be impacted by almost 5% based on prevailing prices. Higher duties and softening of raw material prices provide a support to domestic steel companies; debt protection metrics however are likely to remain weak Low realisations remain a concern; debt coverage indicators to remain under pressure The operating profitability of domestic steel industry (sample: 18 large and medium Indian companies in the steel sector, together accounting for over 60% of the total domestic capacity) declined further in Q1FY16 to 11.4% from 12.2% in Q4FY15 due to a continued fall in sales realizations. However, the safeguard duty has reduced the possibility of further significant price declines. This, coupled with the softening of iron ore and coking coal prices is expected to support the profitability of blast furnace operators to an extent in the near term. Debt protection metrics of the domestic steel industry weakened in FY15, with interest coverage dropping to 2.4 times in FY15 from 3.1 time in FY14 and debt burden relative to operating profits increasing to 5.8 time as on March 31, 2015 from 4.6 time as on March 31, The trend continued in Q1FY16, with interest coverage ratio declining further to 1.16 time. ICRA expects the debt protection metrics of steel players to remain weak in the near term, given the already elevated debt levels of most of the steel players, which have commissioned/are at advanced stages of commissioning additional capacities. ICRA LIMITED P a g e 6

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