Evolving Role of Scrap in India MRAI January 27 th, 2017 Rahul Prithiani, Director - CRISIL Research
Key messages Muted steel demand growth at 2-4% in 2016-17; to rise to 5.5-6.5% in long term Share of scrap in steel making in India at 24% below global average of 34%; to rise to 28-30% in 2020-21 with rising availability and displacement of sponge iron 60K-65K/ T India s Aluminium demand growth to slow to 4-6% in 2016-17 post de-monetization; 20K-30K/ T increased intensity in auto, power and B&C to drive 9% growth over longer term Share of secondary aluminium rose sharply to 31% in overall demand on back of rising auto castings demand; to continue its growth momentum In long term, evolving role of scrap will potentially be a function of domestic scrap availability led by Government policies led by ELV. 2
Steel demand to recover in FY18 after being hit in FY17; export growth to support utilization levels Domestic demand rise to 5.5-6.5% CAGR through 2020 (MT) 120.0 100.0 80.0 60.0 40.0 20.0-11.9% 6.9% Note: E- Estimated; P- Projected Source: CRISIL Research, JPC share in demand 66.4 2010-11 71.0 2011-12 73.5 74.1 77.0 80.3 2012-13 3.5% 2013-14 0.8% 3.9% 2014-15 4.3% 2015-16 2-4% 2016-17P 4-6% Steel Demand (mn T) Alloy Steel Y-o-Y Growth (RHS) 83.0 H1 2016-17, growth of 2.5% 36% Building & Construction Infrastructure 27% 2010-2015 2015-2020 2010-2015 2015-2020 1-2% 4-5% 7-8% 10-11% Urbanization, Housing for All, PMAY, Rural demand Steel Growth: 6-8% CAGR 87.0 2017-18P 110.7 6-8% 2020-21P Smart cities, freight corridors, metros, PMKGSY (irrigation), Bharatmala, Sagarmala, etc. share in demand 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% share in demand share in demand 10% Automotive Others 27% 2010-2015 2015-2020 2010-2015 2015-2020 ~1% 8-10% 2-3% 5-7% 3
Scrap constitutes 24% of India s crude steel production vis-à-vis global average of 34% Global average ratio of steel scrap usage to crude steel production at 35% Rise / decline in share of scrap over past 4-5 years -3% -3% -3% +6% +5% +6% 1800 80% MT 1600 1400 1200 1000 800 600 400 200 0 34% 1621 555 803.8 Source: World Recycling Report, JPC, CRISIL Research 80.5 10% 166.1 Note: Indian numbers indicative for financial year 2015-16 and rest for calendar year 2015 53% 24% 70% 88.8 89.80 22.0 78.8 55.5 World China EU India USA Crude Steel Production Steel Scrap Steel scrap as a % of crude steel (RHS) 70% 60% 50% 40% 30% 20% 10% 0% Share of scrap in world s crude steel production has reduced marginally from 37% to 34% over past 5 years on account of number of BF-BOF capacities being added especially in China However, in India the share of scrap has increased from 18% to 24% over past 5 years on account of better cost economics over sponge iron
Improving scrap availability, favorable cost economics, and technological benefits to drive an increase in scrap usage Drivers Deterrents Increased global availability of high quality scrap Volatile scrap prices Proximity of key demand cluster to sources of scrap High level of fragmentation and unorganized nature of the industry Rising domestic scrap generation (esp. post V-VFM implementation) Preference towards EAF technology over obsolete IF (EAF is 40-45% in US & EU; no IF/DRI) Large BF/BOF players expanding in long steel Better cost economics vis-à-vis sponge iron Lower extent of scalability vis-àvis BF/BOF units Drivers Deterrents 5
Share of scrap in steel making to increase led by substitution with sponge iron MT 140.00 Average ratio of steel scrap usage to crude steel production to reach 28-30% 35% Domestic scrap, Imported scrap & Sponge iron prices (Rs/ tonne) MT 35,000 120.00 100.00 80.00 60.00 40.00 20.00-71 18% Source : CRISIL Research Estimates 90 13 21 24% 124 28-30% 35-40 2010-11 2015-16 2020-21 Crude Steel Production Scrap in steel making Share of scrap Scrap figure inclusive of 5-6MT of milling scrap/ home scrap. If milling scrap is not included in the estimates then share of scrap in steel making to increase from 16% in 2015-16 to 24% in 2020-21 30% 25% 20% 15% 10% 5% 0% 25,000 15,000 5,000 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Coal-based sponge iron prices Landed cost of scrap Domestic Scrap Conversion yield Oct-14 Sponge iron- 82-85% Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Scrap- 95-97% Oct-16 Increasing availability of scrap in domestic and import markets coupled to drive increase in share of scrap in steel making going forward Financial stress, raw material availability and logistics challenges to hit competitiveness of sponge iron manufacturers 6
Secondary aluminium demand currently accounts for 31% of overall demand and has grown at ~11% over past 5 years Robust Growth in Secondary (recycled) Aluminium Consumption in India 5.0 CAGR 11% 9% 4.0 CAGR 6% 8% 1.6 Secondary 3.0 1.1 60K-65K/ T 1.0 (Recycled) Aluminium 2.0 0.6 3.3 1.0 2.3 2.4 1.7 Primary Aluminium 0.0 2010-11 2015-16 2016-17 e 2020-21 p Share of Secondary 26% 31% 31% 32% Source: CRISIL Research Estimates, IBIS, Industry Over the next 5 years, we expect overall aluminium demand to rise at 8-9% CAGR largely driven by increase in asset demand especially in automotive sector and infrastructure (building and power) sector Secondary aluminium demand is projected to increase at a CAGR of 9-10%, primarily driven by an expected high growth in the automotive sector especially two-wheelers and cars 7
Key applications of primary and secondary (recycled) aluminium are largely distinct Primary Aluminium Consumption Mix Secondary (Recycled) Aluminium Consumption Mix Consumer Durables, 6% Packaging, 60K-65K/ 7% T Automotive, 9% Others, 6% Building & Construction, 17% 20K-30K/ T Electricity, 56% Consumer Durables, 3% Packaging, 4% Others, 20% Automotive, 59% Electricity, 1% Building & Construction, 13% While electricity constitutes 56% of the primary aluminium demand, its share in secondary aluminium consumption is negligible on account of conductivity losses and quality perception issues Automotive sector constitutes ~60% of secondary aluminium demand followed by building & construction sector which constitutes around 13% of the total demand 8
Demand from two wheelers, cars and UVs to support robust growth in secondary aluminium demand Two Wheelers Demand Growth Cars & UVs Demand Growth 25% 20% 15% 10% 5% 0% 4% 60K-65K/ T 1-3% 21% 8-10% Overall demand to rise at 8-10% CAGR through 2019-20, but correct by (12)-(14)% post implementation of BS VI emission norms 20K-30K/ T 0% 0-1% 7% 4-6% Motorcycles Scooters Mopeds Overall FY 11 to FY 16 FY 16 to FY 21 14% 12% 10% 8% 6% 4% 2% 0% -2% 12-14% 12-14% 11-13% 8-10% 6% 2% 2% -1% Small Cars Sedans UVs + Vans Overall FY 11 to FY 16 FY 16 to FY 21 Improving rural connectivity coupled with improving vehicle ownership economics to help drive demand in the long term. However, Emission norm compliance is expected to drive up prices in the terminal year of our forecast period, thereby impacting demand Faster demand growth expected in the long term driven by better income prospects and subdued cost of ownership of Cars & UVs Exports to rise despite muted global demand, driven by initiatives to export more models and widen reach 9
Voluntary Vehicle Fleet Modernization
Voluntary vehicle fleet modernization policy to have a significant impact on domestic steel and aluminium scrap supply Event Timeline for Government Policy on ELV Delhi, June 15 Ban on diesel vehicles over 10 years old Delhi, Nov 14 Ban on all 15 years or older vehicles Bihar, Chhattisgarh June 16 -Diesel vehicles over 15 years old banned Kerala, May 16 Ban on diesel vehicles over 10 years old Voluntary Vehicle Fleet Modernization Policy August 16 Draft submitted Implementation of the voluntary vehicle fleet modernization (scrappage) policy is expected to potentially impact 28 million vehicle stock initially Source : CRISIL Research Impact on Steel Industry Implementation of the voluntary vehicle fleet modernization (scrappage) policy can potentially generate 20-25 MT of steel scrap over the considered implementation period Impact on Aluminium Industry Implementation of the voluntary vehicle fleet modernization (scrappage) policy can potentially generate 1.0-1.5 MT of aluminium scrap over the considered implementation period 11
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In case of any Clarifications or Business Enquiries please contact :- Rahul Prithiani Director Industry & Customized Research Mobile : +91 8879125244 Email : rahul.prithiani@crisil.com Viraj Vora Regional Manager Metals Mobile : +91 9619008590 Email : viraj.vora@crisil.com 17