al D

istri

butio

n ht

s re

serv

ed.

Industry outlook on Steel industry

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

hFo

r Int

erna

l Use

OC

opyr

ight

© 2

011

1

Key discussion points

Indian steel demand to be muted over the next 2 years

– End user demand for steel in India affected by the economic slowdown.

al D

istri

butio

n ht

s re

serv

ed.Global flat steel prices set to decline in 2012 & 2013

Gl b l i f i ki l t d li d t k d d d l

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

h– Global prices of iron ore, coking coal to decline due to weak demand and over supply

– However, domestic price of flat and longs to remain firm

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1

Profitability of players across the value chain to under pressure

– Demand-side concerns will be exacerbated by

• temporary shortage of both iron ore and non-coking coal in the domestic market

Need for pelletisation in the Indian context

2

Need for pelletisation in the Indian context

India steel demand to moderate in near term; pick up from 2013-14

St l ti tt 2011 12I di t l d d O tl k Steel consumption pattern: 2011-12India steel demand: Outlook

Automobile11%

Capital goods

6%

al D

istri

butio

n ht

s re

serv

ed.

Others33%Pipes &

Tubes10%

4466 70 74

95

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

h

Infrastructure21%

Industrial Construction

19%

44

2006-07 2011-12 2012-13E 2013-14P 2016-17P

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1

Domestic demand for steel in the interim has been hit by;– Lower demand from end-user sectors (namely construction automobiles and consumer

E: Estimated; P: ProjectedSource: JPC, CRISIL Research

Source: CRISIL Research

– Lower demand from end-user sectors (namely construction, automobiles and consumer durables)

Domestic steel demand expected to pick up from 2013-14 onwards – Execution of infrastructure projects expected to gain traction

3

– Execution of infrastructure projects expected to gain traction

– Pickup in domestic and export demand expected in the automobiles sector

Demand assessment frameworkIndustrialInfrastructure Industrial

construction Pipes & Tubes Automobiles Real estate OthersEnd-use segments

al D

istri

butio

n ht

s re

serv

ed.

Assessment of steel product intensity

- per capacity (e.g. 1 mtpa plant) e.g. steel, cement

- per unit e.g. auto, construction equipments, railway (per km), real estate (per sqft)

- per Rs invested e.g. ports, airports, roads

Average tonnage of steel products

Plates HRC

Structural

GP/GC

TMT CRC

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

h

Investments made Size of the end

Capacity additions Supply / new development during

Output / production during the year

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1 during the year(e.g. airports, ports)

Size of the end-use sectors

during the year (e.g. steel, cement)

development during the year(e.g. real estate)

during the year(e.g. automobile, pipes and tubes)

Product level steel demand Aggregation of steel product demand from various end-use sectors

N t

CRISIL Research’s estimate of steel product demand and end-use pattern

Note:Infrastructure includes roads & highways, power, ports,airports, railways, water supply & irrigation, urban infraIndustrial construction includes – oil & gas, steel,automobiles, petrochemicals, textiles, fertilisers, etc.

Flat steel demand to grow at 8-9% over FY 2013-17

• Investments in oil & gas, waterand irrigation

• Oil & gas pipeline to increasePipelines

Flat steel consumption pattern: 2011-12

al D

istri

butio

n ht

s re

serv

ed.

g p pfrom 53,677 km to ~72,000 km

Pipelines, 18.2

Oil & Gas, 4 9

Consumer durables,

8.8

Others, 14.5

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

h

• Cars and UVs: 15-16% CAGR

• Commercial vehicles: 12-13%CAGR

Automobiles

4.9

Automobiles, 18.8Capital

goods, 6.1

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1

Flat steel demand: 49-50 million tonnes by 2016-17

Source: CRISIL Research

• Oil & gas refining capacity ~250million tonnes by 2015-16

Oil & gas tonnes by 2016-17

Flat steel share to be ~52% of total consumption

• Investment growth of 8% (~ Rs 7.3trillion)

Oil & gas

5

Within flats, CR coils demand to outpace others 11 5% CAGR 5 5% CAGR

ConsumerPackaging, 11

Others, 12

Capital goods,

Packaging, 6Others, 9

~8.5% CAGR

~11.5% CAGR ~5.5% CAGR

al D

istri

butio

n ht

s re

serv

ed.Manufacturing

, 25

Consumer Durables , 12

Residential

Industrial Construction,

23

Capital goods, 10

Others, 22

Consumer

Capital goods, 10

Others, 20

~7.5% CAGR

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

h

CR il GP/GC

Automobiles, 37

Residential Construction,

38

Pipes, 15

Automobiles, 13

Automobiles, 15

Oil & Gas, 11

Consumer durables, 10

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1 CR coils(24%)

GP/GC(14%)

Construction, 36

Pipes, 34

Indian Flat steel market

HR Coils (47%)

Plates(14%)

6

(33.7 mn tonnes)

Long steel demand poised to grow at 6-7% over FY 13-17 Over Rs 35 trillion to be spent on infrastructure Long steel consumption pattern: 2011-12

• 75-85 GW of capacity additions expected

• Investment growth of 14-15% (~Rs 11Power

Over Rs 35 trillion to be spent on infrastructure Long steel consumption pattern: 2011-12

IndustrialRailways, 2.0 Others, 17.6

al D

istri

butio

n ht

s re

serv

ed.

trillion)

• Focus to improving road network, to driveinvestments

Industrial construction,

30.3

Capital goods, 6.1

Automobiles, 4.4

Pipes, 1.6

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

h

Source: CRISIL Research

investments

• Investment growth of 12-13% (~Rs 7.7trillion)

Roads

O R 12 5 t illi t b t i d t i l

Infrastructure, 38.1

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1

Subdued investment climate to translate to muted growth in the short-medium term

• Oil & gas refining capacity ~250 million tonnesby 2015-16Oil & gas

Over Rs 12.5 trillion to be spent on industrial construction

medium term

Long steel demand: 44-45 million tonnes by 2016-17

C ti f l t l 48% f

• Investment growth of 8% (~ Rs 7.3 trillion)

• ~Rs 1.1-1.2 trillion of investment to flow insteel sector

SteelConsumption of long steel: ~48% of total

7

steel sector

Huge capacity additions over the next 5 years

Capacity additions (in mn tonnes)Capacity additions (in mn tonnes)• Capacity• Location• Product type

Company announcement

Company 2010‐11 2011‐12 2012‐13E 2013‐14P 2014‐15P 2015‐16P 2016‐17PSAIL 13.6 13.6 17.2 21.2 21.2 21.2 21.2 Tata Steel 6.8 6.8 9.7 9.7 9.7 12.7 12.7 JSW Steel 7 8 11 0 11 0 11 0 11 0 13 0 13 0

al D

istri

butio

n ht

s re

serv

ed.

• Land acquisition• Environmental

clearance• Financial closure

Project progress

JSW Steel 7.8 11.0 11.0 11.0 11.0 13.0 13.0 RINL 3.3 3.3 3.3 6.6 6.6 6.6 6.6 JSPL 3.0 3.0 3.0 4.6 4.6 4.6 4.6 Bhushan Steel 2.2 2.2 2.2 4.7 4.7 4.7 4.7 Monnet Ispat 0.3 0.3 1.5 1.5 1.5 1.5 1.5

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

h

• Policy framework• Macro-economic

conditionsOther factors

Monnet Ispat 0.3 0.3 1.5 1.5 1.5 1.5 1.5 NMDC ‐ ‐ ‐ ‐ ‐ ‐ 3.0 Essar 8.6 10.0 10.0 10.0 10.0 10.0 10.0 JSW Ispat 3.3 3.3 3.3 3.3 3.3 3.3 3.3 Bhushan Power and Steel 2.3 2.3 2.3 2.3 2.3 2.3 2.3

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1

Source: CRISIL Research Capacity additions over the next 5 years

Others 27.1 28.1 29.1 30.1 31.1 32.1 33.1 Total Capacity 78.3 83.9 92.6 105.0 106.0 112.0 116.0

30-35 mn tonnes of crude steel capacity to materialise vis-à-vis announcements of over 60 mn tonnes– Many players focusing on setting up capacities in value added products

Majority of additions coming up in 2012-13 2013-14 & 2015-16Majority of additions coming up in 2012-13, 2013-14 & 2015-16

Domestic demand-to-capacity rates to moderate

India: Demand supply and demand to capacity rates

8285

89 8884 83 85

90

90.0

100.0

90

120 (per cent)(million tonnes)

India: Demand, supply and demand-to-capacity rates

al D

istri

butio

n ht

s re

serv

ed.

9 6 3 6 0 4 9 6 40 6 0 6 3 5 5 01 04

8278

83 85

60.0

70.0

80.0

30

60

90

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

h4 5 6 6 7 7 7 8 96 6 7 7 8 9 9 1 1

50.0-2008-09 2010-11 2012-13P 2014-15P 2016-17P

Finished steel demand Total finished steel capacity Finished steel demand / capacity

P: Projected

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1

Finished steel capacity of 28-30 million tonnes expected over the next 5 years– Incremental demand to be lower at 26-28 million tonnes

Source: WSA, CRISIL Research

– Large companies adding most of the capacities (SAIL, RINL, Tata Steel, Bhushan, JSPL)

Steel players will need to focus on exports, to maintain operating rates– Large integrated players will be able to export as they are cost-competitive

– Small & mid-size players will operate at lower utilisation

9

Global demand outlook – Steel1.20 x 1 01 x 1 12 x1 03 x

2006 2011 2012E4% CAGR1.01 x~1 % 2016P

1.12 x3-4% CAGR2013P

1.03 x1-2%

al D

istri

butio

n ht

s re

serv

ed.

1,373 mt1,392 mt

433

1,602 mt

1,430 mt

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

h

India

ROW

9167 64

365

96 70 67

375

115

77

91

3

46

331

1,142 mt

1072 71

385

7-9% CAGR5-6%3-5%

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1

2 5%

EU (27)

US

Japan

624

153

91

146

96

725

161

188

120

79 6

148

1

3 5% CAGR~2.5%China

624 638 725

378654 ~2% 3.5% CAGR

Global steel demand: 2-4% CAGR over next 5 years– Developing and emerging economies to drive demand

10

China and India account for bulk of global steel capex

1 993 t 2 201 t1.1 x

O tl k Gl b l d d t it ti

327421 84 116 125 160

1,993 mt 2,201 mt~2% CAGR

~7% CAGR

Outlook: Global demand-to-capacity ratio

8376

6873 74 73 73 78

80

100

2 000

2,500

(per cent)(million tonnes)

al D

istri

butio

n ht

s re

serv

ed.

841884

459 458

158 161 327

~1% CAGR

16 00 20 11 76 97 37 2283 04 04 23 93 43 15 01

68

20

40

60

80

500

1,000

1,500

2,000

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

h841

2011 2016P

China EU NAFTA Japan+S.Korea+Taiwan India Row

1,31

1,30

1,22

1,41

1,47

1,49

1,53

1,72

1,58

1,70

1,80

1,92

1,99

2,04

2,11

2,20

-

20

-

500

2007 2008 2009 2010 2011 2012E 2013P 2016P

Crude steel demand Crude steel capacity Demand to Capacity (RHS)

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1

205-215 million tonnes to be added globally

China India to acco nt for 36 % of the total addition (Asian dominance

P: ProjectedSource: WSA, CRISIL Research

E:Estimated, P: ProjectedSource: WSA, CRISIL Research

China, India to account for ~36 % of the total addition (Asian dominance to increase to about 65%)

Global operating rates to not near pre-crisis levels (2007) even by 2016

11

Global input costs to moderate in 2012 &13

I i t l d(Million tonnes) 2008E 2009E 2010E 2011E 2012E 2013P

Trade import demand 845 934 979 1,031 1,032 1,052

Trade exportable supply 820 932 1,011 1,029 1,073 1,162

Iron ore prices to cool down: – new mining capacities; and

Iron ore trade flow

Company Country 2011 (mn tonnes) 2013 (mn tonnes)Vale Brazil 358 445

al D

istri

butio

n ht

s re

serv

ed.

p pp y , , , ,

Surplus/(deficit) (25) (3) 32 (2) 41 110

Contract price ($/tonne) 92 61 110 140-150 115-125 105-115

P : Projected, E : EstimatedSource: UNComtrade, CRISIL Research – moderation in global steel

Vale Brazil 358 445 BHP Billiton Australia 153 223 Rio Tinto Australia 262 298 Fortescue Australia 55 155

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

h

demand

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1

(Million tonnes) 2008E 2009E 2010E 2011E 2012E 2013P

Contract price ($/t) 293 129 191 289 209 175-185

In 2012 and 2013: Prices to correct as supply eases and demand moderates

Coking coal trade flow

P : Projected, E : EstimatedSource: CRISIL Research

12

Global HR steel prices to soften

Gl b l HR t l i tl kGlobal HR steel price outlook

8 9 695800

1,000

($ per tonne) Pre-crisis:prices soared on demand

Crisis: prices crashed from peak,

with demand slowdown

Post-crisis: prices on rise with rise in demand and input

cost

Steel prices to moderate on account of weak demand and

lower input costs

al D

istri

butio

n ht

s re

serv

ed.

115 102233 168

187 275

200-210 180-190214 206

388 302

383

534

410-430 370-390

520 588

879

469

614 695

590 545-565

200

400

600

800

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

h

P: Projected

99 104 155 134 196 259 210-220 190-200115 102

-2006 2007 2008 2009 2010 2011 2012P 2013P

Total iron ore cost Total coking coal cost Total raw material cost HR Steel (CIS, FoB, Black Sea)

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1

Domestic HR steel price outlook

jSource: WSA, CRISIL Research

Year Domestic prices (Rs/tonne)

Domestic long steel price outlookYear Domestic prices (Rs/tonne)

2010-11 36,500

2011-12 42,769

2012-13P 43,000-44,500

2013-14P 42,000-43,500

2010-11 36,812

2011-12 39,575

2012-13E 39,000-40,500

2013-14P 37,500-39,000

13

Source: CRISIL Research Source: CRISIL Research

Domestic iron ore market in the middle of a clean-up driveState wise production break up: 2011 12 (170mt) India: Iron ore production (in mn tonnes)

Jharkhand, 12%

Others, 2%State-wise production break-up: 2011-12 (170mt) India: Iron ore production (in mn tonnes)

State 2009‐10 2010‐11 2011‐12 2012‐13 2013‐14Odisha 79 76 68 50 55 Karnataka 44 38 14 12 18

al D

istri

butio

n ht

s re

serv

ed.

Odisha, 40%Chhattisgarh

, 18%

Goa 39 37 34 15 ‐ Chhattisgarh 26 29 31 33 35 Jharkhand 22 23 20 24 32 Others 9 5 3 4 4

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

h

Karnataka, Goa, 20%

Total 219 208 170 138 144

Total excluding Goa 180 171 136 123 144Domestic demand 112 120 125 130 137

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1 8% Domestic demand 112 120 125 130 137Surplus/Defecit 68 51 11 ‐7 7

Source: Ministry of mines, CRISIL Research Source: Industry, CRISIL Research

Indian iron and steel companies to face an acute shortage of iron ore in 2012-13 – many facing closure, others experiencing low utlisation levels

14

Supply situation expected to be marginally better during 2013-14

Domestic iron ore prices to remain firm (1)

In $/tonne 2012E 2013P

CFR price at Indian port 120 110

Domestic iron ore lump price

al D

istri

butio

n ht

s re

serv

ed.

Add: Lump Premium 10 10

Add: Port + Handling charges 4 4

134 124

In Rs/ tonne 2012-13E 2013-14P

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

hIn Rs/ tonne 2012-13E 2013-14P

Exchange rate (Rs/USD) 54 53

Iron ore import parity price 7,236 6,572

E:Estimated; P: ProjectedS I d t CRISIL R h

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1 Source: Industry, CRISIL Research

Prices of lumps in the domestic market set in line with import parity:– Global iron ore spot prices taken as a proxy and– Global iron ore spot prices taken as a proxy and

– A premium of 10-15 $/tonne is usually considered while signing contracts

Lump ore prices in India to increase by 12% y-o-y in 2012-13

15

– and decline going forward on account of a dip in international prices

Domestic iron ore prices to remain firm (2)

In $/tonne 2012E 2013P

CFR price at Indian port 120 110

Iron ore fines prices in India: Various methodologies

Import parity priceImport price

al D

istri

butio

n ht

s re

serv

ed.

CFR price at Indian port 120 110

Add: Port + Handling charges 4 4

124 114

In Rs/ tonne 2012-13E 2013-14P

Exchange rate (Rs/USD) 54 53

I i t it i 6 696 6 042

Export parity price

Domestic price range

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

hIron ore import parity price 6,696 6,042

Outlook: Domestic iron ore fines prices

Export parity price - 1,000 2,000 3,000 4,000 5,000 6,000 7,000 Rs/tonneIn $/tonne 2012E 2013P

CFR price at Chinese port 120 110

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1 Outlook: Domestic iron ore fines prices

1,600-1,800

2,300-2,500 2,400-2,600 2,200-2,400

2 000

2,500

3,000 (Rs/ tonne)

Less: Sea freight 15 15

FoB price at Indian port 105 95

Less: Port + Handling charges 5 5

Less: Export Duty (30 per cent) 32 29

68 61 1,600 1,800

-

500

1,000

1,500

2,000 In Rs/ tonne 2012-13E 2013-14P

Exchange rate (Rs/USD) at Rs 54 and Rs 53, respectively 3,672 3,233

Less: Domestic freight (export specific) 1,800 1,800

Iron ore import parity price 1,872 1,433

16

2010-11 2011-12 2012-13 P 2013-14P

Iron ore fines (62% Fe) E:Estimated; P: ProjectedSource: Industry, CRISIL Research

Domestic iron ore and coal prices to increase further in 2012-13Iron ore contract prices DomesticIron ore contract prices - Domestic Thermal coal prices - Domestic

3,500-4,000

5,000 (Rs/ tonne)

4,700-4,900

6,400-6,600 7,200-7,400

6,500-6,700

5,000 6,000 7,000 8,000 (Rs/ tonne)

al D

istri

butio

n ht

s re

serv

ed.

2,505

1,000

3,000

2010 11 2011 12 2012 13P 2013 14P

1,600-1,800 2,300-2,500 2,400-2,600 2,200-2400

-1,000 2,000 3,000 4,000

2010-11 2011-12 2012-13 P 2013-14P

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

h

Note: Lumps are Sponge iron grade CLO (Calibrated Lump Ore), 65% Fe Source: Industry, CRISIL Research

2010-11 2011-12 2012-13P 2013-14PE-auction non-coking coal (Rs/tonne)

Source:Industry, CRISIL Research

Iron ore fines (62% Fe) Iron ore lumps

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1

Supply situation in the domestic iron ore market is expected to improvemarginally during 13-14

– Prices are expected to go down with the increase in supply

However, non-coking coal costs to remain firm

17

Small & mid-size players margins to remain under pressure

Ch i t d i t t t f ll d di l

2009-10 2012-13 E

Iron ore

Changing trends in cost structure of small and medium players

6 120

2013-14P

10 56011 600

al D

istri

butio

n ht

s re

serv

ed.

Non-coking Coal

Iron ore

5,634 (19-20%)

6,120 (21-22%)

9,520(22-23%)

10,560(25-26%)

9,008(21 22%)

11,600(27-28%)

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

h

Power

Scrap

2,122

2,728(9-10%)

3,023(10-11%)

3,654(8-9%)

4,840(11-12%)

(22 23%)

3,640(8-9%)

4,964(11-12%)

(21-22%)

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1

39,500-40,50025 000 25 500

Excise duty

Other 5,500(19-20%)

(7.5)

37,500-38,500

5,500( 13-14%)

4,300 (10.5%)

5,500( 12-13%)

4,500 (10.5%)

39,500 0,500

EBITDA/tonneRs 3,000-3,500

Operating margin6-8%

25,000-25,500

EBITDA/tonneRs 3,500-4,000

Operating margin12-13%

Operating cost3 ,500 38,500

EBITDA/tonneRs 3,000-3,500

Operating margin6-8%

18

42,000-43,00028,000-29,000Realisation 41,000-42,000

Long prices to remain firm in 2012-13

Trend in domestic flat and long steel prices*Trend in domestic flat and long steel prices

42,769 43,000-44,500 42,000-43,500 45,000

50,000 (Rs/tonne)

al D

istri

butio

n ht

s re

serv

ed.

34 330

37,810 32,313

36,354

39,575 39,000-40,50037,500-39,00031,790

36,544

31,833

36,500

30,000

35,000

40,000

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

h34,330 32,313

25,000

,

2007-08 2008-09 2009-10 2010-11 2011-12 2012-13E 2013-14P

HR Coil TMT

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1

Traditionally, prices of long and flat steel products have moved in tandem

*Long prices are those of primary steel manufacturers; secondary players sell at a discount owing to differences in quality

E: Estimated; P: Projected

Source: Industry, CRISIL Research

– Trend has reversed in 2011-12: Higher domestic iron ore and non-coking coal prices

Domestic long steel prices to stay firm over next 2 years

19

Structure of steel industry in India

Steel Industry

Large Integrated Players(Mainly produce flat steel)

Small and mid-sized Players(Mainly produce long steel)

al D

istri

butio

n ht

s re

serv

ed.

( y p ) (Mainly produce long steel)

With Mine (WM)

Without Mine (WoM)

Small Integrated (SI)

Small Non-Integrated (SNI)

Re-Rollers (RR)

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

h

Captive availability of iron

ore and coking coal mines

Non availability of captive iron ore,

coking coal mines

Have backward integration with respect

to iron making

manufacture steel f rom steel intermediates and

scrap

Buy semis and converts into f inished

long steel

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1

BF – BOF process

EAF/ IFProcessprocess Process

Hot metal/ pig iron/ scrap Hot metal/ Sponge iron/ scrap/ pig iron

20

Note: BF-BOF: Blast Furnace-Basic Oxygen Furnace; EAF: Electric Arc Furnace; IF: Induction Furnace

Large players to face margin pressure in 2012-13

L l O ti fit iLarge players: Operating profit margins

40.0

50.0(per cent)

19‐20 20‐21 16‐18 15‐17

80

100 (as a % of sales)

EBITDA Margin

al D

istri

butio

n ht

s re

serv

ed.

25.721.9

19.8 17.510.0

20.0

30.0

9 10

6 7

15 15

2 2

34 31

63 64

20

40

60 Raw material costs

Salaries and wages

Power and fuel

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

h

WM: SAIL, TATA SteelWoM JSW Steel

0.0Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12

WM WoM

22 24 11 12 6 7

‐2012‐13E 2013‐14P 2012‐13E 2013‐14P

With mine Without mine

Other expenses

WM: SAIL, TATA SteelW M JSW St l

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1

Players with mine

WoM: JSW SteelE: Estimated; P: ProjectedSource: CRISIL Research

WoM: JSW SteelE: Estimated; P: ProjectedSource: CRISIL Research

– 2013-14: Marginal improvement in margins due to decline in coking coal costs

Players without mine– 2013-14: Margins to continue to remain under pressure owing to supply constraints in the domestic raw

material market

21

Cost pressures to impact OPMs

S ll d id i d l O ti fit iSmall and mid sized players: Operating profit margins

1620

25(per cent)

al D

istri

butio

n ht

s re

serv

ed.

146

10.26-8 6-8

35

1-3 1-33 4

3.7

1 2

5

10

15

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

h

E:Estimated; P: Projected

1.53 41-2

1-20Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12E Mar-13P Mar-14P

SI SNI RR

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1

High input costs (iron ore and non-coking coal) to impact margins

Source: CRISIL Research

– Iron ore mining ban in Karnataka and ban on illegal mining in Orissa and Goa to hit smaller players

– Current shortage of non-coking coal coupled with CIL’s price hike will put further pressure on margins

22

Key messages

Domestic demand growth to remain muted; long-term growth intact

Domestic capacity to outpace demand through FY13-FY14;

al D

istri

butio

n ht

s re

serv

ed.– Operating rates to decline from 87% (2011-12) to 78% (2013-14)

Flat steel prices to decline but long steel prices to remain firm

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

hFlat steel prices to decline, but long steel prices to remain firm

Domestic iron ore and non coking coal prices to remain firm due to

s ppl iss es

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1 supply issues

Margin pressure to remain through FY13-FY14

23

Need for pelletization

I i th t b th G t t d t il bilit f i t thIncreasing thrust by the Government to ensure adequate availability of iron ore to the domestic steel industry and promote export of value added products:– Ad-volerum export duty on iron ore fines increased to 30% (Union Budget – 2012-13)

– No export duty on iron ore pellets

al D

istri

butio

n ht

s re

serv

ed.

No export duty on iron ore pellets

– Import duty reduced (Union Budget – 2012-13) on the capex incurred for setting up pellet plants• Imported parts account for 10-12% of total setup costs

With high-grade lumpy ores rapidly depleting, pelletizing is becoming paramount

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

hWith high grade lumpy ores rapidly depleting, pelletizing is becoming paramount– Steep rise in the prices of raw materials for DRI & Pig Iron production

– Indian steel making capacity to reach ~110 mt by 2015-16, translating to huge demand for iron ore

Improved productivity and efficiency with superior reducibility behavior of pellets

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1 Improved productivity and efficiency with superior reducibility behavior of pellets compared to lump ore in– Rotary kiln

• Use of pellets to translate to savings of Rs 2,900-3,500/ tonne

– Blast Furnace• Use of pellets to translate to savings of Rs 2,300-2,800/ tonne

No losses in handling iron ore as pellets do not break during transport or handling

24

DRI- cost savings and capacity additions

Without pellet With pellet

Lump ore 17.1 17.220.0(mn tonnes)

Pellet capacity additions by DRI players

al D

istri

butio

n ht

s re

serv

ed.

pRs 6,550/t

Iron ore fines

2 300 2 400 *1 050

8.0

10.7

13.9

10.0

15.0

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

h

I/O norm1 65

Iron ore ll t

2,300-2,400 *1.050

Pulverised coal (33-35 kgs) 550-650

4.5

0.0

5.0

2010-11E 2011-12P 2012-13P 2013-14P 2014-15P 2015-16P

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1 1.65 pellet

3,900-4,400

550-650Heavy oil (16/18 litres)

Electricity (55-60 kWh)

Other costs

200-250

250-3001.5

DRI - Pellet

CostRs 10,800/t

of DRI

Other costs 250-300

Lump ore

Rs 7,200-8,000/t of DRISavings of upto-> Rs 2,900-3,500/ tonne

25

of DRI Lump ore6,500-6,600 0.2

of DRIg p , ,

BF- cost savings and capacity additions

Without pellet With pellet

Lump ore

al D

istri

butio

n ht

s re

serv

ed.

pRs 5,300/t

Iron ore fines

2 300 2 400 *1 050

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

h

I/O norm1 7

Iron ore ll t

2,300-2,400 *1.050

Pulverised coal (33-35 kgs) 550-650 Savings due to reduced coke

intake

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1 1.7 pellet

3,900-4,400

550-650Heavy oil (16/18 liters)

Electricity (55-60 kWh)

Other costs

200-250

250-3001.5

intakeRs 800-900/t

CostRs 9,000/t

of hot metal

Other costs 250-300

Lump ore

Rs 6,200-6,700/t of hot Savings of upto-> Rs 2,300-2,800/ tonne

26

of hot metal Lump ore6,500-6,600 0.2

metalg p , ,

Pellet vs Sinter

U f ll t dditi l R 500 700/ t f h t t l l ti tUse of pellets save an additional Rs 500-700/ tonne of hot metal relative to sinter feed

Consequently, incremental capacity additions in pellet more than the capexi i t i

al D

istri

butio

n ht

s re

serv

ed.

in sintering

Pellet capacity additions by BF players Sinter capacity additions by BF players

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

h

41.7

49.750.0

60.0(mn tonnes)

60 3 62 669.1

77.884.0 84.0

80.0

100.0(mn tonnes)

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1

17.5

27.733.7 33.7

10.0

20.0

30.0

40.0 60.3 62.6

20.0

40.0

60.0

0.02010-11E 2011-12P 2012-13P 2013-14P 2014-15P 2015-16P

BF - PelletSource: Industry, CRISIL Research Source: Industry, CRISIL Research

0.02010-11E 2011-12P 2012-13P 2013-14P 2014-15P 2015-16P

BF-Sinter

27

Summing up: Pelletization to cut ore costs by 10-20%

Iron production

al D

istri

butio

n ht

s re

serv

ed.

DRI BF

DRI players primarily use iron ore lumps BF players primarily use iron ore a mix of

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

hDRI players primarily use iron ore lumps

Current mix

Lump 90%

BF players primarily use iron ore a mix oflumps and sinter

Current mixLump 43%

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1

Pellet 10%

Use of pellets to translate to savings of

Sinter 47%

Pellet 10%

Use of pellets to translate to savings of Rs2 300 2 800/ tonne of hot metalRs 2,900-3,500/ tonne of DRI

Future Mix (2015-16)

Lump 70%

2,300-2,800/ tonne of hot metal

Future Mix (2015-16)Lump 32%

Sinter 36%

28

Lump 70%

Pellet 30%

Sinter 36%

Pellet 32%

Miners: Forward integrating into pellet manufacturing owing to the regulatory climate

EBITDA/ tonne

Moisture at 5% 3.7 4.4 7.8

2 years ago 1 year ago CurrentlyChanging landscape for exporters: iron ore finesRs 600- 1,000/

tonne

al D

istri

butio

n ht

s re

serv

ed.

58.8 District mineral fund tax (equal to royalty)

Administration and selling expenses

Royalty

Export duty5.0

30.0

3.7 3.0

37.5

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

h

16.0

-5.0 3.7 2.0

Forest Development tax

Demurrage

Handling charges at port

Railway freight

T t t il t ti

32.8

5 0

21.3

-

20.0

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1

7.0 3.7 Transport to railway station

Mining and processing cost 7.0 3.7

7.0 3.7

Assumptions: 1) Iron ore has an Fe content of 63%2) Exchange rate : Rs 55/ USD3) Iron ore fines price: Rs 120/ dry metric tonne

Currently, miners getting an EBITDA/ tonne of Rs 3,500-4,500 on pellets – Robust demand and better realizations from the domestic market

N t d t ll t

Source: Industry, CRISIL Research

29

– No export duty on pellets

~55 mt of pellet capacity to be added over the next 5 yearsSteel players to add 46 million tonnes

47 6

58.866.9

607080

(mn tonnes)

Steel players to add 46 million tonnes

al D

istri

butio

n ht

s re

serv

ed.Steel

players22.0

35.744.4 47.6

1020304050

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

h

Total pellet capacity~85 mt by 2015-16

02010-11E 2011-12P 2012-13P 2013-14P 2014-15P 2015-16P

Steel - pellet additions

Miners to add 5 million tonnes

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1

Miners9.1

11.1 11.1

8

10

12

(mn tonnes)

Miners to add 5 million tonnes

5.9 5.9 5.9

0

2

4

6

8

Standalone pellet plants

30

02010-11 2011-12 2012-13 2013-14 2014-15 2015-16

Miners - pellet additionsSource: Industry, CRISIL Research

plants(6.4mt)

About us

CRISIL LimitedCRISIL Limited CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. We are India's leading ratings agency. We arealso the foremost provider of high-end research to the world's largest banks and leading corporations.

CRISIL ResearchCRISIL Research is India's largest independent and integrated research house We provide insights opinions and analysis on the Indian economy

al D

istri

butio

n ht

s re

serv

ed.

CRISIL Research is India s largest independent and integrated research house. We provide insights, opinions, and analysis on the Indian economy,industries, capital markets and companies. We are India's most credible provider of economy and industry research. Our industry research covers 70sectors and is known for its rich insights and perspectives. Our analysis is supported by inputs from our network of more than 4,500 primary sources,including industry experts, industry associations, and trade channels. We play a key role in India's fixed income markets. We are India's largest provider ofvaluations of fixed income securities, serving the mutual fund, insurance, and banking industries. We are the sole provider of debt and hybrid indices toIndia's mutual fund and life insurance industries. We pioneered independent equity research in India, and are today India's largest independent equityresearch house. Our defining trait is the ability to convert information and data into expert judgements and forecasts with complete objectivity. We leverage

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

h

our deep understanding of the macroeconomy and our extensive sector coverage to provide unique insights on micro-macro and cross-sectoral linkages.We deliver our research through an innovative web-based research platform. Our talent pool comprises economists, sector experts, company analysts,and information management specialists.

CRISIL Privacy Notice CRISIL respects your privacy. We use your contact information, such as your name, address, and email id, to fulfill your request and service your account

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1 p y p y y , y , , , y q yand to provide you with additional information from CRISIL and other parts of The McGraw-Hill Companies, Inc. you may find of interest.

For further information, or to let us know your preferences with respect to receiving marketing materials, please visit www.crisil.com/privacy. You can viewMcGraw-Hill’s Customer Privacy Policy at http://www.mcgrawhill.com/site/tools/privacy/privacy_english.

Last updated: April 30, 2012

Di l iDisclaimerCRISIL Research, a division of CRISIL Limited (CRISIL) has taken due care and caution in preparing this Report based on the information obtained byCRISIL from sources which it considers reliable (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data /Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. This Report is not a recommendation toinvest / disinvest in any company covered in the Report. CRISIL especially states that it has no financial liability whatsoever to the subscribers/ users/transmitters/ distributors of this Report. CRISIL Research operates independently of, and does not have access to information obtained by CRISIL’s

31

y yRatings Division / CRISIL Risk and Infrastructure Solutions Limited (CRIS), which may, in their regular operations, obtain information of a confidentialnature. The views expressed in this Report are that of CRISIL Research and not of CRISIL’s Ratings Division / CRIS. No part of this Report may bepublished / reproduced in any form without CRISIL’s prior written approval.

al D

istri

butio

n ht

s re

serv

ed.

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

hFo

r Int

erna

l Use

OC

opyr

ight

© 2

011

CRISIL Limitedwww crisil comCRISIL Limitedwww crisil comwww.crisil.com

www.standardandpoors.comwww.crisil.com

www.crisilresearch.com

Site-wise capacity additions

Site wise capacity additions (in mn tonnes)Site-wise capacity additions (in mn tonnes)

Company Site Nature Crude Steel capacityIISCO Brownfield 2.2Rourkela Brownfield 2.0Bhil i B fi ld 2 1SAIL 7 2 t

al D

istri

butio

n ht

s re

serv

ed.

Bhilai Brownfield 2.1Durgapur Brownfield 0.3Bokaro Brownfield 1.0Jamshedpur Brownfield 2.9Orissa Phase 1 Greenfield 3.0

SAIL

TATA

7.2 mt

5.9 mt

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

hOrissa Phase 1 Greenfield 3.0JSW Vijaynagar Brownfield 2.0RINL Vizag Brownfield 3.3JSPL Angul Phase 1 Greenfield 1.6Bhushan Steel Angul Brownfield 2.5

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1

Source: CRISIL Research

Monnet Ispat Raipur Brownfield 1.2NMDC Nagarnagar Greenfield 3.0

Delayed capacity additions adds up to ~28 mt

Delayed capacity additions (in mn tonnes)Delayed capacity additions (in mn tonnes)

Company Site Nature Crude Steel capacityOrissa Phase 2 Brownfield 3.0J d l G fi ld 5 0

Tata 8 mt

al D

istri

butio

n ht

s re

serv

ed.

Jagdalpur Greenfield 5.0Vijaynagar Brownfield 3.0Salboni Phase 1 Greenfield 3.0Jharkhand Phase 1 Greenfield 3 0

JSW 6 mt

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

hJharkhand Phase 1 Greenfield 3.0Raigarh expansion Brownfield 2.0

SAIL Bokaro Brownfield 2.0Posco Dhinkiya Greenfield 4

JSPL 5 mt

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1

Source: CRISIL Research

Posco Dhinkiya Greenfield 4Arcelor Mittal Torpa Greenfield 3

Iron ore supply in Karnataka

in mn tonnes 2010 11 2011 12 2012 13E 2013 14Pin mn tonnes 2010‐11 2011‐12 2012‐13E 2013‐14P

NMDC 7 7 7 7

Other miners 31 7 5 11

Total 38 14 12 18

al D

istri

butio

n ht

s re

serv

ed.They will be allowed to start

mining under the following conditions:• Validation of mining plan

Similar processes to be followed as with Category ‘A’ mines. In addition, they have to meet

conditions like depositing the penalty for illegal mining, as

•CEC has recommended for both penalty and cancellation of

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

h

14-15 mt in 10-11

• Validation of mining plan • Acquisition of forest and environmental clearances • Reclamation and Rehabilitation of the affected areas

p y g g,decided by the court . leases for these mines

• Decision still pending

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1

Category A

Category B (72 mines)

Category C

12-13 mt in 10-11 10-12 mt in 10-11

166 mines

g y(45 mines)

g y(49 mines)

35

166 minessurveyed

Iron ore supply in Orissa

– Operations without requisite clearances – forest, environment, pollution control board, operating mine beyond the deemed

lease period, overproduction beyond limits allowed by Mining Plan, irregularities in transport – missing dispatch certificates,

overloading of material, theft, etc.

Irregularities in iron ore mining in Orissa

al D

istri

butio

n ht

s re

serv

ed.

Captive mining (~30 mt of 68mt)

As per the Government of Odisha circular dated

3rd Oct 2012

Onl

y –

Not

For

Ext

erna

by C

RIS

IL L

td. A

ll rig

h

Merchant mining divided into two broad categories

First 30 years of lease period (28 mn)

– The mining lease to be renewed provided it is being used for

captive purpose by the lessee.

– The area to be renewed shall be limited to the captive

requirement of 30 years of the existing capacity of the lessee

For I

nter

nal U

se O

Cop

yrig

ht ©

201

1

Crossed the 30 year lease period (10 mn)

Allowed to do merchant salerequirement of 30 years of the existing capacity of the lessee.

– The balance land shall be reserved for the Odisha Mining

Corporation.

As per the Government of Odisha circular dated Not allowed to do merchant sale

in mn tonnes 2010 11 2011 12 2012 13E 2013 14P

p

5th Dec 2012

– 50% of the production of merchant miners, not put to captive

36

in mn tonnes 2010‐11 2011‐12 2012‐13E 2013‐14P

Total 76 68 50 55

use, to be sold to the standalone end users within the State.

– To be effective from the month of Dec 2012