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CRISIL Research Steel Industry Mar12

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  • CRISIL Insight

    About CRISIL Limited

    About CRISIL Research

    CRISIL Privacy

    Last updated: 31 March, 2011

    Disclaimer

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

    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 70 sectors 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 of valuations of fixed income securities, serving the mutual fund, insurance, and banking industries. We are the sole provider of debt and hybrid indices to India's mutual fund and life insurance industries. We pioneered independent equity research in India, and are today India's largest independent equity research house. Our defining trait is the ability to convert information and data into expert judgements and forecasts with complete objectivity. We leverage 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.

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    CRISIL Research, a division of CRISIL Limited (CRISIL) has taken due care and caution in preparing this Report based on the information obtained by CRISIL 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 to invest / 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 CRISILs Ratings Division / CRISIL Risk and Infrastructure Solutions Limited (CRIS), which may, in their regular operations, obtain information of a confidential nature. The views expressed in this Report are that of CRISIL Research and not of CRISILs Ratings Division / CRIS. No part of this Report may be published / reproduced in any form without CRISILs prior written approval.

    About Global Business Connect (GBC) Global Business Connect (GBC) is a business networking division of SteelGuru.com. GBC was conceived to create an effective and powerful business networking experience. GBC is committed to create unparalleled networking opportunities and dedicated platforms to bring together the government, private & public enterprises, policy makers, academia, consultants, strategists, manufacturers, service & solution providers, professionals, traders, brokers, financial institutions, educational & management institutions and technology experts from multiple sectors globally.

  • 1

    Short-term blip, but long-term story still on India arrives on the global scene; domestic story unfolds The last few years have been, at various times, eventful, transformational, and even traumatic, for the steel industry worldwide. And no prizes for guessing, the story of the decade has been, without any doubt whatsoever, the spectacular emergence of China on the global steel landscape as the industry bulwark. Be it demand or supply, Chinas appetite has been voracious, and its impact on prices of all commodities and products of consequence to the industry so humungous that no country or player has been left untouched (or unscathed, as the case may be) by it. No less noteworthy, particularly since the recession of 2008, has been the catapulting into this league albeit in a smaller way, when viewed though the China prism of India. The epicenter of the industry has inexorably shifted to Asia, and the two Asian giants are bang in the middle of it. Mirroring the global steel industrys fortunes, the five years from 2005-06 to 2010-11 was one of robust growth for the Indian steel industry, except for the blip in 2008-09 when, emulating international trends, demand shrank by 0.4 per cent due to the adverse impact of the global economic crisis. Domestic steel demand grew by a healthy 10 per cent CAGR during this 5-year period, propelled by rising investments in infrastructure and construction and vigorous growth in sectors such as capital goods and automobiles. Domestic steel consumption (2005-06 to 2010-11)

    17,016 19,59622,966 21,912

    29,283 30,981

    22,16924,732

    26,454 27,076

    26,80131,156

    0

    10,000

    20,000

    30,000

    40,000

    50,000

    60,000

    70,000

    2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

    ('000 tonnes)

    Flat products Long products

    E: Estimated Source: JPC, CRISIL Research This was also a period when investment in domestic infrastructure gathered momentum, at both the Central and state levels. Domestic long steel demand, inevitably, went up and is estimated to have grown a CAGR of 14.1 per cent over 2005-06 to 2010-11.

  • 2

    CRISIL Insight

    There was vibrant demand for flat steel too. Over the five years to 2010-11, the Indian cars and utility vehicles industry grew at 18 per cent CAGR, fired by the rise in disposable incomes, easy availability of finance, and greater choices for the customer, in terms of a wide range of model choices, coupled with attractive discounts. Demand for steel pipes was supported by the huge network of pipelines added by the oil & gas and water & irrigation sectors. Nearly 27,000 km of pipelines are estimated to have been installed in the country during this period, translating to healthy demand for flat steel. The global economic crisis of 2008 bruised the industry, but it limped out of the recession in 2008-09, and the hobble quickly transformed into a sprint in 2009-10 and an even more spectacular run in 2010-11. Domestic demand surged by about 10 per cent y-o-y to around 62 million tonnes in 2010-11, fuelled by robust growth in key end-user sectors such as automobiles, construction, infrastructure, and capital goods, and made India the fourth largest producer and consumer of steel. Infrastructure and industrial construction led the way, accounting for about one-third of the total steel consumed in India in 2010-11, followed by the pipes and tubes industry and the automobile sector. This was a consequence of greater investments in the infrastructure sector in the year combined with vigorous growth experienced by other major steel-consuming segments such as automobiles, consumer durables, and pipelines.

    Steel consumption pattern in India (2010-11)

    Industrial Construction

    15

    Infrastructure18

    Capital goods8

    Pipes & Tubes10

    Automobile12

    Others37

    (per cent)

    Source: CRISIL Research

    During the year, demand for long steel (consumed mostly by infrastructure and industrial construction) rose by 8-10 per cent, whereas demand for flat steel (consumed primarily by sectors such as automobiles, pipes and tubes) grew by 10-12 per cent. Flat product demand grew more than long product demand on the back of brisk growth in the automobile sector.

  • 3

    Domestic steel demand hit a bump in 2011-12, but long-term story still promising However, the euphoria generated in the two years following the recession quickly soured as the demand scenario took a surprisingly disappointing turn in 2012 due to numerous domestic and international factors. Globally, the economies of many developed nations came under strain, slowing growth in many and crippling others (notably in Europe). On the domestic front, demand during the year crumbled, in relative terms, on the back of persistently high inflation, steep interest rates and the snowballing effect of these factors on end-user demand. With rising cost of finance and execution delays arising from lack of timely environment clearances, many construction and infrastructure projects are bogged down, not taking off as initially anticipated and hurting demand for steel. Consequently, CRISIL Research estimates a drastic reduction in domestic steel demand growth in 2011-12 to 5-7 per cent. Consumption of both flats and longs has been severely hit: demand for flat products is estimated to grow by 5-7 per cent during the year, while that of long products is likely to increase by 4-6 per cent. In view of the crisis enveloping the global economy, and uncertainty over the pace of recovery, we believe that the trends in end-user consumption seen this year will persist in 2012-13 as well, albeit with the likelihood of a marginal improvement in demand. We reckon that domestic steel demand will grow by 6-8 per cent in 2012-13: demand for flat products is likely to rise marginally during the year, while demand for long products is expected to remain steady. Demand outlook for steel products in India (2011-12 to 2015-16P)

    29.3 31.0 33.0 35.646.7

    26.8 31.2 32.8

    34.6

    43.9 56.1

    62.2 65.8

    70.2

    90.6

    -

    20.0

    40.0

    60.0

    80.0

    100.0

    2009-10 2010-11 2011-12E 2012-13P 2015-16P

    (mn tonnes)

    Flat products Long products

    E: Estimated; P: Projected Source: CRISIL Research, JPC

    But, we believe that this is only a temporary blip in the fascinating long-term India growth story that continues to unfold. Once the issues bedeviling the global economy are resolved, many of the distressed economies, particularly the developed ones, will return to the growth path, and India and China, which have already become the bulwarks of the global economy, and in particular steel, will continue to forge ahead, enlivening the industrys prospects. Nevertheless because of the relatively dismal performance anticipated in 2011-12 and 2012-13

  • 4

    CRISIL Insight

    compared with the past five years, we expect domestic steel demand to moderate over the next 5 years in view of an expected slowdown (arising from the adverse impact caused by the global economic crisis) in key end-use sectors such as construction, infrastructure, and automobiles. CRISIL Research sees domestic steel demand growing by 7-9 per cent CAGR between 2010-11 and 2015-16 to reach 90 million tonnes in the terminal year, lower than around 10 per cent CAGR experienced in the five years from 2005-06 to 2010-11. Demand outlook for finished steel (2011-12 to 2015-16) Growth rates (per cent) % Share 2010-11 2011-12E 2012-13P 2011-12P to 2015-16P

    Flat steel demand 50 5.8 5-7 7-9 8-10

    Long steel demand 50 16.2 4-6 4-6 7-9

    Overall demand 100 10.8 5-7 6-8 7-9

    E: Estimated; P: Projected

    Source: CRISIL Research, JPC End-use sectors - growth review and outlook Growth rates (per cent) 2005-06 to 2010-11 2011-12P to 2015-16P

    Oil & Gas (refining capacity) 8 4-6

    Automobiles (demand) 16 13-14

    Industrial construction (investments) 22 7-9

    Infrastructure investments 18 12-14

    Pipeline netw ork (kms laid) 9 4-6

    Consumer durables (demand) 15 11-13

    E: Estimated; P: Projected

    Source: CRISIL Research Flat steel demand set to grow Buoyed by healthy demand from key end-use industries such as automobiles, pipelines and consumer durables, CRISIL Research foresees demand for flat steel to grow at a reasonably healthy pace over the next 5 years. With this, the flat steel consumption in India is expected to exceed 45 million tonnes by 2015-16 and account for slightly over half of the total finished steel consumption. Automobile industry growth to moderate owing to high cost of ownership In 2010-11, the Indian automobile industry grew at an extremely robust pace. But, as in most other sectors, the industrys performance was disappointing in 2011-12. Between 2011-12 and 2015-16, CRISIL Research expects the industrys growth to moderate amid rising vehicle ownership costs; both the cars and utility vehicles industry and the commercial vehicles (CV) industry are expected to experience low double digit growth. Growth in cars and utility vehicles during this period is expected to be driven by higher sales of ultra low-cost cars, while sustained growth in economic activity, rise in consumption and healthy freight traffic is likely to drive demand for commercial vehicles. Two-wheelers are also expected to grow at a reasonably healthy rate, driven by strong rural demand, improving financial scenario and new model launches.

  • 5

    With automobile industry growth likely to remain robust despite some moderation, the share of the automobiles sector in domestic flat steel consumption is expected to rise over the next few years. Around 30,000 km of oil and gas pipeline network to materialise over next 5 years CRISIL Research believes that demand for steel pipes will continue to be driven by the huge network of pipelines planned in the oil & gas sector alone. This will be supplemented by the government's increasing focus on water and irrigation projects. Thus, we expect this trend to foster growth in domestic steel demand for the next 5 years. India currently has around 50,000 km of oil and gas pipelines. CRISIL Research expects another 30,000 km of oil and gas pipelines to be added over the next 5 years. Internationally, about 900 pipeline projects are under construction, which will require more than 300,000 km of pipelines to be laid over the next 5 years. Thus, we believe that the expected global demand for pipelines is also a strong opportunity for Indian players to increase their share in global steel exports. As of 2010-11, Indian players are estimated to have accounted for 10-11 per cent of total global exports. Long steel demand too will rise over next 5 years CRISIL Research expects demand for long steel to record high single-digit CAGR growth over the next 5 years. This growth will continue to be driven by investments in infrastructure and industrial construction. With this, long steel consumption in India is expected to be a little over 40 million tonnes (slightly under half of total steel consumption). Infrastructure investments to continue driving long products growth CRISIL Research expects investments in the infrastructure space to exceed Rs 30 trillion between 2011-12 and 2015-16, nearly two times the investments in the previous 5 years. This sharp jump in investments is expected to be almost evenly spread across sectors catering to both economic and social growth. However, in absolute terms, sectors such as power, roads, railways and Irrigation are likely to attract an overwhelming share of total investments. The power sector is likely to see the maximum investments during the next five years (despite lingering hurdles

    with fuel availability and pricing, poor financial health of SEBs, regulatory issues etc) led by the huge demand-supply gap in the power sector, coupled with the announcement of numerous private and public sector power projects.

    Roads and ports are also likely to witness high investment growth rates as the government is encouraging and facilitating private participation in these sectors through public-private partnership (PPP) projects.

    Irrigation, water supply and sanitation are likely to grow only on the back of government initiatives as these projects are not very attractive in terms of returns and, therefore, require significant government support.

    Investments in sectors such as telecom and airports are expected to decline over the next 5 years. This is because in the case of the telecom sector, a majority of the investment in passive infrastructure has already been made over the last 5 years. In the case of airports, most of the big investments have already taken place in the modernisation/ upgradation of Mumbai and New Delhi airports and big greenfield projects at Bangalore and Hyderabad.

  • 6

    CRISIL Insight

    Cumulative investment in infrastructure is expected to grow at a healthy rate during 2011-15 to 2015-16, although it will be lesser than the nearly 20 per cent seen over the previous five years. Industrial construction to see investments of over Rs 10 trillion over next 5 years The construction industry is expected to grow at a robust pace because of the governments continued heavy spend on infrastructure. CRISIL Research estimates investments of over Rs 10 trillion in the construction industry between 2011-12 and 2015-16 sharply higher when compared to the previous 5 years. The oil & gas sector is likely to attract over half of these investments over the next 5 years. Oil & gas is likely to see large investment flows due to continued dependence on imports for meeting domestic

    demand, high oil and gas prices and sustained efforts by the government towards encouraging upstream investments through the New Exploration Licensing Policy (NELP) and downstream investments through gas grids and city gas distribution (CGD) networks.

    Domestic supply Demand-to-capacity rates in India to moderate post 2013-14 In 2010-11, the Indian steel industry's demand-to-capacity ratio was an estimated 88 per cent, but we believe that this will decline from 2013-14 in view of the capacity additions expected in 2011-12, 2013-14 and 2015-16. About 55-60 million tonnes of crude steel capacity additions have been announced over the next 5 years, but we are of the opinion that not all of it will materialise, due to hurdles large steel makers are facing in land acquisition, environmental and forest clearances. In our view, only around two-thirds of this announced capacity will materialise by 2015-16, with large and organised players accounting for over 85 per cent of added capacity. Since a majority of these planned capacities are slated to begin operations in 2013-14 and 2015-16, the industry's capacity formation will get bunched during these two years, but incremental demand during this period is expected to be lower. Consequently, the gap between supply and consumption of steel is set to widen, especially from 2013-14 onwards, and it will be accentuated by India's steel imports (currently accounting for 10-11 per cent of domestic steel consumption). We believe that the level of imports will be maintained as a sizeable quantity of steel is imported by the automobiles and pipeline sectors, which are expected to grow at a healthy pace in the long term, short-term woes notwithstanding. Accordingly, demand-to-capacity rates are expected to moderate in the long term.

  • 7

    Domestic steel demand to capacity (2007-08 to 2015-16)

    49 49 5662 67

    73 7984 91

    54 6065 70

    77 8394 99

    108

    91

    82

    8688 87 88

    8385 84

    50

    55

    60

    65

    70

    75

    80

    85

    90

    95

    -

    20

    40

    60

    80

    100

    120

    2007-08 2009-10 2011-12P 2013-14P 2015-16P

    Finished steel demand Total finished steel capacity

    Finished steel demand / capacity

    E: Estimated; P: Projected Source: CRISIL Research

    A significant fallout of this decline in the demand-to-capacity ratio will be mounting pressure on domestic Indian steel manufacturers to boost exports to protect their operating margins. There are many Indian players who are cost-competitive compared to their global counterparts. They will also account for about 70-75 per cent of the increase in capacity, which will spur them to export. On the global front, in the long term, growth in global demand is likely to outpace capacity additions, causing operating rates to improve and reach the pre-crisis (2008) level by 2015-16.

    Prices Domestic steel prices increase in line with international prices Global steel prices, which had plummeted in 2009 due to the slump in demand (caused by the economic crisis), recovered in 2010 on the back of a sharp revival in demand and the surge in raw material prices. Prices rose by over 30 per cent over 2009 and averaged $600-610 per tonne (FoB, CIS Black Sea) in 2010. Domestic steel prices, which tail the landed cost of imports, crossed Rs 36,000 per tonne during April-March 2010-11 from over Rs 32,000 per tonne in 2009-10. After the government withdrew the import duty on steel products and removed restrictions on imports of HR products in early 2010, domestic steel prices, which were trading at a premium to international prices in the second half of 2009-10, dipped to move in line with international prices.

  • 8

    CRISIL Insight

    Domestic steel prices (January 2009 - July 2011)

    -

    5,000

    10,000

    15,000

    20,000

    25,000

    30,000

    35,000

    40,000

    45,000

    -

    100

    200

    300

    400

    500

    600

    700

    800

    900

    Jan-

    09

    Apr-

    09

    Jul-0

    9

    Oct

    -09

    Jan-

    10

    Apr-

    10

    Jul-1

    0

    Oct

    -10

    Jan-

    11

    A pr-

    11

    Jul-1

    1

    Oct

    -11

    ($ / tonne)

    HR (FoB, CIS Black Sea) (RHS) HR (Domestic)

    Note: Landed costs and domestic prices are inclusive of excise duty Source: Metal Bulletin, Industry Raw material prices for steel manufacturers rose principally because miners, ignoring shrill protests from customers, switched from April 2010 to a quarterly pricing model, from the traditional annual pricing model, for iron ore and coking coal contracts. As a result, iron ore contract prices went up to average $100-110 per tonne in 2010 vis--vis $60-65 per tonne in 2009. Coking coal contract prices too spurted to $190-195 per tonne in 2010 from $125-130 per tonne in 2009. Likewise, spot prices for iron ore increased to $150-155 per tonne in during 2010 from an average of $80-90 per tonne (CFR, China) in 2009, whereas those for coking coal rose to $240-245 per tonne in 2010 from $170-175 per tonne (FoB, China) in 2009. Raw material prices (January 2009 - July 2011)

    -

    50

    100

    150

    200

    250

    300

    350

    Jan-

    09

    Apr-0

    9

    Jul-0

    9

    Oct

    -09

    Jan-

    10

    Apr-1

    0

    Jul-1

    0

    Oct

    -10

    Jan-

    11

    Apr-1

    1

    Jul-1

    1

    Oct

    -11

    ($ / tonne)

    Iron ore (CFR, China) Coking coal (FoB, China)

    Source: Metal Bulletin, Bloomberg

  • 9

    Iron ore prices to remain firm in 2011 and 2012 on tight supply, healthy demand CRISIL Research perceives supply of iron ore to remain tight until 2012-13 as demand is expected to outpace supply. However, post 2013, the supply situation is expected to improve, as major global miners such as BHP Billiton, Rio Tinto and Vale are likely to bring on stream fresh capacities. Moreover, the expected slowdown in steel production in China, owing to a moderation in demand there, will pull down incremental demand for iron ore. In the short term, strong demand and supply disruptions are expected to lead to a deficit in 2011. This is likely to lift contract prices of iron ore in 2011 by 30-35 per cent over 2010. Over the medium term, contract prices of iron ore are likely to remain firm as supply constraints continue to plague the market. The ban on Indian iron ore exports (from Karnataka) will continue to support high domestic iron ore prices. This, coupled with the government's drive to close illegal mines, will pull down iron ore exports over the next few years. Consequently, international iron ore prices are expected to rise sharply. We expect the global iron ore market to see a marginal surplus in 2012. Thus, CRISIL Research expects average contract prices of iron ore to remain firm in 2012. Coking coal prices to stay firm in 2011, fall in 2012 as supply remains constrained Australia, and within it Queensland, continues to lord over the coking coal global seaborne market with a 65-70 per cent share. Queensland has the lion's share of Australias exports, and controls over 50 per cent of the global seaborne market. (About 60 per cent of India's coking coal requirements are imported and a major portion of this comes from Australia). With supply constrained and demand remaining healthy, the coking coal market is expected to remain in deficit in the short term. The floods in Australia in January 2011 severely hit coking coal supply, particularly in Queensland, which accounts for about 80 per cent of the Australia's coking coal exports. We believe that the persistent supply-side issues, lack of alternative sources of hard coking coal and healthy demand from China and Japan in 2011 should result in strong overall demand for coking coal. Contract prices of coking coal have averaged $285-290 per tonne during the first three quarters of 2011. CRISIL Research expects average contract prices of coking coal to have increased by 30-40 per cent y-o-y in 2011. Australia's production and exports of coking coal are expected to improve gradually, which will reduce the supply deficit in 2012 compared with 2011. As a result, contract prices of coking coal will decline marginally in 2012.

  • 10

    CRISIL Insight

    Raw material price outlook

    47 51

    92 61

    108

    140-150 120-130

    111 92

    293

    129

    191

    280-290

    220-240

    -

    50

    100

    150

    200

    250

    300

    350

    2006 2007 2008 2009 2010 2011E 2012P

    ($ / tonne)

    Iron ore contract Coking coal contract

    E: Estimated; P: Projected Source: CRISIL Research

    Domestic steel prices to rise in line with international prices over the long term On the back of high raw material costs and healthy demand for steel, CRISIL Research expects global steel prices to increase to around $680-690 per tonne in 2011 and remain firm around $600-640 per tonne in 2012. In keeping with this trend, domestic steel prices are also expected to go up. CRISIL Research expects domestic steel prices to increase in 2011-12 and be steady around Rs 37,000-40,000 per tonne in 2012-13, in line with global prices. Steel price outlook (2011 and 2012) Year International prices ($/tonne) Year Domestic prices (Rs/tonne)

    2010 614 2010-11 36,812

    2011 E 690-720 2011-12 P 38,500-40,000

    2012 P 600-640 2012-13 P 35,000-37,500

    E: Estimated; P: Projected

    Source: CRISIL Research

    Note: Domestic prices are inclusive of excise duty of 10 per cent and education cess of 3 per cent

    Looking beyond the short term As the industry builds up steel production capacities, one of the major challenges it faces, and will continue to face, is the availability of critical raw materials, such as iron ore and coking coal. Since India hardly has any reserves of coking coal, it is mostly imported and many players have begun scouring overseas for coking coal assets.

  • 11

    Iron ore presents a different challenge. India is rich in iron ore but most of the iron ore it produces is in the form of fines and is currently exported. A major problem plaguing the iron ore industry today is illegal mining, which has been brought sharply into focus by the events in Karnataka that has resulted in a ban on mining of iron ore in the state. In Goa too, this is turning out to be a critical issue for the industry. Added to that is the view among a section of the industry and the government that the country should not be exporting precious mineral resources, but should, instead, aim to use the iron ore that is produced and try to be a net value-added steel exporter. One consequence of such thinking is the 30 per cent export duty on iron ore, which the mining industry wants removed. It is clear that clarity in the mining policy is a prerequisite for steelmakers as many of them seek backward linkage into raw materials. In this context, the proposed Mines and Minerals Development and Regulation Bill (MMDR), cleared by the Cabinet in September 2011, is a welcome initiative. It may be too early to debate too much on its merits and de-merits at the moment, as it is yet to be passed by Parliament and become law, but clarity in the regulatory environment will be welcomed by the industry. Some key proposals in the bill are In case of coal, mining companies have to part with 26 per cent of their profits (from mining activities); In case of minerals other than coal, mining companies have to part with 100 per cent of the royalty amount

    towards local community development Additionally, mining companies will also be levied central and state cess, which will be used to set up a

    minerals fund that will focus on research and introduction of scientific mining methods. The central levy will be 2.5 per cent of customs/excise duty, while, as per the draft bill, states can charge up to 10 per cent cess on royalty.

    It is extremely likely that companies will pass on these costs to the end-users and their ability to do so will determine the eventual impact of the bill. In the current circumstances, if the bill is implemented, iron ore miners may have to hike blended prices and pass on the increase in costs. This, they are quite likely to do, in view of the current shortage of iron ore and healthy demand from China. The mining ban in Karnataka and the clampdown on illegal mining in Orissa and Goa has caused a shortfall in iron ore for both the domestic as well as international steel industry. The consequence of not passing on these costs will be a fall in their operating profit margins. For instance, if this levy had been in force in 2010-11 and the iron ore miners had been unable to pass on the rise in costs to end-users, their operating profit margins (OPM) would have been lower by 300 basis points (bps). The new bill will result in higher royalties for steel players with captive access to mines. In order to maintain their margins, steel players would have to increase steel prices: a large part of this hike would be because of higher royalties and partly owing to higher power tariffs. Royalties and power costs currently account for 6-7 per cent and 1-2 per cent of sales, respectively, for steel players with captive access to mines. The steel players without captive access to mines would also bear the brunt of the bill through higher iron ore costs, as the iron ore miners are expected to pass on the impact of the new mining bill.

  • 12

    CRISIL Insight

    Steel miners are in a position to pass on the increase in costs because, in spite of the moderation in demand seen this year, steel prices (HR coils) have risen by 9-10 per cent, on average (first 6 months of 2011-12). They will take a hit on their operating margins if they do not pass on the rise in costs. For the industry, there are two aspects to value addition. One is to be a manufacturer and exporter of high-grade steel used in speciality applications such as in automobiles. Yet another is to achieve value addition in the chain, that is, use domestic iron ore that is produced to make and export finished steel rather than export the iron ore. Nearly 60 per cent of the iron ore produced in the country is in the form of fines, while the remainder is in the form of boulders that has to be broken down into lumps of different sizes for use in blast furnaces or sponge iron plants. In the past, much of the iron ore fines were exported because few players had sintering plants (due to the high costs associated with setting up such units), and iron ore cost was low, and there was no major domestic market for fines. Moreover, top class pelletization technology too was the preserve of some of the developed countries. But that is slowly changing. With iron ore prices almost trebling in the past three years, and scarcity of the ore, domestic steel manufacturers are feeling the pinch and have redoubled their efforts to reduce costs of this key input. In this context, switching from their traditional feed - lump ore - to agglomerated ore, through sintering or pelletisation, will enable steelmakers to slash ore costs by 10-20 per cent. As rising steel demand fuels further increases in iron-ore prices, more players will, therefore, need to resort to sintering or pelletisation to mitigate cost risk. Unlike sintering plants that have to be located close to the furnace, another added advantage with pelletization plants is that they can be located at the mines and the pellets can be transported. In recent times, world-class pelletization technology too has arrived at Indias doorstep. Many Indian players with backward linkages have pelletization plants that make it possible to convert not just the fines produced but also the fine iron ore that is generated during the crushing of large lumps for use in blast furnaces or DRI furnaces. Although pelletization is an old technology, many of Indias iron ore miners have been exporting fines for decades without any value-addition. But, as outlined above, the time is ripe for iron ore miners and steel players to exploit this unfolding opportunity.

  • 13

    Sinters/pellets significantly cuts iron ore, coke costs

    Note: Assumption iron ore lumps (63 fe) @ Rs 6,500/tonne, Iron ore f ines (63 fe) @ Rs 3,400/tonne; Coke @ Rs 18,000/tonne

    Use of sinters saves Rs 1,700-2,100 per tonne of hot metal

    Use of pellets saves Rs 2,300-2,700 per tonne of hot metal

    BLASTFURNACE

    Iron ore costs i 10-

    12%

    Coke costsi8%

    In both cases, coke costs

    drop owing to reduced

    consumption per tonne of

    hot metal

    Iron ore costs i 15-17%

    BLASTFURNACE

    The technology landscape too is favourable. It has now become possible for iron ore miners, and even sponge iron manufacturers, to set up pelletization plants with the improvement in technology and the entry of many foreign technology providers into India. Therefore, in the current circumstances with regulations likely to be tighter on mining in the future in view of environmental and social factors, and the ongoing debate on use of natural resources it is not only prudent but also economically viable for these players to set up pelletization plants to meet the incremental demand for iron ore that will surely arise as many players add fresh capacities. It is thus clear that the critical elements of a long-term roadmap for the growth of the steel industry should encompass the following: a clear-cut, stable mining policy; investments in newer technologies to manufacture high-grade and speciality steel; and setting up pelletization plants and other newer technologies to make greater use of the iron ore fines mined in the country to make steel, and thus become a net exporter. A stable mining policy, it is clear, appears to be only a matter of time before it becomes law. Almost all stakeholders, it is also clear, are agreed on the fact that the communities affected by mining need to be effectively resettled and compensated. The industry needs to work with the government and local communities to ensure that everyone is partaking of the profits made from mining of precious natural resources, and resettlement and rehabilitation are adequate, so that hurdles to mining operations are minimised, if not done away with altogether. Likewise, the industry will have to invest in pelletization plants and other cost-reduction technologies and processes so that it is able to become a cost-competitive producer and exporter of not just iron ore, but also steel of all types, including high-grade steel for speciality applications. In the long run, this will be a win-win situation for both iron ore miners and steel players and help the country achieve its vision, as articulated in the steel policy of 2005, of becoming not just a major global player but also a net exporter of steel.

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    NOTES

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