Raw material prices may hit margins, says JSW Steel's Seshagiri Rao

India requires eight to nine mt (more) every year. The capacities that are coming up might not be sufficient to meet this growing demand, says Rao

Steel prices are falling globally and in India. Seshagiri Rao, joint managing director and group chief financial officer at JSW Steel, tells Ishita Ayan Dutt, that rising imports could be an area of concern, particularly in the context of falling prices. Edited excerpts:

The market has softened. What has changed globally and in the domestic market?

Underlying demand remains robust, both in India and globally. However, on the supply side, a lot of material has come into the market, particularly from China, as also other places. Global steel capacity utilisation went up and the margins were quite attractive in the past few months. With that, the incremental supply which has come to the market is close to 70 million tonnes in the first 10 months of the calendar year. The demand grew by 3.9 per cent but supply has really outstripped. 

There is a slowdown as far as China is concerned and that has changed the sentiment a bit, leading to correction in steel prices. Once these started falling, buyers started using inventories and putting additional pressure on overall prices. Going forward, things should look better.
 

Will margins be affected in the next quarter?

Raw material prices are globally strong. Iron ore prices, even though these had corrected a bit, are again seeing an uptick. Coking coal really went up due to disruptions. So, the cost side being very strong and steel prices having corrected a bit, the margins will be under pressure until inventories on the user side are exhausted, which might take weeks. 

Is China again a worrying factor?

The type of measures that have been taken by way of safeguards and quotas by Europe and also the US have so far not been relaxed. Several other Asian countries have also put restrictions on import. So, China’s ability to dump steel is limited as compared to 2015-16. So, yes, China is worrying but less so than what it used to be. 

Is rising import in India a cause for concern?

Export from India is falling and import is not falling to the same extent. Import has fallen by 4 per cent and export by 34 per cent. More, import is not falling from China, Korea or Japan. These remain at the same level or slightly higher. It is a matter of concern. We should be cautious, particularly in the context of falling prices globally. 

The outlook for the sector?

Already, long-product associations are saying their margins are negative. In the case of flat products, they are just breaking even. If that is the scenario when iron and coking coal remain at current levels, the downside in steel prices is very limited.

Is capacity utilisation likely to drop?

If slowdown in China happens, particularly in the property sector, the options are to reduce production or give a stimulus. If domestic demand remains moderate in China, the only option is to reduce production. 

What will be the ripple effect in India?

Indian growth in production is only five per cent, whereas demand is growing at 7.5 per cent (annually). What we need to watch is import. 

Will the expansion (at existing sites) planned by major producers, including you, get affected?

India requires eight to nine mt (more) every year. The capacities that are coming up might not be sufficient to meet this growing demand, as no greenfields (erections at new sites) are coming up. So, the incremental capacity is through brownfield (existing sites) and ramp-up from the change of ownership through IBC (the insolvency law). If both are taken together, by 2020-2021, there should be shortage of steel. 

With the delay in resolution through IBC and a softer market, will valuations get impacted? 

I don’t think any bidder will place bids based on current prices. You have to take prices in a cycle. But, if the steel industry outlook in India in the next few years changes, the valuation could change. But, we remain optimistic and bullish about the outlook for the Indian economy and the steel outlook in India. 

If the sentiment continues, will the payback period get stretched for Monnet or Bhushan Power, if you bag it?

We have taken prices in a cycle, not current prices. That way, our bids have been cautious. For Monnet, whatever assumptions we have made, we will be within that. We will not be able to comment on Bhushan Power & Steel right now because we don't know who will be the winner.

At current prices, would it be difficult to find partners for Bhushan Power?

Whether it is Bhushan Power or Monnet, if we become the successful bidder, as long as the steel outlook in India remains optimistic, I don't think there is a problem in finding an investor.

Has the liquidity scare blown over?

From the demand side, in the retail segment, it remains a worry. Liquidity is not still normal, whether on account of the NBFC (non-bank finance corproations) issue or a general reluctance on the part of banks to extend loans. The ground situation is tight liquidity, which is having an impact on the retail segment.