'Very large' cost hike for steel industry can come next qtr: Seshagiri Rao

Senior executive of JSW Steel sees 'distortions in market' after Russian invasion of Ukraine

Raw material costs have surged for Indian steel companies after Russia invaded Ukraine on February 24. Seshagiri Rao, joint managing director and group chief financial officer at JSW Steel, told Ishita Ayan Dutt the surge in raw material may be temporary as demand-supply dynamics play out but the company is working on ways to mitigate impact.

Here are edited excerpts from an interview.

The steel industry is facing headwinds, with a surge in raw material prices. What impact will it have on JSW Steel?

There is a big impact on cost--iron ore and coking coal prices have gone up. Over and above, base metals like zinc, aluminium have increased, as have ferroalloys and refractories. The overall cost increase is very large which can come in the next quarter (Q1FY23).

What is JSW doing to mitigate the cost impact?

Mitigation can be done by changing the blend and source. The third is to pass on the cost to the consumer. And if nothing works then production has to be cut. The increases that have happened in steel prices do not compensate for the cost increase.

China is enjoying a benefit of $150-$200 per tonne for coking coal, which was completely opposite a few months back. China influences most of the Asian prices and due to the arbitrage--even though steel prices have gone up--it is still at $900 per tonne. That’s not the story in Europe or the US.

For the first time, steel prices in Europe are higher than the US; prices in Europe today are $700 more than what we are seeing in Asia. So, there are these distortions in the market.

Is there a pushback from the market after the price increase?

We need to understand the demand-supply dynamics. If we look at the rest of the world other than China, I don’t think there is a huge amount of supply that can match the fall in supply from Russia and Ukraine. These are supply side dynamics.

On the demand side, it is falling in Europe and they are not producing fully – capacity utilization is 72-73 per cent right now. So additional production will not come from Europe.

As far as raw material is concerned, China does not want to import coking coal and this statement in the last three days has brought down coking coal price to below $600 per tonne. So there may be a surplus in Russia and prices which we are seeing in the market is temporary.

But is there any visibility on when coking coal prices will come down?

There is a re-routing of trade and there is a surplus from Russia. In that context, I think, prices will cool down. It may not happen tomorrow, but the trend is now at its peak and there will be a downward trend. 

When would you take a call on production cut?

If I have to buy coking coal at $670 and if I take iron ore at $150 then cost will be close to $1000 per tonne including the cost of PCI (pulverized coal injection) and anthracite. So steel prices have to go above $1000 at least to break-even. Therefore, if raw material prices continue to sustain without an increase in steel prices then production cuts across will be felt, not only in India.

But my view is, raw material prices will come down. I don’t expect steel prices to go up to pass on the cost either due to supply cuts or demand disruption. Then, demand for raw materials will come down or supply dynamics will favour a correction in raw material price. 

Is it possible to offset raw material cost increase with exports?

Europe has a quota and one has to live within that quota. Whatever exports are going from Russia, under the quota, that is getting redistributed. If it gets redistributed, then quota for India will go up by 3 lakh tonne. That is not a very big increase.

How is domestic demand?

Demand from auto is weak right now but other sectors is okay. We are not seeing a slowdown at all this month. Everybody is working to maximize sales in the last month of the financial year. Also, expectation is that prices will go up further next month, so sales are quite robust this month.

What kind of steel price increase is expected next month?

Total price increase is around 12 per cent since the end of February. This increase is not to the OEM (original equipment manufacturer). From here on, we have to watch what is happening internationally and the raw material prices. I am seeing a bit of volatility. Iron ore is in a range of $140 -$150 a tonne and volatility is relatively less but coking coal is now on a downward trend and so is thermal coal. If they come down, I don’t think prices of steel will go up.

You were keen on acquiring RINL and NMDC’s Steel Plant. Given the current market circumstances, would you still be interested?

There is incremental demand that is going to come in India. How will it be met unless new capacities come in and brownfield happens? There is a possibility of expanding in brownfield particularly in RINL.

You must have seen the kind of bids that have come in for NINL. Only a few assets are left in the acquisition play so there will be good interest in both.