The Hindu Business Line : Steel prices will be under pressure this fiscal: JSW official

Domestic prices are not higher than landed cost of international steel and are marginally lower. International prices have gone up by $100/ tonne but this has not happened in India. — Mr Seshagiri Rao M.V.S., Joint Managing Director, JSW Steel and Group Chief Financial Officer

Mr Seshagiri Rao M.V.S., Joint Managing Director, JSW Steel and Group Chief Financial Officer

Suresh P. Iyengar

Mumbai, Aug. 14 The Rs 40,000-crore JSW Group is fast expanding capacity in steel, energy, minerals and mining, infrastructure and cement. Mr Seshagiri Rao M.V.S., Joint Managing Director, JSW Steel and Group Chief Financial Officer, spoke to Business Line on the road ahead for the company.

Excerpts from the interview:

Contrary to industry’s demand, banks have hinted that rates will start appreciating soon. What is your view?

The Government has already mopped about Rs 2 lakh crore which amounts to 50 per cent of its borrowing programme while banks are still flush with funds. This is a clear indication that there is scope for banks to reduce lending rates from the present 11-12 per cent levels. If the Government really intends to boost the economy through investments, then the lending rates should ideally be below 10 per cent.

Iron ore and coal prices have fallen substantially and there are expectations that steel companies should reduce prices. What is your take?

Steel prices have fallen ahead of the adjustment of long-term contract for coal and iron ore. When they were below $500 a tonne in January and February, industry expected long-term coal prices to settle at $100 a tonne against $300 a tonne last year.

Similarly, iron ore prices, which were $84 a tonne, will come down to $45-50 a tonne based on which steel prices have fallen to under $500 a tonne. After a series of negotiations, Japanese suppliers have settled for only a 33 per cent reduction in iron ore prices to $61 a tonne while coal prices were signed for $128 a tonne, significantly higher than what the industry expected.

The higher long-term iron ore and coal prices saw world steel production contracting by 25 per cent as most mills could not operate at such high input costs. With the long-term contract prices settled in May, no steel producer could sell below $500 a tonne. In fact, international steel prices have gone up by $100 a tonne and base HR (hot-rolled) coil prices are now $600 a tonne.

All this indicate that with long-term raw material prices, it is unlikely steel prices will fall below to what they were before the long-term contracts were signed.

Is $600 a tonne sustainable over a period of time?

Production cuts have happened across the world and deeper in developed countries. Some production may come up once demand picks up and prices settle at higher levels. With new production planned, prices will not be at the current level and will be under pressure through this fiscal.

Secondary steel producers say they are forced to import as Indian prices are higher than international prices. Do you agree?

Domestic prices are not higher than landed cost of international steel and are, in fact, marginally lower. International prices have gone up by $100 a tonne but this has not happened in India.

Steel production capacity expansion is happening but restricted to big companies. Secondary steel makers’ cost of production is still higher and it is not remunerative for them to continue production at the current level of prices. They operate at a lower capacity utilisation.

On the one hand, steel producers are increasing production but, on the other, secondary steel producers are lowering output. Overall, there will be only a production growth of 4-5 per cent.

If the domestic prices are lower than international prices, will safeguard duty make sense?

Today, the real issue is there are some countries dumping steel and industry’s demand is, therefore, justified. Steel coming from other countries, particularly the CIS (Commonwealth of Independent States), is being dumped at a very low price. That explains why steel imports from these countries in April and May have gone up relative to the same period last year.

Overall imports into India, except for June, have gone up six per cent while exports are falling. Some producers here are not able to operate at full capacity even as domestic demand is strong. The Government must take steps to protect them.

Is dumping still happening, particularly after the pick up in international demand?

Demand in international markets has not gone up. Capacity utilisation in Europe and the US is still 50 per cent. What is increasing is production in China; in November 2008 it was 34 million tonnes and in June 41 mt. Internationally, the increase in production and demand is largely contributed by China with a little from India. Global demand is still contracting and remains sluggish. The CIS is one of those countries where domestic demand is strong and they are looking at other countries such as India for dumping their products.

How is that JSW Steel’s sales realisation in Q1 this year was down 34 per cent despite a fall in input cost? Also, is the forex gain of Rs 240 crore notional?

Last year, we incurred a forex loss of Rs 790 crore when the rupee depreciated from Rs 40 to Rs 50.95. At that time, we made it clear that it was notional and would be reversed once the rupee began appreciating. This is precisely what happened and the rupee appreciated to Rs 47.87 in the first quarter which helped us book a gain of over Rs 200 crore. It is a re-statement of forex debt. As far as realisations are concerned, they are down 3 per cent sequentially also. It may remain stable in the months to come.

What caused the fall in realisations?

We sold a higher proportion of semis such as slabs and billets whose realisations were lower compared to finished goods such as cold rolled products. We are now in the process of expanding our cold-rolled capacity which will be ready in December.

What are your plans for JSW Energy?

JSW Energy plans to set up power production capacity of 3,600 MW in three stages with an investment of Rs 11,000 crore. Of the planned addition, 600 MW will come up in Karnataka, 1,200 MW in Maharashtra, and 1,800 MW in Rajasthan. About 300 MW has already been commissioned in Karnataka (Vijayanagar) and the remaining will be completed between July and September. All other projects will be completed in stages between December 2010 and March 2011. JSW Energy is into all the segments related to power such as transmission, and trading besides power equipment manufacturing in a joint venture with Toshiba.

What is the status of your projects in Jharkand and West Bengal?

Both Jharkand and West Bengal projects are on hold. We have acquired 4,800 acres in West Bengal and are putting up a boundary wall.

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