The Indian steel industry may already be in deep waters with imports rising above the normal levels—a situation that’s expected to worsen as countries retaliate to the U.S. steel tariffs, according to JSW Steel Ltd.’s Seshagiri Rao.
Indian steel imports have risen to 8.4 million tonnes in the financial year ended March 2018, the managing director and group chief financial officer of the country’s largest steelmaker, told BloombergQuint in an interview. These import levels are higher than the normal range of 6.5-7.5 MT, he added. Steel imports have risen 15 percent while exports have fallen 29 percent.
“India being a country which has robust steel demand, we should be very, very watchful of the rising imports and falling exports.Seshagiri Rao, MD & Group CFO, JSW Steel
Currently, trade data suggests that India is likely to turn into a net importer of steel products for the first time in three years.
U.S. President Donald Trump announced $50-billion tariff on Chinese goods, including steel, out of which $34 billion worth of tariffs are set to hit on July 6. The country has also imposed steel and aluminium tariffs on trade giants such as Canada and Europe.
“If retaliatory actions take place by all these countries there is approximately 80 million tonnes of steel going into these countries that will need to find a new market and that is a reason for concern for all of us, particularly India,” Rao said.
Watch the full interview here:
Here are the edited excerpts from the interview:
You are investing about a billion dollars in the U.S. You have already done half of it. Can you take us through when you will put int the remaining half and how did it fit to your overall strategy from capacity and financials point of view?
As far as the U.S. economy is concerned, we are seeing good traction. It is recovering and the demand is coming back, as reflected in our operations in a plate and pipe mill operations there. It has picked up in the last few quarters. We have decided to commit approximately $500 million for facilities in Texas. This $500 billion is divided into three phases.
In phase 1, we are spending $75 million. We are already committed and spending that money for modernisation and upgradation of plate and pipe mill. We have committed another $75 million in phase 2, and the work is going on. Phase 1 and Phase 2 is for modernization of existing plate and pipe mill. For phase 3, we have decided to spend another $350 million subject to necessary environmental clearances for backward integration to set up an electric arc furnace and caster facility. Thereby, we will have 1 MT fully integrated operation at the Baytown unit, which is likely to turn out to be a profitable business going forward with fully integrated slabs from electric arc furnace and caster.
Your targeted capacity is 10 MT in the U.S.?
For overall overseas global footprint, we are talking about a total of 10 MT. So, Baytown will become a 1-MT fully integrated facility up to plate and pipes.
And the rest of it will come from which geographies? Are you looking to acquire any of steel mills that Arcelor Mittal is willing to sell?
Out of the total 10 MT, we have visibility of 4 MT in the U.S., and approximately another 1.3 MT in the Europe, where we have almost completed the acquisitions to this extent. So, out of our 10-MT global footprint, the visibility is to the extent of 5.5 MT at present--4 MT in the U.S. and 1.5 MT in Europe. For the rest of 4.5 MT, we are evaluating various options in these two continents. As and when it fructifies, we will be able to share more data on it.
To compete as regards to the U.S., we have recently acquired Acero Junction Steel in Mingo Junction, Ohio...Right now, it is integrated at 1.5 MT. It has electric arc furnace and caster, and 3 MT of hot strip mill. We are now spending money for restarting the operations, including electric arc furnace and caster. It may take 3-4 month to get it commissioned. So, the total acquisition, including the startup expenditure, is approximately $230 million.
We may have to set up another electric arc furnace to use the balance capacity which is available in hot strip mill. Once we do that, the total investment in Acero acquisition will be $500 million and we will have 3 MT of fully integrated facility. Putting these two together, we will have 4 MT capacity in the U.S.
Can you give us metrics of the U.S. business and also the European acquisition that JSW Steel has already done, and how they fair as compared to the India business in terms of margin and profitability ratios? What will this business mean for your consolidated numbers?
If you look at the total 3-MT facility which is fully integrated at $500 million, compare every MT today for any greenfield project, it comes to more than $1 billion. Even for brownfield expansion, it is $500 million per MT. In comparison, the investments are very competitive from that point of view. As regards to profitability, our steel companies in the U.S. are doing well. So, both the acquisitions have good potential to give returns to our shareholders.
Similarly in Europe, we are spending 55 billion euros for acquiring 1.3-MT rolling mill facilities. So, this is a very good acquisition from the total capex commitment point of view in the facility. We will be spending another 30-35 million euros to start the operations.
In the medium term, we will be going for backward integration again, setting up electric arc furnace and caster facility in Europe. Post that, we will have fully integrated 1.3 MT facility in Europe. So, we are talking about overall investment of $1.1-1.2 billion total, out of which we will be spending approximately $250 million out of equity which we will be giving from India. The balance will be raised from non-recourse basis loans oversees.
Given all the tariff pressures and trade issues, what is your outlook for the second half of this calendar year or the rest of the financial year in terms of global steel demand supply and price?
Global steel demand as given by the World Steel Association at the beginning of the calendar year is 1.8 percent which is 30-MT incremental demand. But after five months of this calendar year, the production went up. What’s interesting to see is that the initial assumption was that China’s demand and production was expected to be flat. But it reported the highest-ever production of 81 MT, showing a growth of 6 percent. Overall, China’s production grew by 4.5-5 percent in the current calendar year but there is no disturbance in the overall demand-supply position.
Overall, it clearly shows that global steel demand is quite robust. It has picked up momentum, which is a positive sign.
Another good thing is China’s drive for ultra-low emission and environmental plan to ensure that 480 MT of steel production happens through ultra-low emission processes by 2020, and that goes to 900 MT by 2025. Their full production will be through this route. The kind of thrust which they are giving towards environmental protection and ultra-low emissions is leading to structural change in demand-supply and raw materials. This has led to a very good demand for high grade iron ore and coking coal. That is why there is a very wide gap between low grade and high grade raw materials.
Also, as I mentioned earlier, their exports are moderating. With that, I think things are quite okay and steel prices are expected to be range bound.
The negative side is that of dollar strengthening, interest rates going up, and trade tensions. These are some areas where one should be conscious of what is going to happen. Once the U.S. puts Section 232, we will see retaliatory actions from various countries. Europe and Turkey are talking about safeguard and Canada is talking about retaliatory measures. Out of the 335 MT of steel trade happening across the globe, excluding intra-steel trade in Europe to the extent of 100 MT; 80 MT of steel is going into these countries. If they all take retaliatory actions, this entire supply will have to find new markets. That is a matter of concern which one has to watch, particularly in India. India’s steel demand is robust; it went over 8.5 percent last month and it’s picking up momentum.
At the same time, because of trade concerns, Indian steel imports have gone up too, by close to 15 percent and steel exports have fallen by almost 29 percent. This is a clear indication that the trade concerns and the retaliatory actions taken by various countries is having an impact. As we have robust steel demand, we should be very watchful of growing imports and falling exports.
The data suggest that we will turn net importers of steel for the first time in three years on account of various factors, specifically the retaliatory measures. At what level, as an industry, did you start getting worried, as for the last few years some of the measures that the Indian government has put in place has helped restore the steel industry to help in profitability. What level will you go back to the government and say that we need protection again?
It is not a protection but if any unfair competition comes in, then the Government of India has to take steps to stop the injury to domestic industry.
From 2008 to 2014, every year the normalised imports are around 6.5-7.5 MT. It is the range in which the imports have been happening. There were aberrations in only in 2015 and 2016. In 2015, the imports went to 11 MT and in 2016 to 13 MT. When it happened, not only Indian steel industry but entire global industry suffered which showed that there was steel dumping. So, the Indian government has taken several remedial actions. In the meantime, the global steel prices also went up. In financial year 2017-2018, steel imports in India, have gone up to 8.4 MT, as compared to normalized imports of 6.5-7.5 MT between 2008 and 2014.
So, anything above the normal range of 6.5-7.5 million tons, Indian industry has to worry about it. In the current financial year, we are seeing increase of 15 percent over 8.4 MT on an annual basis. It is matter of concern.
We are also seeing that out of the 8.4-MT imports that happened last year, 51 percent imports are from Free Trade Agreement countries such as Japan, Korea and other Asian nations which is zero percent duty. These are the areas which steel industry have to be watchful and should bring to the attention of the government.
You also pointed out that demand has been better than anticipated. Is that demand not enough to be able to absorb these higher imports? What capacity utilization you have been running at for the last couple of months?
If you see the total Indian steel demand, we had 91 MT of consumption last year. Out of that, we exported around 9 MT and imported 8.4 MT. So, import and export is balanced as far as our steel consumption and production are concerned.
We have 130 MT of installed capacity. Out of that, we produced crude steel of 102 MT last year. If you take 85-90 percent of capacity utilization, still there is scope for 10-MT increase in incremental production. If our demand is growing at a rate of 7-8 percent, that means we need 7-8 MT of steel every year to meet our domestic demand.
It can come from unused capacity today in India. On an average, India steel industry is operating 80 percent and JSW Ateel is operating above 90 percent. In the next two years’ time, there is an incremental capacity of 7 MT which is coming in from JSW Steel. We are at 18 MT today and plan to be at 25 MT by March, 2020.
In addition, if we end up acquiring Monnet Ispat, we can get another 1 MT into the market.
Similarly, for our other competition, there is incremental capacity coming in next two years. Including sales and recently commissioned projects, they are talking about 21 MT of installed capacity from their existing production of 14 MT. Add to that another 6-7 MT from the government sector. From all these, I don’t find any issues to meet the domestic demand growth which will come in the next 2-3 years. Only worry is imports.
We have seen a huge rise in domestic prices since the beginning of this calendar year. Are these levels sustainable given the various demand supply factors? What is the impact of it?
India’s steel prices are tracking the global rates. Our prices will continue to be range bound. China is pushing for environmentally strict standards which has increased their cost of production, to the extent of around $40-50 per tonne. They are demanding very high quality raw materials. So, these two factors are likely to keep prices range bound across the globe. And in that case, India’s domestic steel prices follow suit.
The landed cost of import from China at present is around $592- 600 free on board. Compared to this, Indian steel prices are at a discount of 8-9 percent. Therefore, our prices have not moved not in tandem with global prices. They are moving in the same direction. Considering the strong demand in India and the high global prices, domestic prices will be range bound.