How Jindal Steel Bucked The Trend In Lockdown-Marred April

While the nationwide lockdown stretched through April, hurting supply and output of steel in the world’s second-largest producer, Jindal Steel & Power Ltd. managed to hold its ground.

The company’s standalone production volumes rose 5 percent year-on-year to 550 kilotonnes during the month, according to its statement. That compares with a 60 percent plunge in output of JSW Steel Ltd.—the only other steelmaker that has disclosed production numbers.

Steel mills have been hit because of the government’s restriction on production and movement of people as it tries to prevent the spread of the Covid-19 pandemic. That deepened the slump in demand for the alloy as new construction and purchases of cars and houses were delayed, leading to a fall in prices. India’s automakers—which contribute 10-12 percent of the steel demand—couldn’t sell any vehicles in April as operations remained stalled.

The lockdown and a staggered restart of economic activity in the weeks ahead is expected to take a toll on the economy, heading for its first full-year contraction in more than four decades. And while the government has allowed steelmakers to operate under eased restrictions, availability of manpower and logistics is the key.

Jindal Steel, on its part, set up residential colonies for staff in Raighad and Angul that ensured availability of labour for operations, cooperation from the railways ministry helped in smooth transportation of rakes, Managing Director VR Sharma told BloombergQuint. Higher demand from Europe contributed to greater production for the company, which is booked for orders until May 30, he said.

A differential product mix comprising “specialty rails”, used in metro and high-speed train corridors, and “plate mills”—a rolling mill for producing relatively thick flat metal products—helped, he said.

Here are the factors that played out well for Jindal Steel.

Better Utilisation Levels

Jindal Steel averaged capacity utilisation of around 80 percent in April. That compares with 38 percent and 52 percent of utilisation levels of JSW Steel and Steel Authority of India Ltd., respectively. SAIL, according to Emkay Global, has been holding on to two-month inventory.

According to Ritesh Shah, research analyst at Investec, April volumes/utilisation levels is a “vindication” of Jindal Steel’s strong operational footing in current macro situation.

Shah listed two reasons why Jindal Steel may be better placed than peers.

• Favourable product mix—larger longs basket versus flats makes it better placed to ride the economic recovery faster amid hopes of infrastructure stimulus by the government.
• Strong market share gain, taking into account about 53 percent of India’s steel production is via electric arc furnace and induction furnace, largely semi/unorganised, which is more tilted towards longs.

Cost Advantage

Jindal Steel an advantage over JSW Steel in sourcing raw materials.

In January, Jindal Steel was allowed to transport iron ore from Odisha’s Sarda mines, helping it to reduce the cost of production. In contrast, peers such as JSW Steel are still obtaining it from the open market, adding to their expenses.

Amit Dixit, assistant vice president-research at Edelweiss Securities, expects relatively lower impact on Jindal Steel’s margin due to Covid-19 situation. That’s because of use of iron ore fines (negligible cost) from Sarda mine’s stock and presence of rails and specialty plates.

The Supreme Court’s verdict allowing Jindal Steel to transport high-quality iron ore lying in Sarda mines, according to Dixit, couldn’t have come at a “more opportune time” as this will significantly pull down the cost of production for the company, which is anyway resorting to higher means of exports.

Higher Exports

Jindal Steel’s exports, which constituted 74 percent of the volumes, more than doubled month-on-month in April.

“While export volumes would earn lower Ebitda margin (about Rs 5,000 per tonne), it’s still positive for Jindal Steel as this should help recover fixed costs and earn positive cash flows, which are critical in this environment,” Investec’s Shah told BloombergQuint.