JSW Steel's Seshagiri Rao Says Global Energy Transition Has Triggered This Steel Supercycle
The current boom in steel prices is here to stay for long as a global focus on renewables and infrastructure drives demand for the alloy, according to Seshagiri Rao of JSW Steel Ltd., India's largest steelmaker.
"The current cycle is anticipated to be the fifth supercycle in the history of the industry and the cause of this is Covid," the joint managing director and group chief financial at India's largest steelmaker, said in a conversation with BloombergQuint's Niraj Shah. "The pandemic and the health crisis brought a transformational change in the demand for steel."
The coronavirus brought focus on energy transition across the world because of the climate change, according to Rao. As a result, he said, capital expenditure on renewables and infrastructure has gone up, creating an uptick in demand for steel.
"The increase over normalised steel price has been greater than 10%, which marks a supercycle," he said. "We're seeing renewed demand. So these three factors are similarities to those (previous)."
Rao expects this supercycle to last five years.
Watch the full conversation here:
Here are the edited excerpts from the conversation:
Could you give us a complete synopsis of where do you believe the steel cycle right now?
The steel cycle is quite strong right now. When Covid one hit the world, steel demand has fell quite drastically. Thereafter, there is a good recovery across the world at the time nobody anticipated that the steel cycle would continue for a longer time. Even I was expecting it may last for a few quarters, but the way it shaped up as the underlying demand is concerned, it is a very transformational event as regards to Covid, a health crisis which has happened. Secondly, it also brought about a big transformation with regards to the overall shape of the demand for steel. These are two reasons why we are seeing a very big recovery in the steel demand which is expected to continue for a longer time, and you must have seen a lot of commentaries earlier, as and when there is a commodity super cycle starting from 1900 there were four cycles. This is anticipated to be a fifth super cycle. The cause of this super cycle is Covid, it has resulted into energy transition across the world, where climate change, the impact of climate change on the planet is being realised by everybody. Everybody is pushing for a large amount of capital expenditure on the energy transition, not only on the renewables but the infrastructure which is to be created for energy transition across various sectors. That is also pushing the steel demand. Just to give you a number, right now demand from these segments for steel is approximately 15-20 million tonne which is expected to reach 90 to 100 million tonnes, because of this one big transition that has happened across the world. Number two is the kind of expenditure, which is being spent across the globe on energy transition—that is 2 to $3 trillion per annum, which is also a very big expenditure that is commodity intensive and also steel intensive. This is one change which I am seeing that will keep the steel demand very strong across the world. Second is the under-investment in infrastructure by various countries, the amount of liquidity that has been pumped in to revive the economies that is being used for building the infrastructure across the globe. You take Europe, Europe is majorly on the energy transition side where capex is happening, in the U.S., it is on the infrastructure side, even other countries including India, a lot of expenditure is coming in the infrastructure segment. So, these two together, in my view will drive the steel consumption when provoked. So, this is not going to end quickly, this will continue for some more time. Just to get some of the comparisons in the past of the super cycles as and when such a super cycle came in, they lasted for around five years minimum. It could be even more than five years. So, I expect this super cycle to continue for such a time. It is not going to end in one or two quarters, it will continue for some more time. This is also corroborated if you look at the increase in production—in the current calendar year, the first seven months of the year, it is 128 million tons of incremental steel production, which has come into the market. Out of 128 million ton what is also interesting is, a chain of produced steel has only 48 million ton out of these 128 million tonnes. The balance 80 million tonne comes from the rest of the world. That is also an indication that it is not only China which is driving this commodity cycle this time, but also the rest of the world where the factors which I just explained is contributing for incremental steel demand and additional layers of steel demand that are coming across the world.
What are the similarities that you see, since you talked about the past four super cycles and maybe this could be the fifth one? What are the similarities between those and now typically history, it may not repeat, but it tends to remake? Do you see some similarities
There is some trigger for these super cycles, if I look at the last cycle which has come in the year 2000, that is caused by China, China joining the World Trade Organisation, the huge amount of trade that has increased and a huge amount of infrastructure build within China, that was the trigger that lasted almost 40 years, if I exclude the financial crisis for around a year, even after that the cycle was continued to be driven by China. So that was the event, which has caused this super cycle last time. Similarly, as and when the super cycle came in, the incremental demand over
the past cycle and the price increased by at least minimum 10% over the normal price in the last cycle. So, this time it is much more than 10%. So, there is an increase in price, there is an increase in demand, and there is a transformational event that has triggered this demand. So, these three factors we are seeing as a similarity compared to the last cycles. The cycle is a trigger, and that trigger lasts for a longer time. So, this I feel it will be exactly similar to the situation we are in, and who are having capacity in my view, they will be the winners in the steel sector, not only capacity but they also must be efficient and should have a good product mix. Those companies in my view will win in this cycle
A bit of near term, before we talk about the slightly longer term, two or three quick questions, a Credit Suisse note I read out from that note that after the precipitous fall in the global iron ore pricing from a month ago, this was dated about August 23, or 24, they said that the risk to the steel prices have increased and this fall in iron ore opens up room for about $150 per tonne in steelmaking costs, which the millers may choose to pass on to their consumers should demand crumble. They also note that demand has moderated at least in India. What are your thoughts on this?
As and when any event happens in China, the immediate perception in the marketplace is that the iron ore prices will fall because of the tailwind. So this is what the market has been expecting for the last two months, that's where you're seeing a lot of volatility. So, China for instance to give you a number, what happened in the iron ore side, iron ore imports in the month of June, by China was 122 million tonnes. If I take the same number and if I compare in the month of July, it came down to 88 million tonnes. So, 122 to 88 million tonnes of imports, that is huge amount of a drop in iron ore imports by China. China is weakening, there's no doubt in that, either in terms of overall steel consumption within China or overall steel production or their import of iron ore is concerned. That is why you have seen a steep fall in iron ore prices from around $230 per tonne, which we’ve seen in the peak, which came down to as low as $130 per tonne, but it did not last it on 30, there is some volatility in the iron ore prices. It again picked up at 160 and it is varying in that range but considering the iron ore demand and supply dynamics across the world, I feel that iron ore prices will have a very short book so it will get corrected downwards from the even existing price levels due to majorly China, which is importing lesser and iron ore into the country. Now, whether it will have an impact on the steel prices, that is the issue. If I really analyse whether it had an impact on the steel prices across the world, there are discussions in steel prices today because of the restrictions by various countries. The price in the U.S. is completely different with the price of what we have seen in Europe or in China or in Asia or in India. So, there are different prices in each region, and the difference is much wider than what we have seen in the past cycles. So, we have seen a $2000 plus in the U.S., and $1400 plus in Europe, and close to $900-2000 in Asia and in India around $900 per tonne. Those are the prices, which are prevalent today. Iron ore prices have fallen, there was a correction in steel prices to the extent of 5%, particularly in Asia but if I compare today, that is as on September 1 to July 1, did steel prices correct because the iron ore prices corrected? No, it is not. It has again rested back except in Northern Europe, where we have seen a 30 to 40 Euro correction downwards, we have not seen anywhere prices below the level of July 1, that got restored after that. Now, what is the reason? Why did prices again have gone back when iron ore prices got corrected. I think coking coal is one of the reasons, coking coal as I see on July 1, which was in the range of around $200, it went up more than $50 per tonne, it is close to $250. So, coking coal prices went up, electrode prices went, refractive prices went up and all other prices have gone up. At the same time if you look at China, the Chinese imports, because they are not importing from Australia, it is over $400 coking coal. So, the difference between Australia and the FOB price vis-à-vis the chain of the import prices has widened. It is almost close to $150 per tonne of an increase from
July 1 to September 1, the import price of coking coal into China. So, when coking coal prices went up and the iron ore prices dropped, the coking coal price increase is more than offset the price drop in iron ore. That is why we have not seen very drop in the steel prices, this is one reason. The second reason is the demand, demand continues to be strong. Why I'm saying this, is because in the month of July, the steel production within China has come down drastically, they have produced 100 million tonnes in the month of May 100 million tonnes of steel. The same number in the month of July was 87 million times, that is 13 million tonne lower production in China. But what happened to the rest of the world? In the rest of the world, the production in May was 75-million tonnes, in July, again 75 million tonnes. So, the production has not dropped in the rest of the world, it clearly indicating that if I exclude China, the underlying steel demand for the reasons which I just talked about, is very strong. The demand is strong, so the cost pressure remains notwithstanding as there’s pressed correction, therefore we don't see the price correction steeply. There may be some volatility in the prices because of certain events but structurally if I see the trend, the steel demand is strong and price correction here and there continue to happen, but I don't see a steep fall or a crash in steel prices.
So, you don't foresee that coking coal prices might also follow suit and if the price of the two raw materials are down, then steel prices might also correct. Small corrections yes but no major corrections?
Coking coal again if I really see the dynamics of coking coal, China consumes over 500 million tons of coking coal. Out of 500 million tonnes, the dependency on imports is slowly coming down. Why are then the coking coal import prices in which they're going up because of some reasons, one reason is Covid that they are not able to import which they used to do from earlier, and also within China, the domestic production has not been at the same normal levels. There are some reasons why we're seeing a steep increase in coking coal prices. So, some correction in the coking coal prices can happen but overall coking coal demand dynamics across the world, if I look at it, is not undergoing a change because out of 250 million tonnes of coking coal which is traded globally, there are four or five countries which import around 50 million tonnes of imports every year. They will continue to import these 50 million tonnes. Take China, take Japan or Korea or India or Europe, these four countries together is 50 million tonne each, the 200 million tonne imports are not changing, what is changing is only China. 50-60 million tonnes of imports which they can do sometimes because of the reasons which I just explained, there may be a huge hike in the coking coal prices but the overall supply is not increasing coking coal. So, don't expect a big correction in the coking coal price.
We did a story on this whole China, Olympic Blue Sky wishlist and what that will do to production curbs there because we understand Tang Shang and some of the others that are probably going to extend that. Could that reduce the supply in the oil markets if you will and could that keep an upward pressure on the prices if you will?
There is definitely a policy directive that has come from China, which is in the direction of reducing pollution—whether it’ll be the short term or a medium term, if somebody analyses it, if you look at short term what we explained about Winter Olympics in February 2022, they want to keep the environment clean. That is why they are putting curbs on reducing production, which is the number, which I mentioned. It is about 200 million tonnes to a 87 million tonne drop in production, is one of the reasons because of this. The medium term again, if I see the kind of announcements, which have come in from China, it appears to be that they have committed very much or have puts curbs on the carbon emitting industries, thereby the pollution will come down. That's why they have given 260, they wanted to become carbon neutral and company by
company in China is announcing a timing, which is much earlier than what China as a country is committing. So that is an indication that there could be a drop in the overall steel production and also steel demand within China. Now, that’s good for the rest of the world where steel demand is strong and the steel production and demand could be could good for the rest of the world notwithstanding some correction within China. But the ESG focus in the rest of the world that also constraints the big increase in the steel production, that is an area where India scores. It doesn't mean India is polluting too much, there are a lot of steps which India is taking particularly large steel players, they are setting up for instance JSW Steel is setting up a very efficient big blast furnaces, which are quite efficient in terms of fuel consumption and also the kind of inputs which we'll be using is much better than what we used to do earlier. So, with the carbon emissions will be substantially lower, even with the blast furnace rules in India. I think India is a country for future steel production growth and also meeting domestic demand, and also to export from India.
Can the quantum of supply over the next few years become a bit more infrequent considering all the measures that the bodies are urging steel companies to take and therefore, it might become a bit more expensive than normal to set up a steel plant in the first place anyway, do you foresee that or no, not really?
Today the new capacities that are coming up in India, including JSW Steel, when we negotiate with the equipment suppliers, we are asking them clearly, that digitisation, complete automation of the equipment which we are buying, number two is emission. Emission is one of the main criteria while selecting the equipment—whether costs go up or not, you're absolutely right, the cost of setting up the steel plants will be higher than what it used to be. So, that is the amount of expenditure additionally that the industry has to spend to ensure that we are in line with what is happening globally. So, if India's carbon emissions per tonne of steel in the steel sector is 2.3 or 2.4, tonnes of steel produced, I think there are pressures, which will come down below 2 by 2030, almost every company has now given the guidance by 2030, by how much they reduce. So, I think there are a lot of efforts which the Indian steel industry is taking to reduce these carbon emissions, particularly in the blast furnace route steel making to the levels comparable with the best in the world.
Most experts who have tracked this industry for a while, not on the company side but on the analyst side, have this thing to say about how the western prices won't matter as much in determining where the world prices might be or the Indian prices might be, China will be the big elephant. Now, you’ve mentioned at the start and we've seen that the difference in the prices between the West, particularly the U.S., and what's happening in Asia, what do you think, based on the demand supply scenario is the normal course for steel prices back home in India, say for the next 6 to 12-odd months?
Steel prices in India today, not only today even if I look at for the last two years, they are at a discount to the landed cost of imports. The discount is also much steeper. It used to be 20%, sometime in the past. Even today if I compare, it is more than 10-15% that is the range if I compare the Asian prices. If I compare them with the U.S. or Europe, they're much higher as far as the discount is concerned. Now, why are the Indian steel prices when there is a deregulated commodity like steel at a discount in India? If I see the domestic demand after Covid, it took some time to pick up and actually the prices have not gone up in India, like international markets. Number two is, it is also an opportunity for the user industries to export, by using domestic steel and become more and more competitive. So, with both these factors together, we will see a very big increase in the exports not only directly steel, but also in indirect steel trade has gone up quite substantially. Engineering goods for instance have gone up in the first quarter by 24% on a year-on-year basis.
That is the reason why we see that it is very good for the user industries, at the same time whether steel prices in India will go up or not in the future, I don't think it will go up not aligning with what is happening globally. Whatever Southeast Asian prices are there, I think those are the price levels at which the Indian steel prices will continue to move in sympathy with that. It is how I see it, it will get corrected either upwards or downwards based on what is happening in Southeast Asia that is the benchmark, through which the Indian steel prices will continue to fluctuate.
And you reckon the dichotomy between the West and Asian prices, the Western prices might correct if at all there is almost zero probability of the Asian prices even trying to converge? Forget the U.S. prices but even European prices?
The Chinese exports are coming down year after year, and because of these curbs which we just discussed, their exports to even Southeast Asia is falling. That is the reason why somebody has to fill this gap up, which is there today. So, to some extent, everybody anticipated Japan, Korea and Russia, which are also exporting countries, to fill this gap up. Russia put certain restrictions on exports, so I think it is a great opportunity for India to fill this gap up. Just to answer the question, whether the prices in Asia will get corrected or not I doubt very much whether prices get corrected even in Asia to a large extent, which everybody is anticipating because of a very strong demand and because of the Chinese policies, both of the two together. Also, the other countries are not exporting aggressively. So, all this together I don't expect prices to correct drastically.
The big conversational point about what's happening to the current disrupted global sea trade as well the cost of containers, the availability of containers, the cost of freight and how big an issue, it could be. So, even if the export opportunity exists, would companies be able to take full advantage of that or are there real and pressing issues which may not go away we were talking to the Indian outfit of Mersk, and the MD was saying that this disrupted scenario is the new normal, at least for 2021, maybe for a better part of 2022 as well
There are two three reasons why this problem is coming because the availability of crew, because wherever the crew goes, there’s quarantine, or the turnaround time is long. The availability of crew is one big issue today. The overall capacity of the shipping line is coming down, that is one. Number two, the turnaround time with the ports, that is the second area, the crew is not available, the equipment is not working, there are some restrictions in some countries, so the overall capacity remains the same. If I look at the trade whether it has increased or not, no, the turnaround times have increased, and the availability of the crew is another big issue. That is why the congestions that we are seeing at the ports, in my view, it is a temporary issue but as on date, it is a big issue. Even in all the ports in India, there’s an accumulation of boats at the ports and there’s a huge amount of congestion as the industry is incurring a lot of damages too. The freight rates have gone skyrocketing too. So these are the reasons why it could have a dampening effect in pushing the exports substantially. This issue in my view is transitory and once the crew availability and the turnaround time after Covid becomes normal, I think it will get corrected
But until then it might take the sheen away from any kind of big export classes that could be there for Indian steel makers as well?
So, until the time they see the constraints, not only in the case of containers, even in the case of bulk material, the problem remains and also the smaller ships’ availability is reduced. Now, even the cape rates and the dynamics’ rates are going up more and more. People are shifting from small vessels to capsize vessels or bigger vessels. So, with that the freight rates across the shipping line have gone up.