Russia-Ukraine War: JSW Steel's Take On What's In Store For India Steelmakers

Indian steel companies could benefit from reallocation of Russian steel import quota and the shortage of semi-finished steel products, according to India's largest steelmaker.

Steel prices continue to rise, especially in Europe, where they are up over 50% month-on-month due to soaring energy costs. A rise in Covid-19 cases in China’s Tangshan province has hit crude steel production, while the Russia-Ukraine crisis has created supply bottlenecks of key raw materials.

“The geopolitical conflict’s impact on steel companies is difficult to assess, as two opposing forces appear to be at play,” Seshagiri Rao, joint managing director and group chief financial officer at JSW Steel Ltd., told BloombergQuint’s Niraj Shah in an interview. While the supply-side shock has created logistical challenges, the Covid-19 outbreak in key provinces of China—covering 78% of total GDP of China—could lead to a commodity demand shock, he said.

The silver lining is that raw material costs are starting to fall, he said. “Coking coal is down from $670 per tonne to $540 per tonne. And it’s the same story for shipping freights.”

Rao expects the “balancing” to help commodity prices fall more and gradually normalise.

Still, beyond May and June, Chinese commodity futures are trading higher than the spot rates, indicating that prices can recover from where they are today, he said.

Russia-Ukraine Conflict Impact

Supply of pulverised coke injections, or PCI used in making coking coal, is dominated by Russia. “Some arrangements where trade can be settled with Russia, especially in case of rare products produced by it, will help producers in India.”

Rao expects coal supplies from Canada and Australia to stabilise soon as well.

Steel Prices In Europe To Benefit Exporters

A disruption in steel supplies to 27 European countries from Russia and Ukraine (about 21% of EU steel imports in CY20/21) could cause a sharp rise in steel prices in the region, said Rao.

The EU import quota limits on value-added steel could benefit Indian companies. Due to the conflict, the Russian quota will get reallocated and India will get an incremental quantity, though not "very large", he said.

There may also be an opportunity from the shortage of semi-finished steel products like pellets, pig-iron or billets, which used to be made in Ukraine and Russia. “There is no quota (for semis) and prices are at elevated levels today,” Rao said.

Demand Revival

China wants to set up over 500 gigawatts of renewable energy, which could result in large capital expenditure. To contain the overall energy costs, it has locked coal costs at cheaper than international level, he said. Post the Covid-19 disruptions, Rao expects the Chinese economy to stabilise.

Higher spending on defence from Europe could also stimulate demand and there could be a demand revival in India due to a rising share of capex, he said.

While certain brokerages have flagged a potential "slowdown" in construction and real estate due to high steel prices, Rao said the housing sector is not seeing a slowdown.

He considers India’s steel demand to be “reasonably okay”, except for the auto sector.

In FY22, India's total steel consumption could be 105-106 million tonnes versus 94 MT in FY21, he said. Demand will remain "strong" in FY23.

Steel Prices To Rise

“Indian steel prices are mimicking the landed cost of Asian steel prices, which are for the retail market and lower than steel prices in the west,” said Rao.

He expects original equipment manufacturer price resets in April. The steel industry will work with end consumers like the auto sector to make them understand the need to hike prices due to higher costs of inputs, he said.

“The nature of the increase in cost of raw materials seems to point towards a large increase in steel prices in India as well.”