Currency devalution has been putting pressure on global steel prices, says Seshagiri Rao, Joint MD & Group CFO of JSW Steel , adding that domestic prices, which have corrected 5-6 percent in Q3, fell in line with international prices. He however feels stability is coming back and further corrections are unlikely.
The company’s current annual coking coal requirement stands at 7-8 million tonnes. Rao feels sourcing coking coal locally will reduce operational cost.
He however, feels that the state of iron ore production is worrisome. “There is hope that more production will come into operation, but nothing has been happening on the ground. This is leading to an increase in imports. This year around 10-15 million tonnes of iron ore has been imported, which is a matter of concern,” he said.
With domestic steel industry not getting adequate iron ore to produce, he expects total iron ore production for FY15 to be sub-105 million tonnes against against 135 million tonne last year. Below is the transcript of Seshagiri Rao's interview with Latha Venkatesh & Reema Tendulkar on CNBC-TV18.
Latha: A word on what Russian fall mean for global steel prices. Some of the Commonwealth of Independent States (CIS) countries companies also sell steel, we understand there is a goodish bit of undercutting now with China which also in a mood to undercut it domestic steel consumption is falling. What is the global steel price, are your landed prices becoming a bit of a competition?
A: Yes, that is true because the currency devaluation which has happened for the last few months either ruble or Japanese yen, Korean won, it has an impact on the international prices adding to that Chinese slowdown. Therefore, the countries which are export dependent, those countries are producing more steel and looking for markets – that is also supported by the devaluation of those currencies and that is why in this quarter we have seen the prices dropping internationally but now we are seeing little stability in the prices because scrap prices started looking up which has gone down below USD 300 and now we are seeing USD 320 per tonne, so scrap prices started looking up and also the raw material price fall which was there, iron ore around USD 70 and coking coal at USD 110, they are all indications that the stability is there in the prices internationally, so correction already happened in the last two-two-and-a-half months.
Reema: A word on the approach paper on the coal auctions which was laid out yesterday. There is a provision that the total extractable reserve price cannot exceed 150 percent of the coal requirement for the company for 30 years. Can you tell us what is JSW Steel’s coal requirement and therefore what is the maximum amount of coal you can bid for in the mines?
A: As far as coking coal is concerned, our annual requirement is around 7-8 million tonne per annum at the current level of production. So 7-8 million tonne will translate to 150 percent of that is around 10.5-11 million tonne. If you take 30 years, it is over 300 million tonne of the total requirement. If you look at resources, this is the final output which is required, so based on the stripping ratio we need more coal over 300 million tonne of the finished product means the actual requirement is over half a billion tonne plus based on stripping ratio.
Latha: You cannot take into account potential expansions; you have to go with 30 year projection of your current investment?
A: The restriction there is 80 percent of the end used plant should have been done and therefore we cannot take the potential, end used plant should be ready, so current requirement is relevant.
Latha: What is your sense though, do you expect that you are going to see a dramatic rise or at least some rise in your input prices, should we be prepared in FY16 for a pressure on margins on account of this?
A: We are anyhow importer of coking coal. If at all we are able to get locally the coking coal. I think it will reduce the cost instead of increasing the cost because we are importing it right now. As far as JSW Steel is concerned, I do not think it will have any negative impact.
Latha: Let’s just finish the steel, the Russian-Chinese competition argument. I understand from our in-house research expert that CIS prices are down in the past one month by 8.5 percent, European prices by 5 percent but domestic prices have fallen by 3 percent. Is there any price cut that we should expect from a company like yours?
A: It is not correct to say that international prices have fallen and domestic prices have not fallen. If the domestic prices are not adjusted inline with the landed cost of imports, the imports will increase quite high but I do not think that is the scenario, domestic prices are also corrected inline with the landed cost of imports, in fact in the last few days the rupee depreciated by almost Rs 1.5-2, in fact there is an increase in the landed prices on account of that. I do not agree that the domestic prices are not aligned with the landed cost of imports.
Reema: What has been the total correction in the prices in the quarter gone by up until now?
A: The domestic prices also corrected close to 5-6 percent in the quarter so far.
Latha: What is the status of mining in the country? We have seen state after state the court allowing mining but we also get ground reports that there is still a lot of hesitation on the part of state government to either renew leases or permit mining when it was banned earlier. Are people taking decisions in the mining space or are you just being footballed from Centre to state?
A: It is a matter of concern as far as the iron ore overall production relative to the demand is concerned there is a gap – that gap is not getting filled up. There is a lot of hope that more production will come into operation either in Odisha or Karnataka but we are not seeing anything happening on the ground – that is why the imports are increasing into India as far as iron ore is concerned, so in this year at least 10-15 million tonne of iron ore imports are happening. So this is a matter of concern. We are seeing commentary that iron ore exports are not happening. The major concern today is the domestic steel industry is not able to get adequate iron ore to produce steel, so we are importing steel into India because of lack of iron ore in India.
Latha: You are not seeing any policy progress on this; no one has seized of the problem?
A: Seized of the problem but nothing is happening on the ground and that is the major concern because several approvals are required, so they are taking their own time that is why in every state where iron ore is getting produced either Jharkhand, Chhattisgarh, Odisha or Goa or Karnataka, these are the major five states where iron ore is produced in India. So the total iron ore production in this year is not expected to be more than 105-110 million tonne as against 135 million tonne in the last year. So there is a reduction of almost close to 25 million tonne, so that is causing a huge pain to the industry leading to more imports and not able to produce to the capacity.
Reema: You told us about 5-6 percent decline in the domestic steel prices. In this quarter how have the raw material cost panned out, what has been the decline in coking coal as well as in thermal coal and therefore how will your margins look in Q3?
A: Margins are definitely under pressure but even though the iron ore prices got corrected relative to the last quarter, it came down as low as USD 70-69, so that is a price at which iron ore prices are stabilising. There is some benefit on account of lower iron ore prices but at the same time coal prices have stabled whereas because of the currency depreciation which has happened overseas either yen or ruble, it has put some pressure on the international steel prices, so prices got corrected. Therefore, margins in this quarter are definitely under pressure.
Latha: Are you still on track to meet your sales target of 12.4 million tonne for FY15?
A: We have been continuously talking about this that we will produce 12.9 million tonne of crude steel and sales of 12.4 million. We are on track and we will be able to achieve that. Latha: Any FY16 guidance?
A: We will give FY16 guidance in the next quarter, so we will work out the numbers.
Reema: Do you think the actual cleared price to be significantly higher than the floor price?
A: It depends upon the requirement of each of the companies. There will be aggressive bidding because there is a huge need for coal in India, most of the companies which are dependent where their end use plant are ready, they will not get coal if they don’t get it in this e-auction. I think there will be aggressive bidding in the coal auctions.
Read more at: http://www.moneycontrol.com/news/business/total-iron-ore-productionfy15-seen-sub-105-mt-jsw_1256727.html?utm_source=ref_article
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