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JSW Steel expects to be a 50 million ton company by 2030

2020-01-04

Jan. 4, 2020 - If we compare the peak steel prices in India last year vis-à-vis the current prices after three hikes, and compare it to landed cost of imports, there is a scope for further increase in price in the domestic market, says Seshagiri Rao, Joint MD & Group CFO, JSW Steel. Excerpts from an interview with ETNOW.


Q: Can you explain the dynamics of the steel industry? We are going through a tough time with profitability levels falling. Would you attribute the steel price fall to the slowdown that the Indian economy is currently witnessing?

A: It is a result of global as well local factors. For steel industry to be understood, one has to see what is happening globally because it is a globally traded commodity. Almost one-third of the steel is traded globally. The trade dispute which arose between China and the US was the starting point which led to an overall slowdown in the global economy and that has impacted the steel industry.


The steel consuming sectors - construction, infrastructure, real estate, manufacturing, auto - have seen slowdown globally and that has an impact. Global developments contributed to a bigger slowdown in India. The slowdown in government expenditure and credit flow to the industry together had a very serious impact in the overall fall in demand and also fall in prices. At the same time, raw material prices have not fallen in the same proportion.


All these together put pressure on margins and that is why the industry went through a severe pain in the first half of this financial year. Over and above what happened in the industry in India, the FTA countries like Japan, Korea and Asian countries continue to export steel into India because it has zero percent duty. It has gone up from around 58% last year to 77%. That also contributed to the fall in steel prices in India. The fall in steel prices in India is much steeper than what happened globally.


But we have seen a bit of recovery starting from October. So in this quarter which we ended, EPS is going to be better as we are hearing from other steel companies also. They have reduced inventories and their sales were better in the last quarter. This is the trend we are seeing which is expected to be better in the third quarter compared to the second quarter. We expect the second half would be better.


Q: We have seen two takeovers because of IBC. You have acquired one large asset, the Tatas have acquired one large asset which means more than greenfield, big players have updated existing capacities. Do you think for the next two to three years there is enough capacity in the country and large players like JSW Steel may not be looking at large greenfield expansion?

A: We are seeing consolidation through IBC. These companies are existing operating companies. The capacity utilisations in these companies are at reasonably higher levels. Even after change of control through IBC, I do not think a very big capacity or incremental production would come into the market. Considering the total capacity of the steel industry of 540 million ton in this year, we will be producing 110 million ton. So, the capacity utilisation is reasonably high in this industry. If we continue to grow even at a rate of 5% on a 100 million ton of steel consumption, every year we need 5 to 6 million ton of incremental steel demand.


For that, new investments have to be done -- either brownfield or greenfield -- to meet growing demand. The acquisitions are only change of control. I do not think that will contribute to the capacity or incremental production in the market.


Q: You have significantly increased your capacity in the decade gone by. In 2010, you said India’s steel demand will always grow in line with India’s GDP. Now that India’s GDP has come below 5%, do you think in the next 10 years the steel demand will also come down because a) there is disruption in auto demand, b) delay in housing demand and c) falling demand globally due to trade war?

A: As far as India is concerned, steel demand will be driven by mostly infrastructure construction and real estate. The national infrastructure pipeline which has been announced for investment of Rs 102 lakh crore in that the roads, energy and urbanisation will contribute close to 60% of the total infrastructure build in India. Out of the 60%, they are mostly steel consuming industries where steel demand is quite positive for this pipeline of national infrastructure which has been announced.


If that is the kind of infrastructure investment which is going to happen in India, then steel is the immediate beneficiary of the infrastructure spend. That is why we are quite positive as regards to the steel demand in India, going forward. The 2030 ambition of becoming a 300 million ton steel industry for India is not unrealistic.


Q: Between 2000 and 2010, if Indian companies were expanding and if they were increasing their debt to equity ratio, markets were rewarding it because that was considered growth debt. In the last 10 years, every time companies have expanded and debt has gone higher, markets have punished those stocks. It has forced most of the corporate companies to start reducing debt. Are you comfortable with these debt levels or could you think of reducing your debt levels dramatically?

A: We always look at relative ratios, we do not look at the absolute amount of debt. So when the company is 18 million ton, we cannot say we will reduce our debt to the level of 2002 that is not workable. We are comfortable with 3.75 ratio for a company which has grown from 1.6 million tons in 2002 to 18 million tons today. In the next one and a half, two years time, we will be close to 28 million tons including the acquisitions through IBC. If that is the kind of growth, we are quite comfortable with this 3.75 and 1.75 ratios.


Q: In the next 10 years when will you become a 50 million ton company? Would it be in 2024 or 2025?

A: We are 15-16% of today’s installed capacity. Even if we assume that we maintain that kind of market share in the overall installed capacity, if 300 million ton is India’s capacity by 2030, we will be in the range of 45 to 50 million ton by 2030. Considering the pace of growth in India, if this 300 million ton is expected to be achieved even earlier than 2030, we will also grow at the same pace. We want to be 45-50 million ton player in the 300-million-ton total play in the steel industry in India in the next decade.

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