From the big investors to commodity traders, everyone is labelling the current momentum in steel as a super cycle. What according to you is making steel prices go up? And do you really think the super cycle is going to be one that is prolonged and not temporary in nature?
The way it appears to be today is that the demand is quite strong. Secondly, there are a lot of supply-side constraints, either driven by the second or third wave of COVID in various countries and also driven by raw material supplies. These two are limiting the overall supply increases in various countries. Over and above, we are seeing demand pick up majorly through stimulus by the government. These two together are showing a very robust increase in prices.
How long it will continue is anybody’s guess. I am saying so because if I look at December 2020, production across various countries versus capacities, there is surplus supply of close to 120 million tonne, including 40 million tonne from China, which can come into the market. Compare it to the peak of the production that has happened in those countries. Therefore, the supply can come into the market.
If that comes in, there will be some correction in the prices. So how long it will continue is anybody’s guess. But as on date what we are seeing is that demand is strong, supply is constrained, the third is that raw material supply is limited. Taking all these factors into account, this current situation will continue for some more quarters.
China has hit the brakes on steel production, and US steel demand in turn will be accelerating post Biden’s multi trillion-dollar infrastructure package. In that context, is the steel crunch problem that exacerbated and is that also causing prices to go even higher?
Yes, that is the issue which I am talking about – supply-side constraints. Supply side from China due to decarbonisation and also the policy-driven constraints or restrictions on supply, where they wanted to limit the total production to the 2020 level.
Whether they will or not is anybody’s guess. But as on date, they have been highlighting that the production for 2021 calendar year will be limited to 2020. So limited supply of steel from China and across the board for various other reasons. That is causing the spurt in steel prices with the supply constraint while the demand is strong.
How do you see the new infrastructure plan of the US administration boosting your US business?
In the US we have restarted our electric arc furnace after revamping in Mingo and in Baytown after the phase 1 refurbishing of the plate mill was restarted. We are coming at the right time where the demand is looking better. Also, the infrastructure stimulus which is being worked out in the US of close to over $2.3 trillion, 800 billion has been earmarked for roads, bridges and other infrastructure.
This is a great opportunity for steel companies in India to beat the US to meet the growing demand there. I think we are in the market at the right time with more supply. Also, integration between the Mingo Junction and Baytown by supply of slabs to produce plates is also a very good opportunity for us to be in the market at right now.
Suddenly export realisations for a steel company are much better than domestic realisations. Why do you think the domestic markets and domestic prices have lagged behind?
I do not think so, because majorly Indian steel companies first meet the domestic demand. If there is any surplus or if there are products where there is more demand outside than in India, those products are getting exported. Particularly downstream if I look at either colour coated or galvanising coil or any of the other valued-added products with surplus capacities in India, those products are getting exported.
The focus of the Indian steel industry is to first meet the domestic demand, after that the products where there is limited demand in India are getting exported. I do not think realisation will drive the whole thing, as far as meeting domestic demand is concerned. But you are perfectly correct in saying that the international price realisations today are looking much better than the domestic prices.
A recent report suggests that we could see demand moderating given the resurgence in cases and restrictions on mobility. What is your perspective?
The second wave of COVID is spreading much faster and may affect lockdowns getting reimposed with restrictions. It is a matter of concern that people follow COVID protocols and stay careful. Only then will we be able to avoid the lockdowns. It is anybody’s guess if any lockdowns come or what happens to the overall economy or to overall domestic demand. So, it is a matter of concern.
But as on date, if I look at demand, it is quite strong. January demand was 9.9 million tonnes, similarly in February it was 9.1 million tonnes. Even March demand was quite strong. So, overall demand in India even in the quarter of January to March 2021 is quite good.
BPSL’s acquisition marks your foray into the eastern market. Talk to us about the synergies there and whether you feel you can remove some of the inefficiencies which made the BPSL and IBC case in the first place?
BPSL is very strategic for us. It is in the East and North of India. Those markets today are being serviced by JSW from South and West of India. It is very strategic to be present in those markets which are growing and also are rich in resources. We have a two-year plan to turnaround as far as BPSL is concerned. The turnaround we have kept as two parts. Part one is to reduce the cost. Central plant is not operational, there is no PCA system. That way there are a lot of shortcomings which are there today. The projects to reduce the cost of production are not completed. So, these projects will focus on reducing the cost. In phase two, there is a possibility of increasing the capacity from the current 2.5 million tonne to full. That is the second phase. Overall, we are keeping a two-year time period for turning around BPSL.
What will be the cost that you will incur for all that? By when will you be able to accomplish full utilisation?
Cost of production from the current levels, there is a scope of reduction by 20%. That is how we are targeting to reduce the cost. Once the projects are completed over a period of 12-18 months, we will see this cost reduction. The second is increasing the capacities. Simultaneously, we will take up some projects where the capacity can go up to 4 million tonne so that we are continuously incurring expenditure while working on reducing cost. All these capital expenditures, both the phase I and phase II together will be in the range of around Rs 3,500 crore.
Your purchase price implies in EV per tonne of $890. What would you say to those who label this as an expensive buy?
To set up a Greenfield project is very long term. It may take even more than five years’ time. So, if somebody wants to acquire a company which is operating right now and has a sizable capacity of close to 2.5-3 million tonne, the price can be justified from that point of view. That is why we were aggressive in the bidding for this asset. Number one is strategic, not being present in these two sites. The second, it is a readily operable plant and has the possibility of increasing the capacity to 4 million tonne. Considering all these factors, we have taken that call. So, if I compare with any of the Greenfield projects that will come up, I do not think this is expensive from that point of view.
What would be the expected rise in debt because of the BSPL transaction?
These numbers we will give when we announce the results in the month of May. We have already communicated to stock exchanges that the total exposure of JSW Steel by way of cash outflow is Rs 5,080 crore. Balance amount is raised either in the holding company for investing as equity in BPSL and the balance is raised in the target company. That is how we have funded the total Rs 19,350 crores.
Steel spreads have got to a multi-year high. How will this cash flow which you will generate because of higher realisation affect your profits?
We have been communicating relative ratios we focus on rather than focussing on the absolute number, that is the 3.75:1 debt-to-EBITDA and 1.75:1 debt-to-equity. We are well within those parameters while doing inorganic and organic growth that is happening in the company.
What about the Dolvi project, the expansion project and the operational capacity you see at the end of FY22?
Projects we have taken up in the last three years, many of them are getting commissioned or are already commissioned. Like pellet plant and dual power furnace that is SMS3 modernisation and CRM1 expansion at Vijayanagar. These projects we have already completed.
In Dolvi, the pellet plant is already commissioned, the blast furnace is under heating, and we have already rolled some plates in the hot strip mill before 31st March. It is a very very advanced stage of commissioning. In the next one-two months’ time, we will be able to run the operation on an integrated basis starting from the pellet plant to the hot strip mill. That is the status of Dolvi. Dolvi capacity will go up to 10 million tonne from adjusting 5 million tonne. So, overall capacity of JSW Steel in the existing operations will go up from 18 to 23 million tonne in the next one or one-and-a-half months.