4 Steel Insights, December 2013

COnTEnTs

38 | COVERDebt wish of steel millsBanks grapple with massive exposure to steel sector which is burdened with low demand.

34 | FEATUREAre Indian realty prices heading for correction?14 out of 26 major cities witnessed a drop or stagnation in property prices in Q2.

26 | FEATURESponge iron industry at crossroadsDRI sector cornered by restricted raw material availability and scrap import, seeks reform.

14 | FEATURERecasting the future of Indian foundriesCome 2015, Indian foundries will see a make-over under EU-sponsored project.

6 | SpECIAl FEATUREGoa’s iron ore pie may not satiate desi, global appetiteSteel-makers make a beeline for 11.46 mt stockpile of low grade ore from Goa.

20 Indo-German trade sees ray of hope despite economic gloom

24 National steel policy on anvil; Mills on value-added steel

28 Lots in store: Steel mills eye retail pie 31 SAIL, NMDC, RINL line up `15,000-cr

next fiscal 32 Steel consumers reflect bearish

sentiment 35 Auto sector in ‘stop-and-go’ zone 36 Coking coal prices lose sizzle in

November 37 Ferro alloys remain stable 46 Siemens Jet Process boosts flexibility

of raw material use in converter steel-making

47 Danieli to supply new pickling line to China’s Rizhao Steel

48 Danieli launches modern steel plant equipment facility in India

49 JSW tweaks Salboni strategy, plans 660-MW power plant from April

50 Tata Steel Group Q2 net profit at `917 cr 52 SAIL Q2 PAT jumps 117% 54 RINL completes expansion programme 55 Usha Martin Q2 net plunges 96% 57 Traffic handling by major ports up 1.68%

in April-October 58 Railways’ iron ore handling rises

marginally m-o-m in October 59 Global crude steel output up 1.38% in

October m-o-m 60 Domestic long and flat markets 61 Domestic raw materials 62 Price data 63 Production data

6 Steel Insights, December 2013

market. So it is unlikely to have much of an impact on international prices, analysts and traders said.

Sellers would have to offer steep discounts to move the ore, given plentiful of global supplies and thin appetite for lower grades, they said.

With tougher environmental regulations in place this year in China, that ore is getting a lot more difficult to use. So mills are chasing better-quality material, industry insiders said. “I think the Chinese are less interested in it than they have been in the past. I think that the discount on this low-grade material will be much greater than it was in 2012,” said an analyst.

Spot iron ore prices have fallen by about 15 percent from this year’s peak of near $160 a ton as a slower economy curbed Chinese demand, while Rio Tinto and BHP Billiton continued to increase output. The court also set up a panel to determine an output limit for Goa. The panel is expected to submit an interim report by February 15, 2014.

“We are setting up a six-member expert committee to study the cap on production based on the carrying capacity of roads etc,” Justice A K Patnaik said.

While analysts expect a gradual recovery in Indian exports over the next two years, the pace is likely to be modest and leave it far from the record high of more than 117 million tons set in the fiscal year through March 2010.

Some analysts forecast Indian exports of 25 million tons in 2014 and possibly a little higher the year after.

The industry does not see it really going higher than that at this stage, partly because of the restrictions on production. Generally, there is a decline in the appetite for very low-grade ores. So there is no possibility of the same kind of volumes coming out of Goa.

Sesa Goa Limited, India’s top private sector mining company and a unit of London-listed Vedanta Resources plc, would be the biggest beneficiary if mining resumed in Goa, as it is the largest producer in the state.

Steel-makers eye Goan ore

Meanwhile, Indian steel-makers are looking to bid for most of the 11.46 million tons of low-quality iron ore that Goa will auction, after court-ordered restrictions on mining have cut off supplies.

The domestic steel mills have traditionally preferred ores with higher iron content

Goa’s ore pie may not satiate desi, global appetiteThis is the 10th of a series of analytical articles on the iron ore sector which began with the March edition of Steel Insights. Readers are welcome to send in their feedback. Steel Insights may, at its discretion, publish the discussions for the benefit of a larger audience.

Tamajit Pain

In our last edition, we pondered on how the M B Shah Commission, which launched a major tirade against India’s

illegal mining practices that led to the arrests of public officials, was wound up in October.

Little did we know that our question at that point of time on whether mining will resume in Goa, would be answered so soon. In this edition, we examine the latest verdict of the Supreme Court where it maintained a 14-month ban on iron ore mining in the top iron ore producing state of Goa but allowed sale of more than 11 million tons of the material that sat in stockpiles.

Restrictions aimed at clamping down on illegal mining have slashed output and shipments from India, previously the world’s third-largest exporter with over $7 billion a year of iron ore supplied, mostly to China’s steel-makers.

The world’s top miners, Vale, Rio Tinto and BHP Billiton, have stepped into the vacuum left by India to boost sales to China, Japan and South Korea. The court ruled recently that 11.46 million tons of inventory held by miners in Goa could be auctioned.

The ore may be exported as it is low-grade material and unsuitable for most Indian steel mills, feel some analysts. The volume is a fraction of the 1.1-billion ton iron ore export

sPECIAL fEATuRE

14 Steel Insights, December 2013

fEATuRE

Madhumita Mookerji

If things go according to plan, then the future of three foundry clusters in India could be recast by 2015. Clean-up in terms

of technology, funding, physical surroundings and a soot-encrusted mind-set could exponentially increase their efficiency levels.

Scaling up Sustainable Development of MSME Clusters in India, a European Union (EU)-funded project, is working on several strategies across 11-odd clusters across the three states of Punjab, Rajasthan and Howrah in West Bengal in the areas of policy-level initiatives, financial linkages, increasing energy efficiencies, aggregate reporting and strengthening of business member organisations.

The Foundation for MSME Clusters, a non-profit organisation set up under the suggestions of Ministry of Small Scale Industries, is anchoring the project with other partners that include the Small Industries Bank of India (SIDBI), United Nations Industrial Developmental Organisation (UNIDO), GIZ (German Enterprise for International Co-operation) Global Reporting Initiative (GRI) and the Indian Institute of Corporate Affairs (IICA).

Where policy-level initiatives are concerned, the foundation is planning to prepare a policy paper that will be submitted next year to the Ministry of Steel, whereby it seeks to expand the supply of foundry-grade pig iron, a key raw material for foundry units, whose quality and pricing are crucial issues at present.

The Howrah units used to mainly source this raw material from IISCO, Burnpur. However, today, IISCO has replaced the manufacture of foundry grade pig iron with steel grade pig iron, says Anijit Bhattacharya, Project Co-ordinator, Howrah, Foundation for MSME Clusters.

The organisation aims to propose to the ministry that IISCO, which is under the Steel Authority of India (SAIL), should produce around 10,000 tons of foundry-grade pig iron

to facilitate the foundry clusters, especially those in Howrah.

It seems, since IISCO stopped manufacturing this raw material, the units started procuring the same mainly from Tata Metaliks, Neo Metal, Kazaria Pig Iron Plant, Industrial Development Corporation, Odisha (IDCOL) etc.

However, under present circumstances, the units are sourcing from the unorganised sector on credit through intermediaries, whereby quality is not assured.

“The need of the hour is to source pig iron that offers consistent quality, otherwise the end-product suffers… only a few larger brands satisfy the required quality parameters,” Bhattacharya said.

The foundation, which has personalities like Dr Sheela Bhide (retired IAS official of 1973 cadre and who served as an independent director at Coal India Limited) and Mukesh Gulati (who chaired the committee for preparing the Micro & Small Enterprises Cluster Development Programme (MSE-CDP) scheme, is devising a survey to elicit information from the foundry units on the overall demand volume and issues relating to the sourcing, pricing and quality of pig iron. The results of the survey will be couched in a policy paper and submitted to the Ministry of Steel.

Today, back-of-the-envelope calculations reveal that each foundry unit uses not less than 50-55 percent of pig iron as input material. In Punjab, the ratio is one kg of pig iron mixed with 4 kg of scraps. In Howrah, the ratio is 3:2 or 4:1. However, the mix depends on the end-product. The Bengal

units mainly supply low-end products like hand-pumps and sanitaryware castings, using old technologies.

Credit mapping

Since funding is a key issue for all cluster enterprises, the foundation has awarded a 12- week study to Dun & Bradstreet for identifying the credit gaps in all the three states. It expects the study to pin-point the financing pressure points and demands. “We will forward the report to SIDBI, which, on its part, can either make revisions in its credit line or tweak the existing schemes since it will take longer to devise a new credit line altogether,” informs Bhattacharya.

SIDBI already has a few credit lines in tie-up with the Japan International Co-operative Agency (JICA) which can be availed of. But only those units which comply with the energy efficient best practices norms can avail of this financing channel, Bhattacharya enlightens. Hence, the need is to tailor-make a few schemes to suit the micro units.

To change over to the divided blast cupola, these units will need financing for which they need to approach banks. But this can be a time-consuming process. Since SIDBI is the foundation’s partner, the financial linkage has been planned in such a way that it will give the funds to any regional bank, which, on its part, will provide the funds to the borrower to allow for a speedier disbursal process.

Tech tonic

The Foundation for MSME Clusters is working according to five work packages with the aim of infusing best practices and process improvisation. One of these strategies involves a changeover to the divided blast cupola method from the conventional cold blast cupola which involves higher coke consumption. Other thrust areas are solid waste management, which involves re-using sand, making paver blocks using slag etc.

Recasting the future of Indian foundries

Package Deal

Work Package Activities

1 Foster sustainable production through technical and non-technical measures

2 Build capacities of Business Membership Organizations (BMOs) for SCP

3 Introduce and facilitate Aggregate Sustainability Reporting among Cluster MSMEs

4Enhance access of MSMEs to credit through stronger linkages with Financial Institutions (FIs) and innovative financial products & delivery mechanisms

5 Undertake policy advocacy and dissemination

16 Steel Insights, December 2013

fEATuRE

“In Howrah specifically, most units currently use the divided blast cupola so, we can say, they have already implemented the first stage of our programme. This changeover took place because of a Supreme Court order in 1995 to switch over or shut down the units and install anti-pollution checking devices for lowering suspended particulate matter (SPM) levels, which have also been installed in many units,” said Bhattacharya.

A few years later, under a West Bengal Pollution Control Board compliance order, the units, being located in Howrah’s residential areas, were advised to limit SPM levels below 150mg/Nm3, a transition which has also been completed.

“Since we realised that 95 percent of the units in Howrah have shifted to the divided blast cupola technique, there is not much scope for technology change here. Thus, the next area for the foundation was to explore best melting practices with the aim of reducing coke consumption,” says Bhattacharya.

The project mandate deliverables include reducing coke consumption after three years in all the three states by 18,000 tons

(worth `25 crore) per annum. The current coke:melting ratio is 18-20 percent.

“If a unit runs on 20-22 percent coke consumption, we improvise and bring down the percentage to 15-17%. The foundation has already implemented the best practices in 11 units and the process is under way in another 11. To touch the 18,000 tons coke-saving figure, we have to work with 500 units within the project period across the three states,” Bhattacharya reveals.

Around 22-25 percent coke consumption is reduced after the switch-over to the divided blast cupola. In the case of Rajasthan, the clusters here too have switched over to the divided blast cupola technique.

“The focus in Rajasthan and West Bengal are similar – sort of stage two, where there is scope for implementing best melting practices, offer training and reduce 10-12 percent of coke consumption. However, if we could change the technology, then the coke consumption would have reduced by 20 percent,” indicates Bhattacharya.

In Punjab, 390 single blast cupolas have already been identified. The Punjab team

is working in Ludhiana, Jalandhar, Goraya, Batala, Phagwara, Mandi Govindgarh and a few other locations. Bhattacharya admits, thus, there are greater opportunities for initiating changes in Punjab.

Slag march

Apart from energy efficiency, solid waste management involving slag and sand are also important issues that need a re-look.

In Haryana, in a previous government-funded project, the team had made chemical analysis of the slag at foundry units in Faridabad, Samalka and Kaithal and suggested that they could use slag for making pavement blocks or use the same as a filler because the material does not have any strength and will merely replace the sand used in foundries. In any case, the sand and slag dust cost price differential is negligible.

The present team in Howrah is attempting to do even better than these options. In this regard, the foundation is looking to collaborate with the National Institute of Foundry & Forge Technology (NIFFT) Ranchi, the National Metallurgical Laboratory (NML), Jamshedpur and the National Institute of Technical Teachers Training & Research (NITTR), Chandigarh to explore options for recycling foundry slag.

It has also approached the Central Glass & Ceramic Research Institute (CGCRI), Jadavpur. “The Kolkata-based institute has the technology to do so and proposed a project worth `12 lakh. But, for us, a `3-4 lakh project would be more affordable,” informs Bhattacharya.

However, one area where slag can find application is bricks. Cement major ACC, it seems, is using blast furnace slag for making bricks. However, Bhattacharya informs that ACC is not sourcing the slag from the foundries but using the blast furnace counterpart. One reason floated is that the chemical composition of the slag from the cupola furnace is not suitable for brick-making. “We aim to propose small projects to the foundry owners for evolving new ideas for recycling their slag. The material is being given free of cost (read, dumped) to local bodies for paving footpaths or towards land filling, mainly to clean up their factory premises,” reveals Bhattacharya.

The foundation is also exploring tie-ups with institutions for recycling waste sand. At present, only a percentage of the burnt

Foundries flounder in slowdown whirpoolSteel Insights Bureau

All the foundry clusters in India are bearing the brunt of dwindling orders. Those tracking the sector say, overall, production volumes have reduced drastically since the beginning of this calendar year. A source speaking on condition of anonymity, says that production volumes at a large, export-oriented foundry unit in Madhya Pradesh has been cut from 2,000 tons per month to 600 tons per month. “The same trend is visible in Coimbatore, Pune and other foundry clusters strewn across the country,” adds the source.

In Howrah, for instance, the source observes, units are currently conducting 7-8 castings (lines of production), which involves 120 tons, in a month against the previous practice of three castings in a week, which translated into 12 castings (240 tons) in a month.

“These micro units are keeping the casting operations ongoing but at a drastically reduced level,” says another source, adding that they are further handicapped by pending payments from end-users. Also, in another key development, the units are sourcing pig iron not directly from the larger manufacturers but intermediaries who offer the material on credit. “Large companies will not work on such a format, so these foundry players are taking refuge in traders who will offer materials on credit,” said a source, adding: “This trend is visible from beginning of this calendar.”

Intermediaries are offering material on one year’s credit cycle though it is charging an additional `3-4 per kg on the material. However, the units prefer this since they do not have to pay up immediately and can channel these funds as working capital. Micro units generally do not approach banks for funding since they are not in a position to service this debt.

38 Steel Insights, December 2013

As Indian banks struggle to reduce the huge quantum of bad loans on their books and steel mills grapple with the interest outgo on

their mammoth debts against the backdrop of a slowing economy and scarce raw materials, the root cause of all ills is inflation, say experts. Unless this is addressed, India may lose its competitive edge.

Tamajit Pain & Madhumita Mookerji

The Indian economy has slowed down to its lowest in a decade and one sector that will experience the downside of this scenario in particular is the country’s banking system.

For the fiscal ending March 31, 2013, the economy clocked a five percent GDP increase, the smallest increase in 10 years. During this period, Corporate India’s debt levels reached a 10-year high, even as profits continued to be under pressure.

State-owned banks make up 75 percent of the banking system and are the major lenders to corporations. Over the past few years, they have provided loans to fund India’s dreams to power ahead with more electricity generating plants, loftier highways and swankier airports.

Many of these projects, however, are way behind schedule. Now high debt levels, a slowing economy, a crashing rupee and squeezed profits have left many companies unable to service their debt, in turn, stretching the banks’ balance sheets.

COvER sTORy

Steel Insights, December 2013 39

Amidst all this, the central bank – the Reserve Bank of India (RBI) – increased interest rates to tighten liquidity to control inflation and a downwardly mobile rupee. These moves have made loans from the domestic market expensive and increased the chances of debt defaults by companies with already stretched balance sheets.

Banks stressed out

The Reserve Bank of India (RBI) recently said Indian banks are struggling to reduce bad loans and improve their loan recovery process, warning that increasing stress on asset quality posed a major challenge to the banking system.

The RBI’s annual publication, Trend and Progress of Banking in India, said the gross non-performing asset (NPA) ratio of the banking industry, at the aggregate level, stood at 3.6 percent at the end of March from 3.1 percent a year ago.

The deterioration in asset quality was most perceptible for the State Bank of India (SBI), the country’s largest lender, and its five associate banks. The group’s NPA ratio reached five percent at the end of March. SBI and its five associates constituted 23.45 percent of the Indian banking industry’s total assets in fiscal 2012-13.

“In the short term, the stress on banks’ asset quality remains a major challenge,”the report said.

Slower economic growth, which at five percent in the year to last March was the least in a decade, high interest rates and stalled projects have hurt the cash flows of companies and impaired their ability to repay debt. Prospects of a recovery have been dimming, with estimates for the current year being progressively scaled down.

Assets quality showed signs of deterioration as doubtful loan assets rose in the sector, the RBI said. A loan not serviced by the borrower for a year is termed doubtful.

The increased shift of loan assets towards the doubtful category was most prominent at the SBI Group and nationalised banks, the report said, adding that the slippage ratio, defined as additions to NPAs during the year as a percentage of standard advances at the beginning of the year, also showed an increase during 2012-13.

At the aggregate level, the ratio of restructured standard advances to gross advances stood at 5.8 percent at end-March,

2013. It was the highest for nationalised banks — at 8.3 percent, followed by the SBI group — at 4.7 percent, according to the report.

“While the primary driver of the deteriorating asset quality was the domestic economic slowdown, the contribution of other factors like delays in obtaining statutory and other approvals as well as lax credit appraisal/monitoring by banks was also significant,”the report said, adding that credit concentration in certain sectors and higher leverage among corporations also increased the stress on asset quality.

The report also expressed concern over a steep rise in the growth of restructured debt under the corporate debt restructuring (CDR) mechanism in 2012-13. The mechanism covers only multiple banking accounts where the collective exposure is `10 crore and above.

In 2012-13, the total number of cases approved for restructuring under this mechanism increased by about 37 percent. The debt thus restructured rose 52 percent. Iron and steel and the infrastructure sectors witnessed the maximum stress in asset quality.

Banks need to strengthen their recovery processes, and it should be focused on “efficiency and fairness—preserving the value of underlying assets and jobs where possible, even while redeploying unviable assets to new uses and compensating employees fairly,”the RBI report said.

To do this, there is an “urgent need for accelerating the working of debt recovery tribunals and asset reconstruction companies”, the report further said.

If economic growth picks up, the bad debt position “may improve”, the report indicated.

Economists say that may not be the case in at least this financial year.

“The cyclical factors, like agriculture-related activities, may improve, but we have deep-rooted structural problems. Even as those are addressed, the positive impact will come only after a lag of seven-eight months. The reforms processes initiated were mostly by the end of the last fiscal and there are still lots to be done. Overall, the last fiscal was one of the most uneventful business years,”said Rupa Rege Nitsure, chief economist at Bank of Baroda.

The root cause of all ills, though, remains inflation, economists said. Until that is brought down substantially, India will continue to lose its competitive edge and a recovery in exports will be hard to achieve.

The year 2012-13 was marked by a slowdown in the growth of credit to all productive sectors — agriculture, industry and services. The slowdown was the sharpest for agriculture and allied activities, according to the RBI publication.

Retail loans, led by lending to the housing and auto sectors, were the only segment that continued to grow in the year.

COvER sTORy

11.4

9.5

8.69.2

9.9

7.5

6.56

5.1 5.4 5.24.7 4.8

4.44.8

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

4QFY

10

1QFY

11

2QFY

11

3QFY

11

4QFY

11

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

Quaterly GDP trends

Source: CSO

Tear along the dotted lineTear along the dotted line

70 Steel Insights, December 2013