4 Steel Insights, January 2014

COnTEnTs

42 | IN FoCuSElectricity sector growth to drive CRGo demandDemand for CRGO steel by power generation, distribution sectors pegged at around 2.75 lakh tons.

29 | CoVER SToRYSecondary steel industry: No second class citizensSteel mills are evaluating all alternatives to survive weak markets; hopes for revival in 2015.

24 | FEATuRERealty market: a short term risk, long term opportunityEven if property markets suffer slowdown, long term prospects remain intact.

18 | FEATuREComponent indigenisation drive helping auto steel suppliersSteel mills expect auto steel demand to rise as it is expensive to import on weaker rupee.

6 | SpECIAl FEATuREWill 2014 end the plight of iron ore industry in India?Strong policy needs to be in place to see mills do not face shortage of iron ore because of regulations.

14 Indian consortium re-negotiating Afghan ore project

16 Industry bodies urge steps to halt stainless steel dumping

20 Long products demand to grow 7.6% by 2020-21

21 Tata Steel’s Odisha expansion to be complete by FY15

22 Steel consumers continue to languish 25 Not a ‘happy new year’ for India auto

industry 26 Coking coal prices lose spark in

December 27 Indian manganese ore miners must focus

on productivity: FIMI38 Siemens’ second continuous slab caster

enters service at JSW Steel39 Oil in a day’s work44 SAIL achieves sales growth of 14% in

Dec y-o-y46 SAIL expansion delay may lead to cost

escalation47 P Madhusudan assumes charge as new

RINL CMD48 Konecranes brings new lifting solutions

into market50 Social Buzz 51 Traffichandlingbymajorportsup1.43%

in April-November 52 Railways’ iron ore handling up 4.3%

m-o-m in Nov53 Macroeconomic indicators of India 54 Global crude steel output drops 5.14% in

Nov m-o-m 55 Domesticlong&flatmarkets56 Domestic raw materials

6 Steel Insights, January 2014

billion in the same period, according to the Federation of Indian Mineral Industries (FIMI).

Even if efforts to fully lift the bans make it past the many bureaucratic and legal hurdles, iron ore miners do not expect complete resumption of production till late 2014.

The structural shift in India’s iron ore industry could be a blessing for other suppliers, as demand growth from top market China slowed and Australian miners Rio Tinto and BHP Billiton ramp up output. It will also make it harder for India to regain its spot as the world’s No.3 exporter of the steel-making raw material.

Mining in Goa was banned in September 2012, freezing shipments that reached about 50 million tons in fiscal 2010-11. In neighbouring Karnataka, where the ban came into force in 2011, exports remain frozen even though they were lifted in April 2012. In both states, the bulk of mining was done by private companies, which were accused of mining outside lease areas and in excess of set limits.

Only 16 out of 115 mines have resumed mining in Karnataka. For those keen on returning, the bureaucratic hurdles can be overwhelming.

“There are 30-40 companies whose quantities are so low that they will never restart,” said Basant Poddar, owner of Mineral Enterprises Ltd, which has four mining leases in Karnataka but none operating currently.

“For those willing, there are forest clearance issues. The whole process goes through about 50 levels or officers for Stage I clearance, and for Stage II, it’s cut down to about 20,” he added.

Only recently, Vedanta Resources plc, a London-based mining conglomerate controlled by Indian tycoon Anil Agarwal, said its Sesa Sterlite unit had resumed operations in Karnataka after clearance from a court-appointed panel.

International appetite waning

Analysts see Indian iron ore exports at 15 million tons next year, rising to 20 million tons in 2015. This is well below the record of more than 117 million tons in 2009-2010. Lower levels of Indian supplies have eased pressure on a market seen moving to a surplus scenario given the expansion plans of

Will 2014 end the plight of iron ore industry in India?Steel Insights takes forward the series of analytical articles on the iron ore sector as we enter 2014. 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

Another watershed year has passed by and we have stepped into 2014. However, it needs to be seen whether

2014 brings back smiles on the faces of iron ore miners and steel mills long gasping for freedom from regulations in mining the main steel-making raw material.

In the last 10 analytical articles, we had tried to take a bird’s eye view of the industry from various angles to get a complete perspective. In this edition, we take time to find what happened in the last 2-3 years and how it impacted the iron ore industry at large. We will also try and analyse how these

events would shape the future of the industry in the year that has just begun.

Bans on iron ore mining and exports in India’s top producing states of Karnataka and Goa have choked the industry so hard that many firms have stopped functioning. The sudden gush of regulations, which ought to have been in place since the onset of commercial exploitation of iron ore, has taken industry players by surprise.

The bans, put in place as the government tried to clamp down on illegal mining, have cut India’s iron ore exports by around 85 percent, or 100 million tons, over the past two years. These measures have also reduced foreign exchange earnings by more than $17

sPECIAL fEATuRE

8 Steel Insights, January 2014

sPECIAL fEATuRE

low-cost producers such as Rio Tinto, BHP Billiton and Brazil’s Vale while growth in Chinese demand eases.

India’s exports to China reached just over 10 million tons in January-November, down 68 percent from a year earlier. “Players are now definitely not depending on the Indian material,” traders said. “Most traders have switched to mainstream cargoes from Australia and Brazil and cargoes from India are going at a discount of maybe up to $4 a ton,” said a source.

India’s central and state governments, which put in place the various bans under direction from a Supreme Court determined clamp-down on illegal mining, appear keen on getting the iron ore sector back on its feet.

The court has set up a panel that will determine a limit on Goa’s production. The panel is expected to submit an interim report by February 15, but industry watchers do not expect a resumption in mining before October at the earliest.

Job cuts

When iron ore miners give up, so do businesses relying on the raw material. Out of the 53 sponge iron making plants in Karnataka with an annual production capacity of about 3 million tons, 19 have closed down and 27 are operating at half their capacity due to a shortage of iron ore, according to industry sources at Sponge Iron Manufacturers Association (SIMA).

India is the world’s top producer of sponge iron, an alternative steel-making ingredient that is economically viable where natural gas is abundant and cheap.

Industry group FIMI is estimating 200,000 job cuts across Goa and Karnataka because of the bans.

Price increase

Global iron ore prices are expected to ease as China, which is the largest consumer of the commodity, slows down. Increase in supplies by global mining giants like Rio Tinto and BHP Billiton is also expected to keep a check on prices. However, in the domestic market, prices are expected to rise following the Supreme Court ban on mining in Karnataka two years ago and the state government-imposed limit on production in Odisha in 2012. India’s iron ore production in 2012-13

declined 16 percent to 140 million tons (mt). Demand during the year totalled 136 mt (of which 3 mt was met through imports) while exports from the country were at 18 mt.

While a partial resumption of mining in Karnataka from April 2012 is expected to boost supplies, the impact will be felt only one or two years hence. On the other hand, demand for the steel-making raw material is expected to see a robust pick-up in the current year.

Green shoots

NMDC, which is the largest iron ore miner in the country, produces over 40 percent of India’s output from its mines in Karnataka and Chhattisgarh. It sells iron ore to the steel and sponge iron makers in Karnataka through the e-auction route. But, as demand from customers has been subdued, NMDC has cut prices. It has brought the price of lumps down to `4,300 a ton and that of fines to `2,510 a ton in August, from `6,100 per ton and `3,000 per ton respectively in September last year. Throughout the past one year, the company either cut or left prices unchanged in the monthly revisions as demand was lacklustre.

During 2012-13, domestic steel consumption grew 3.5 percent, the slowest in many years, amid weak demand from end-user industries, such as automobiles, construction and consumer durables. However, there is now a silver lining. In October, NMDC hiked prices by `100 a ton, for the first time in the past one year.

In December again, it increased prices by another `200 a ton, given the recovery in demand and lower supplies. Iron ore production in Karnataka, which contributes to a fourth of India’s steel-making capacity, is currently only about 15 mt (including 9 mt from NMDC), as against the 30 mt cap imposed by the Supreme Court. Many mines in the state are yet to restart operations as they await environmental clearances and approval of expired leases. With demand from local steel and sponge plants totalling 30 mt, only half of the existing demand is being met.

Gap to widen

The existing demand-supply gap will only widen in 2014, since domestic steel demand is expected to rise while iron ore supplies

would pick up only a year or two from now. According to analysts, iron ore output is expected to increase at an annual average rate of 0.5 per cent only, reaching 156 mt by 2017.

The World Steel Association has forecast India’s steel demand to grow at a faster rate of 5.6 percent in 2014. Approval of infrastructure projects worth `1.9 lakh crore by the Cabinet Committee on Investment will help drive steel demand. Recovery in the global economy too, even though modest, will boost steel production. With expansion (aggregate capacity to rise 24 mt by 2017-18 from the current 90 mt) plans lined up by Indian steel-makers, demand for iron ore is only expected to trend further upwards.

Exports decline to continue

India’s iron ore exports declined 43.5 percent in the first seven months of the current fiscal. Between April-October, 2013, iron ore exports touched 8.43 million tons as against 14.91 million tons in the same period last year.

Overall, this fiscal, iron ore exports are likely to be in the range of 14 million tons, a drop of close to 25 percent over the previous fiscal. In 2012-13, India exported 18.66 million tons. Suspension of exports from Goa and Karnataka has largely contributed to the steep decline in exports of iron ore this year. While the Supreme Court has allowed resumption of mining in Karnataka, it has still maintained the clampdown on exports. The apex court has also banned mining and export of iron ore from Goa, which is the major contributor to national exports, since October 2012, industry analysts said.

When compared to the production of iron ore in April-October, which stood at 80.4 million tons, India’s exports accounted for 10.5 percent of the total production. Going by the current trends, analysts expect the current year to end with an overall production of 130-135 million tons and total exports of 14 million tons, because, Goa is still out of business and the process of re-opening Karnataka’s mines is very slow. The only saving grace is Odisha, which will contribute a lion’s share in the total output this year, analysts add.

Prime mills also sufferNot only the small steel mills but prime mills

29Steel Insights, January 2014

Even as the steel industry seeks a lifeline to stay afloat, the plight of the secondary producers seems to be

even worse, forcing many of them to down shutters in the face of severely challenging times.

The Indian steel sector is dotted with thousands of small sponge iron manufacturers, who produce ingots and rolling TMT and a variety of products, accounting for nearly half of the crude steel production in the country. A large number of such plants is facing severe headwinds on the back of raw material availability at high prices, sluggish demand growth for long products amid surplus rolling capacity and quality issues because of technological disadvantages.

If many have shut shop, others are struggling to reduce the costs of input materials and production through technology up-gradation. Many are looking for alternate markets, especially exports, to ride the weak rupee for better realisation and volumes.

Many feel that latent demand is present but the environment is not conducive, with players hamstrung by a slew of policies, or the lack thereof.

Indeed, many feel there are a host of opportunities for a cross-section of players, starting from raw materials and consumable suppliers, technology providers to consultants and exporters etc. But, due to the high degree

Secondary steel industry: No second class citizens

Steel Insights Bureau

Down cycle tests survival strategy of secondary mills till last bit

COvER sTORy

30 Steel Insights, December 2013

COvER sTORy

of fragmentation, it is an uphill ride for the secondary steel sector.

The sector covers sponge iron makers, induction furnace-based steel-makers and steel re-rollers. While some are engaged in one of the above activities, many others are present in all three areas.

Size of secondary steel millsThe secondary steel mills in India contributed 45 percent of crude steel production of 78.30 million tons (mt) and nearly 57 percent of the finished steel production of 77.61 million tons in 2012-13.

As per the latest figures from the Ministry of Steel (MoS), during April-November, 2013-14, secondary steel mills contributed a similar 45 percent of crude steel production of 52.61 mt, while the sector’s share was 56 percent when compared with finished steel production of 53.37 mt during the eight-month period.

This is sufficient to come to the conclusion that secondary steel mills occupy an important position in the steel-making process in the country and its contribution to the overall steel industry cannot be ignored.

Future tenseHowever, all is not well with the sector and if things are not set right then India’s dream of reaching around 150 mt of steel production within the 12th Plan period (by 2016-17) would be nothing but a pipedream.

From the sponge iron industry to induction furnaces and rerolling industry, the story is same: It’s a struggle for survival. Primary players are not doing well either and are resorting to corporate debt restructuring (CDR). The steel sector is the largest segment in Indian industry which has opted for CDR.

The tipping point for the industry was demand. According to SPS Group Chairman Bipin Vohra, spending of government on infrastructure projects has come down drastically. This is because of lack of liquidity factors like import of gold, etc leading to current account deficit (CAD) woes. The dollar’s value shot up and the balance of payments went awry. Thus, the country became busy fire-fighting those issues, rather than creating demand or incurring expenditure. Essentially, it did not have the funds to spend.

Secondary players complain that the country’s power tariffs and transportation costs are higher than those of other nations, though only labour costs are lower compared to that in other countries.

And importantly, industry insiders emphasise, there is the lack of political decisiveness.

Things have been compounded with the coal scam having erupted on the government’s radar, with the comptroller and auditor general (CAG) saying the coal block allocation was wrong. “However, it is obvious this allocation was made for a purpose, that is, growth. In fact, this was the first time that the industry was given blocks. Corruption is a different issue. Today sections in the government are being unable to say why the blocks were allocated. They should have stressed that these had been allocated for the growth of the nation,” complains a secondary steel-maker.

Environmental issues have gained prominence too, which have triggered closure of certain iron ore mines. Those operating in Karnataka “legally or illegally” were shut down. Ore mines in Odisha and Goa too were banned.

But this was not right. There were good mines too, which were also shut down,” observes Vohra of SPS Group.

From sponge iron makers, to rolling mills and induction furnace players, all are fighting a tough battle. K K Garg, President, All-India Induction Furnaces Association

(AIIFA), says the situation has gone from bad to worse. An increase in the customs duty by 2.5 percent on the import of scraps has further worsened the problems being faced by the induction furnace industry.

He adds: “Moreover, we have the disadvantage of being located far from the ports. Further, the state government has increased the cost of power. All these have added to the input costs whereas selling price continues to be the same. Thus, the losses are mounting,” he added.

Indeed, power has become a huge issue for the secondary producers. As says G. Srinivasa Raju, Managing Director of Sujana Universal Industries Ltd, challenges are input prices, availability of raw materials and power. Sujana is into manufacturing of bearings, steel long products and laying of high tension transmission telecom towers etc.

Srinivasa Raju says there is no parity in power tariffs across the country. Andhra Pradesh is effecting a fuel surcharge adjustment after three years. “There is an Energy Regulatory Commission in each state, yet the discoms do not increase the prices on a monthly basis but later will force us to pay arrears.”

“However, how will I now compute the charges based on the costing on my inputs and products sold in the market three years back? Now since the elections are approaching, the government does not want to touch the consumer. Unfortunately, I source from one power supplier and all agreements are one-sided,” he rues.

Power tariffs are also high - `8 per unit is the power tariff in Andhra and then the suppliers complain there are no fuel linkages etc. Everything is having a cascading effect.

“Moreover, it’s on a time share basis. Even if we do not consume that power, we have to pay for it. Policies are faulty. If I get 15 hours of power, I may want to buy nine hours of open access power. But that flexibility is not there, at least in Andhra Pradesh,” he added.

PricingInput costs are more or less similar to that of primary producers. “We import scraps and yet have to compete globally,” Srinivasa Raju argued. He adds that imports (FTAs) are an issue. “That’s where we are unable to compete because we sell at distressed prices and then there are the bank interests. So how can we maintain the prices?

Production by secondary steel mills in Indiain '000 tons

particulars 2010-11 Growth y-o-y % 2011-12 Growth

y-o-y % 2012-13 April-November 2013-14

Growth y-o-y %

Crude steel 32271 3.2 33292 4.6 35227 23576 0.5

Finished steel 38632 15.6 44472 -0.1 44424 30043 1.9

Sponge iron production in Indiain '000 tons

2011-12 2012-13 April-November 2013-14

19633 19768 12130

Steel Insights, January 2014 31

“The cement industry is surviving because there is unity. At least it is able to maintain the pricing. In the steel industry this will be possible only if the operating environment improves and the industry participants involved think differently. One needs lesser investment for starting a furnace, but once a player starts one, he opts for short-cut methods. In such a scenario, the price fixation can never happen,” Srinivasa Raju says.

Banks’ NPAsThere is a cost involved in every closure. That means whatever is invested here is not only the funds of entrepreneurs but bankers as well. If these units don’t survive, what happens to the banks? NPAs are a huge bother and will increase if the industry is not allowed to flourish, warn experts.

FTAs/currency fluctuationsThe government is bringing in stricter provisions of interest rates and expect the secondary sector to compete with rate regimes of countries like Japan and Korea.

“The government cannot afford to only see the dollar attracting investments. Maintaining the rupee by bringing in dollars does me no good as a secondary producer. Why am I not in a position to export? The free trade agreements (FTAs) should be in relation to the technology and not product. Only then can I compete with the world market. I am sharing my market but am not in a position to reach out to a wider market,” reasons Srinivasa Raju.

Multi-point regulationsAccording to Vohra, an industrialist is an entrepreneur who contributes to the growth of the nation. He creates jobs, employment and triggers the economy. However, in India, he is busy most of the time touching base with the several taxation points. Instead of being answerable to several departments, we should be answerable to only a single department, he reasons.

Taxation is not bad per se but what India Inc wants is a single window to avoid harassment. Valuable time is lost in the taxation maze which can be diverted more fruitfully towards planning and production.

“Overseas, if you pay a sizeable tax, you are respected. In India, on the contrary, one comes under the regulatory scanner! So why should an industrialist invest?” he argues.

Punjab’s steel city losing sheenTake the case of Mandi Gobindgarh, for instance. Also known as the “steel city of Punjab”, it is losing its sheen. Despite the high consumption of steel in the state, which is pegged at around five million tons per annum, most steel mills are running at around 40 percent of their respective rated capacities owing to problems like the strengthening of the dollar over the past year, erratic supply, high power tariffs and rising input costs.

As a result, the rising demand for steel and iron ore is being catered to by manufacturers located in iron ore-rich states like Chhattisgarh and Odisha.

The city houses around 400 induction furnaces and steel re-rolling mills, which employ over 500,000 people. The cluster of small and medium-scale steel units is around 50 years old, and caters to the construction and light engineering sectors.

Industry insiders told Steel Insights that Punjab is not naturally endowed with rich iron ore and coal deposits like eastern or southern India.

So, steel units are dependent on scraps, which are largely imported. The depreciation of the rupee against the US dollar has resulted in a significant increase in the cost of imported steel melting scrap, which is a major input in secondary steel production. Above all, the poor proximity to ports and

higher transportation costs are a double disadvantage.

The power outages in Punjab are resulting in production losses and forcing many mills to work only single shifts. Many steel mills are unable to execute orders on time owing to irregular power supply and labour shortages.

Industry sources say that in the past few years many units had either closed down or diversified into other businesses. Even existing units find it difficult to sustain operations because they are forced to sell their products at the lower price levels offered by manufacturers located outside Punjab. As a result, their margins have come under severe pressure over the past year.

Further, in the past few years, steel mills in Himachal Pradesh have developed a competitive edge over the Punjab units owing to the tax benefits they enjoy. They also enjoy the markets of Jammu & Kashmir and Haryana. Steel units in Himachal Pradesh are concentrated around Kala Amb and include the Amba Group and Jai Bharat Steel.

Industrialists pointed out that another major problem being faced by Punjab’s steel mills is the lack of upgradation in technology, owing to a dearth of awareness of modern techniques used in steel re-rolling.

Also, rising operational costs and input rates are pushing induction furnace units and

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Steel Insights, January 201466

Tear along the dotted lineTear along the dotted line