4 Steel Insights, July 2014

COnTEnTs

36 | COVER STORYSteel demand remaining sluggish, production level to be low Primary reasons for low capacity utilisation are non-availability of ore and high input costs.

35 | OPINION Steel takes retail routeChanging consumer behaviour has pushed steel firms to set up newer strategies in marketing.

40 | EXPERT SPEAK Adding more value Pellet makers have to go for enriched technology to convert low grade ore at economic rates.

32 | FEATuRE Budget should spell out easy funding options for real estateSector enthused by government’s “Housing for all” policy, seeks definite directions

16 | SPECIAL FEATuRESteel Ministry pitches for cheaper credit for expansionInvestments of around `12 lakh cr would be required by steel sector to treble capacity.

6 Mines, steel sectors pin hopes on balancing act in Budget

10 Stainless steel makers call for hike in import duty

14 Steel Ministry proposes special mining zones

18 Defence sector opens up door for Indian SME

22 The Great Expectations

26 Coking coal prices ease in June

28 Ferro alloy offers improve on low inventory

30 Realty hopes for a real boom

34 Railway freight hike to push steel price by `500-1000 per ton

43 True Bearing guard to improve plant equipment reliability

45 Siemens and Baosteel cooperate in slag granulation solutions

46 RSP operationalises new 4300 mm plate mill, BOF

46 Essar bags order for 1.2 lakh tons steel pipes for Gujarat project

46 JSW Steel wins Prime Minister’s Trophy

47 Gates India organises annual sales and distributors conference

47 Sridhar Krishnamoorthy takes charge as MD, Gerdau Steel India

48 Iron ore handling by major ports at 3.8 mt in April-May

49 Railway’s iron ore handling up 9.34% m-o-m in May

50 Global crude steel output up 3.33% in May m-o-m

51 Iron ore slump, Karnataka ore production create buzz

6 Steel Insights, July 2014

Mines, steel sectors pin hopes on balancing act in Budget

Steel Insights Bureau

With the budget scheduled for July 10 this year, India’s new Steel and Mines Minister, Narendra

Singh Tomar, finds himself in the proverbial Catch-22. As he prepares his ministry’s proposals for the benefit of the finance minister, he needs to strike a balance between the demands of the steel industry and those of the iron ore miners. Why? Because the steel mills do not want the government to remove the 30 percent export duty on iron ore, but the miners want the tax gone.

Tomar needs to tread carefully. Not only does what he recommends need to make economic and financial sense, it must not tick off either of the two lobbies. One issue relates to mining, the other, to steel. In the previous governments, such a conflict never arose since both were separate ministries handled by different ministers. Today, in the new Bharatiya Janata Party (BJP) Government, while the ministries continue to remain separate, there’s one minister in charge of both, so therein lies the rub.

Steel Min proposes continuity of 30% export duty on iron ore Saying that restrictions on mining of iron ore in Karnataka and Goa has led to a steep drop of 35 percent in its output, the steel ministry has asked the finance ministry to continue with the 30 percent duty on ore exports while abolishing the import duty in the Budget next month.

Portraying a grim picture on paucity of iron ore, the ministry has argued that adequate availability of the mineral is imperative as it is the lifeline of steel production. A 35 percent dip in output over past 4-5 years has triggered concerns within the steel industry.

This steep fall in ore output is primarily due to restrictions imposed on mining in the two largest ore producing states — Karnataka and Goa along with output curbs by Odisha. The country used to produce 200 million tons of iron ore a year and exported 50 percent of it before the Supreme Court imposed a ban on exploration in Karnataka to curb illegal mining in 2011.

This raw material insecurity in certain areas of the country is likely to accentuate

further as fresh capacities come into production, the steel ministry has told the finance ministry as per its Budget 2014-15 wishlist.

Although iron ore exports have progressively dropped from 117.37 million ton (mt) in 2009-10 per annum to 12.24 mt in 2013-14, its production has also slided from 218.65 mt to 145.48 mt in the same period which neutralised the benefits of lower exports for the domestic steel producers.

Moreover, to offset the scarcity due to lower production, the steel makers resorted to imports which shot up to 1.87 mt in 2010-11 and then came down to 0.37 mt in 2013-14, the steel ministry said.

“Accordingly, it is recommended that the export at 30 percent in case of iron ore (both lumps and fines) and 5 percent in case of ore pellets may be continued whereas the existing import duty of 2.5 percent for iron ore and pellet imports may be brought down to zero,” the ministry said in its recommendations.

Mining sector calls for revival of exportWith iron ore export hitting a low, the Indian mining sector has made a fresh plea before the new government to take measures to revive exports.

The Federation of Indian Mineral Industries has urged the Ministry of Commerce to do away with the 30 percent and 5 percent export duty on iron ore and pellets respectively, to enable them to export iron ore fines, for which there isn’t much demand in the domestic market.

sPECIAL fEATuRE

10 Steel Insights, July 2014

fEATuRE

It further said the problem of trade imbalance is especially pronounced in the industry where China now accounts for almost 50 percent of total stainless steel global production in the world.

India, on its part, witnessed a huge surge in its imports to 307,266 tons in 2013-14 from 178,611 tons in 2009-10, the industry body said.

On the contrary, Indian companies have made a huge investment of over `25,000 crore in the last few years and are reporting losses and that this may result in NPA due to the high import of stainless steel from China.

For April 2014, stainless steel exports data indicate an increase of 22 percent during April to 3.9 lakh tons.

“Although India is the world’s second-

largest consumer and third-largest producer of stainless steel, the nation’s average per capita consumption of stainless steel is only about 2 kilos, whereas the global average is 5 kilos,” ISSDA president NC Mathur said.

“To address these challenges and meet development goals, an import duty hike is really needed to create a level-playing field for domestic steel producers because China uses dumping and other unfair trade practices to enter foreign markets,” he said.

“It would also be in the national interest to abolish customs duty on the key raw materials so that Indian steel producers remain globally competitive and meet the challenge of cheaper Chinese products head on.”

The association states that Indian manufacturers depend on imported coking

coal and suffer from borrowing costs in the region of 12 to 13 percent, which is impacting their price competitiveness against Chinese imports.

“China’s capacity of stainless steel has grown at a radical pace, outgrowing its demand and resulting in excess production,” the statement said. “It is this excess produce that finds its way to Indian markets creating an imbalance and destroying the level playing

Steel Insights Bureau

The Indian Stainless Steel Development Association (ISSDA) has called for an increase in basic customs duty rates on

stainless steel flat products to 10 percent from the existing 5 percent. It also wants removal of customs duty on key raw materials and scrap to provide an impetus to the fledgling domestic industry.

In a statement, the stainless steel body said Chinese producers were enjoying advantages like low power tariff and various forms of direct and indirect support provided by the Chinese government.

These were being dumped in India at the cost of domestic industry, it said, adding that the share of Chinese flat stainless steel products into the country had risen to 30 percent.

“The basic customs duty on import of Stainless Steel Flat Products in China is 10 percent as opposed to 5 percent duty in India, while it is 14 percent in Brazil,” it said.

“Also, the import duties on raw materials like scrap, nickel and Ferro nickel is virtually nil in China as compared to 2.5 percent in India,” the statement said, adding that this gives the Chinese mills far higher levels of protection as compared to Indian manufacturers.

Stainless steel makers call for hike in import duty

72%

21%6%

1%

200 series 300 series 400 series Others

52%

30%

17%

1%

200 series 300 series 400 series Others

2005 2012

All India consumption trend of SS by grades (%)

Source: ISSDA

32 Steel Insights, July 2014

be moved to the automatic route with certification from a reputed Architect for the plans which meet the criteria of Affordable Housing definition.

Another significant change is to define Priority Sector Lending (PSL) status. Today, only housing loans below ̀ 25 Lakh in metros qualify PSL. There should be uniform definition of PSL as construction costs are more or less similar across the country be it metros or rural areas. On the same note, considering spiralling inflation, the PSL limit for housing should be raised to `35 Lakhs and the annual increase be automatically pegged to the WPI.

While direct loans from banks are considered priority sector, loans given by banks to HFCs for onward lending are eligible for PSL tag only if they are less than `10 lakh. The objective of these policy measures must be to support flow of funds to low and moderate households and the policy should be agnostic to the structuring of the lending, whether it is direct lending to the customer or indirect lending through an HFC.

CREDAI also demands the Exemption of Service Tax for housing projects. The transaction taxes inclusive of the service tax, VAT, Registration and stamp duty etc for a buyer has sharply risen over the past few years and therefore need to be brought down from 30-35 percent presently to about 15 percent, which will make housing affordable for all.

BJP in their manifesto included interest subvention and rationalization of taxes; we request an interest subvention of at least 3 percent for 5 years to be extended for Dwelling Units of less than 80 sq. mtrs for fulfilling the ambition of Pucca Houses for all by 2022. This will increase the eligibility of quantum of loan amount to the purchaser and help reduce the EMI burden on the Home loans.

The concept of NOCs are stopping the growth of the country, making Houses costly by about 40 percent due to delay in getting project approval etc, it is recommended that NOCs to be completely eliminated to make online approvals implementable and successful. MOEF clearance to be made simple and applicable for a city master plans as a whole and not for individual projects. Civil Aviation Ministry should prescribe allowable heights for projects on the digital

Budget should spell out easy funding options for real estate development: CREDAI

C Shekar Reddy

The real estate sector is enthused by the government’s ambitious ‘Housing for all’ policy and seeks

definite directions on the policy front in the upcoming budget on July 10, 2014.

According to the industry, to ensure the success of any efforts for providing housing for all requires mechanisms for adequate funding for low cost buyers and for developers as a prerequisite. While long-term mortgage market is well developed for middle and high income groups, customers falling under low and moderate income groups find it difficult to access finance. Even access to capital for developers too is highly under served.

Though Housing Finance Companies (HFCs) exist to address this segment, their funding limits need to be augmented. Currently, as per RBI guidelines, HFCs, registered with National Housing Bank (NHB), can offer loans below `25 lakh for a property value below `30 lakh. These HFCs should have a minimum net worth of `300 crore for each of the last three years. Specialized HFCs who are funding low cost housing will not meet these criteria and they should have an equal opportunity to access External Commercial Borrowings (ECBs). As of now, ECB for HFC is permitted under the approval route and we urge the government to move it to automatic route. Currently ECB for Construction Finance to Developers is permitted only under approval route; we recommend that ECB approval

fEATuRE

COvER sTORy

Sponge iron is an intermediate product, a source of metalics for the secondary steel making through EAF or IF route. Other

sources of metalics are steel scrap and hot metal produced in the blast furnace. Steel scrap becomes a direct substitute of sponge iron, since both of them are tradable commodities, unlike hot metal. There are two kinds of sponge iron producers in India: (i) captive users, i.e. those using sponge iron in their own manufacturing facilities and (ii) merchant producers, who are selling sponge iron in the open market. Tata Sponge belongs to the merchant segment having about 20 percent share in this sector.

Furthermore, the sponge iron industry is also classified into two categories: (i) gas based and (ii) coal based which use coal as reductant. There are about three producers in gas based segment and their product is known as Hot Briquetted Iron (HBI). In coal based segment, there are roughly about 400 units across the country and the product is known as Sponge Iron.

Steel demand remaining sluggish, production

level to be low: Deshpande

36 Steel Insights, July 2014

Steel Insights, July 2014 37

COvER sTORy

Excerpts:

Procurement of iron ore is a major problem for sponge iron producers and many small players have shut shop because of raw material shortage. What is the scenario like currently and how do you expect the scenario to be as mines are reopening in Karnataka in 2014-15? Where do you procure your iron ore from?

Iron ore procurement has been a major problem for the DRI manufacturers all along. The multiplicity and scale of sources, the variability in content of the fines and the gangue content have been the reasons. The situation worsened in the recent months due to closure of some mines, and the controls imposed by State governments on the

merchant miners. We expect that with the opening of more and more mines, the new discipline imposed on mining industry and the new pelletising capacities coming in, the situation will ease improving the input availability. The global iron ore demand is weakening as China is reducing its steel output. The iron ore exports would tend to look less attractive.

Overall, it is expected that the iron ore market will become stable. The prospects of importing iron ore would also rise at least to the shore based facilities. Tata Sponge will continue to source its iron ore from the nearby Tata Steel mines and stay in an advantageous position.

How do you see the availability of coal for this sector?

The source of coal for sponge iron making has been mostly the coal linkages. The linkages have become unreliable; the auction prices have moved up. The quality of auctioned coal has always been a suspect. With the correction in imported prices it is looking economical for the DRI plants to import their coal requirements. The absence of a proper market to buy imported

Tata Sponge is a coal based merchant sponge iron producer.

Domestic sponge iron capacity utilisation is showing a downward trend for last couple of years due to weak demand. The tendency of stand-alone sponge iron players moving towards forward integration and ceasing to be pure merchant market players is also visible.

Sponge iron manufacturers located near coal and/or iron ore mines enjoy lower logistics cost and earn higher margin. Tata Sponge operates three rotary kilns with an installed capacity of 390,000 tons per annum (tpa) to produce sponge iron.

The company has established a loyal and stable customer base in eastern India and export market. The company practices have resulted in a small product premium. The waste gas from sponge making kilns has significant energy in the form of heat. This energy is recovered in waste heat recovery boilers to generate steam, which then passes through the generator for producing power.

Two power plants, based on waste heat from kilns with a combined generation capacity of 26 MW are also being operated. Entire surplus power, which was about two-third of generation, was sold. The power revenue contributed to the company’s topline and bottomline.

Iron ore and coal are two important raw materials in production of sponge iron. Iron ore continues to be procured from Tata Steel. A part of coal is sourced from domestic open market and the balance from overseas markets.

With multiple adversities plaguing the Indian sponge iron sector in recent times, companies are increasingly finding it difficult to tide over the crisis looming large over the industry. On one hand, the dull market condition caused by slumping demand is posing

a serious concern while, on the other hand, raw material crisis is hampering production.

Standing at such crossroads, DP Deshpande, Managing Director, Tata Sponge Iron Limited, discussed his views about the future of the company and the industry with Sanjukta Ganguly of Steel Insights in a candid interview.

58 Steel Insights, July 2014

Tear along the dotted lineTear along the dotted line