4 Steel Insights, June 2016

COnTEnTs

42 | INTERVIEW ‘Indian steel industry may pick up from end-2017’Steel cos should focus on operational efficiency, energy economy and environmental sustenance.

26 | FEATUREIndia facing iron ore glut despite non-operational minesIron ore production from operational mines expected to be around 170-175 mt in current fiscal

44 | INTERVIEWExxonMobil sees scope for synthetic oil-based lubricants in futureAs steel industry focusses on productivity, equipment speed & lubrication are of utmost importance.

21 | FEATURE India among top 10 importers in 2015: WorldsteelIndia imported 13.3 mt, a notch up from China, which imported 13.2 mt in 2015.

6 | COVER STORY Efficiency via tech optimisation key to sustainable developmentEfficiency enhancement can only boost profit when topline growth hampered by low demand.

16 Operational efficiency: Need of the hour 23 Dumping duty slapped on Chinese tubes,

pipes 23 Ballooning bad debts staring in face of

Indian banks 24 Centre re-imposes 30% export duty on

chrome ore 25 Indian steel players to be profitable in near

term: ICRA 28 Real estate demand to grow 9% 29 Vehicle policy to generate steel scrap

worth `11000 cr 30 Coking coal offers sputter in May 31 Diesel car ban a speed-breaker on auto

sales in May 32 JSW Steel’s fourth quarter net profit up

two-fold 34 Corporate snippets 35 Tata Steel posts Q4 loss on Europe assets

write-down 36 Odisha: The CSR crucible 38 First hot coil on continuous annealing line

built by Fives at Guangxi Steel 39 Primetals receives FAC for last LD (BOF)

converter supplied to JSW Steel 41 New mineral exploration policy on anvil 48 Will down-under iron ores reach Indian

shores? 52 Mining, solar can pump up industrial

pumps sector 54 Iron ore handling by major ports jump

sharply in April 55 Railways’ April iron ore handling down

10% m-o-m56 Global crude steel output dips 2% in Apr

m-o-m

6 Steel Insights, June 2016

Operational efficiency via tech optimisation

key to sustainable development

COvER sTORy

“When the going gets tough, the tough gets going.”

This fourth quarter results season, for the steel industry, seems to be written in red. The scenario seems grim for steel majors and the industry’s fortune cookie predicts that if the integrated manufacturers have to return to profit, the only way forward is to stress on increasing operational efficiency. Since the topline is not increasing because of lack of demand, the only way to boost the bottomline is technological optimisation for achieving operational efficiency and thereby cutting costs.

Interestingly, at a time when many metals and minerals companies have been

brought to their knees by a downturn in the commodities cycle and an adverse turn in the regulatory tide, forcing some to sell their crown jewels, one corporate group has emerged relatively unscathed from all this, and is, in fact, looking to pick up some prime assets on the cheap.

This approach seems to be just what the doctor ordered!

That entity – the Sajjan Jindal-owned JSW Group – has been well served by its prudent invest-what-you-save strategy. The group may be debt-heavy and may have gone on an acquisition spree, but it has managed to meet most of its capital requirements across its operations – steel, energy, ports and cement – through cost savings, by improving

operational efficiency and preserving cash for future expansion.

Today, while its peers are selling their assets to retire debt, JSW is on a bargain-hunt: it is looking to acquire power projects and has even made an exploratory bid for rival Tata Steel’s loss-making assets in the UK.

The sector had been fraught with a lot of trouble in the recent years. In 2011, the metal industry was caught unaware when the Supreme Court, in an effort to root out illegal practices, issued a blanket ban on mining.

Domestic economic growth also failed to keep pace with capacity expansion.

The clampdown and the strictures by the Supreme Court led the government to enact

Operational efficiency via tech optimisation

key to sustainable development

Tamajit Pain

Steel Insights, June 2016 7

COvER sTORy

the Mining and Mineral Development and Regulation Act, which effectively pushed up the cost of mining in India.

Adding fuel to the fire, cheap imports from China and from trade partners such as Japan, Russia and South Korea rattled the steel companies already groaning under debt.

Reacting to the large-scale dumping, the government levied a “safeguard duty” and fixed a Minimum Import Price (MIP) on steel imports.

While JSW Steel has so far managed to wade through the troubled waters that have swirled around the sector, its ability to take advantage of the anticipated revival in steel demand will face a reality check.

However, all said and done, JSW has courageously fought the difficulties with a robust operational efficiency programme it has adopted over the years.

Profit when others incur losses This has resulted in JSW Steel reporting an over two-fold jump in consolidated net profit at `171.25 crore for the March quarter and chalking out capex of `7,000 crore over the next two years while others reported losses.

India’s largest domestic steel-maker, SAIL, reported a standalone net loss of `1,230.93 crore in the March quarter hit by challenging market conditions and decline is sales realisation. Tata Steel also posted a fourth quarter consolidated net loss of ̀ 3,279 crore (compared to `5,702 crore).

Jindal Steel and Power (JSPL) narrowed its consolidated net loss to `371 crore in the January-March quarter of 2015-16, helped by higher steel sales and cost optimisation measures. The Naveen Jindal-led firm had posted a net loss of `519 crore in the year-ago period.

Cost optimisation & operational efficiencyNot everyone has a sanguine view of JSW’s debt burden. Just last month, credit rating agency Fitch Ratings downgraded the group’s flagship JSW Steel, citing declining profits and rising leverage during a prolonged period of weak international steel prices, coupled with debt-funded investment in capacity expansion.

However, Seshagiri Rao, Joint Managing Director of JSW Steel and Group CFO, who spearheads the group’s strategy, is not excessively worried about the `38,460-crore

debt (as of the March quarter). In fact, even after adding 4 million tons to take its annual steel capacity to 18 million tons in the past two years, the company’s debt level has come down.

“We are absolutely comfortable with the current debt level. Despite massive capacity expansion, our debt position has remained almost stagnant as we are raising fresh funds only to the extent of the loans we repay,” he said.

In fact, he added, the company has prepaid a few rupee loans to raise fresh funds and bring down the overall cost of borrowing by 60 basis points.

“We can free up more cash for expansion by focusing on efficient use of working capital. We have reduced our inventory by 1.40 lakh tons to free up working capital for new projects. Going ahead, we intend to borrow only to the extent of our loan repayment,” he said.

Although the extent of JSW Steel’s leverage will moderate when newly added capacity goes on-stream, Fitch expects the company to be hit if it goes on a debt-funded expansion and the government decides to lift the regulatory protection. Given the heightened competition among domestic producers to support utilisation rates, the rating agency sees constraints on further steel price hikes in the near term.

The past hangoverBanking on buoyant global and Indian economic growth, metal companies made huge investment in expansion and acquired assets overseas with borrowed money.

In 2007, JSW bought three pipe and plate mills owned by Sajjan’s elder brother, P R Jindal, for $940 million and followed it up with the acquisition of iron ore and coal mines in Chile and the US.

Unfortunately, the global acquisitions have not added any meaningful profit to JSW’s bottomline. In fact, the situation would have been worse if the company had acquired Italian steel maker Lucchini SpA in 2014.

Much of the debt on JSW Steel’s books has been inherited from the sick companies it acquired over the years. In 2010, JSW bought debt-ridden Ispat Steel at Dolvi in Maharashtra with a capacity of 3.3 million tons and subsequently merged it with itself to claim deferred tax benefits of over `2,088

crore. In a bid to secure the raw material needs of the Dolvi unit, JSW bought over sponge iron unit Welspun Maxsteel in an all debt-deal of `1,000 crore.

New plans to increase operational efficiencyJSW has added 2 million ton capacity at Vijaynagar and Dolvi units each. The installed capacity of the company has increased by about 25 percent from 14.3 million tons per annum to 18 million tons per annum with the completion of these low-cost and returns-accretive projects.

The company has earmarked capex of `7,000 crore over the next two years and will invest `4,300 crore this year and `2,700 crore next year, which includes setting up of a 200,000 tons tin plate unit at Tarapur in Maharashtra, estimated to cost `650 crore.

The firm is also investing `550 crore to resolve the water shortage issue.

Continuous operational improvement JSW Steel is the first Indian company to use the Corex technology to produce hot metal. The company opted for this technology although it was untested in Indian conditions due to its benefits to the environment.

Corex is a smelting-reduction process developed by VAI, for cost-efficient and environmentally friendly production of hot metal from iron ore and low grade coal. The process differs from the conventional blast furnace route in that low grade coal can be directly used for ore reduction and melting work, eliminating the need for coke making units. The use of lump ore or pellets also dispenses with the need for sinter plants.

All metallurgical work is carried out in two separate process reactors – the reduction shaft and the melter gasifier. Lump ore, sinter, pellets or a mixture are charged into a reduction shaft where they are reduced by a gas to direct-reduced iron (DRI). Discharge screws convey the DRI from the reduction shaft into the melter gasifier where final reduction and melting takes place in addition to all other metallurgical and slag reactions.

In recent years though, steel-making companies around the world have looked for solutions to new-age problems. Setting up steel plants takes a lot of time and money. And once the plant is put up, more investments are needed to source raw materials, mainly

Steel Insights, June 2016 21

Steel Insights Bureau

India, the world’s third-largest steel producer, was among the top 10 importers of the alloy last year, according

to the latest data by global industry body World Steel Association (WSA).

India imported 13.3 million tons (mt) of the metal in 2015 and was just a notch up from China, which imported 13.2 mt of steel during the same period.

According to the WSA data, the European Union as a bloc imported 37.7 mt of steel last year, which was followed by the

India among top 10 importers in 2015: Worldsteel

US (36.5 mt), Germany (24.8 mt), South Korea (21.7 mt), Italy (19.9 mt), Turkey (18.6 mt), Vietnam (16.3 mt), Thailand (14.6 mt), France (13.7 mt) and India (13.3 mt).

fEATuRE

Top crude steel producing companies in 2015

Rank Company Tonnage(million tons)

1 ArcelorMittal 97.14

2 Hesteel Group 47.75

3 NSSMC 46.37

4 Posco 41.97

5 Baosteel Group 34.94

6 Shangang Group 34.21

7 Ansteel Group 32.5

8 JFE Steel Corp 29.83

9 Shoungang Group 28.55

10 Tata Steel group 26.31

11 Wuhan Steel Group 25.78

12 Shandong group 21.69

13 Hyundai Steel 20.48

14 Nucor Corporation 19.62

15 Maanshan Steel 18.82

16 Thyssenkrup 17.34

17 Gerdau 17.03

18 Tianjin Bohai Steel 16.27

19 NLMK 16.05

20 Jianlong group 15.14

21 Benxi Steel 14.99

22 Valin Group 14.87

23 China Steel Corp 14.82

24 US Steel Corp 14.52

25 EVRAZ 14.35

26 SAIL 14.34

27 IMIDRO 14.1

28 Rizhao Steel 14

29 Fangda Steel 13.21

30 JSW Steel 12.42

Source: WSA

42 Steel Insights, June 2016

Excerpts:

Many feel the steel industry cannot survive on MIP and other measures alone. Do you agree?These are definitely required and countries do impose such measures to safeguard their own industries. But these are short-term in nature, and cannot be part of a long-term roadmap for boosting the steel industry.

So, the industry should effectively utilise the breathing space created by the MIP, and become competitive in order to ensure sustainability in the longer term. We are passing through a difficult time – when lower priced steel goods are coming into the country from lower cost producers such as China, and posing a challenge to the domestic industry.

There is a strong lobby against the MIP too. The retailers are reaping the benefits of cheap imports, and are opposed to the imposition of this measure (MIP).

What is your outlook on steel demand growth in India?Steel demand is slowly coming up because there is a GDP growth. Steel is a component of GDP growth. If the GDP growth in India sustains, unlike in China where it is decreasing, then demand will

increase. However, this will be dependent on investments in infrastructure development and growth in manufacturing activities.

Investments will happen in India, and this should augur well for the country.

We feel there will be ups and downs till 2017. But, end of 2017 should, hopefully, see a pick-up in demand. But, at this time, steel producers should not miss the bus, because once demand picks up and they are not able to supply, then a down-cycle will set in again .

When do you foresee the global steel industry picking up?Once the turmoil in West Asia dies down, this region, along with North African countries, would witness rebuilding and growth. So steel will be required. The Indian producers can specifically bank on Africa. But remember Chinese producers are already present there. North Africa, Syria, Iraq etc are countries which need to reconstruct after the ravages of war and political unrest. So Indian producers should look at these markets.

Considering the present sluggish scenario in steel, would there be enough demand created to warrant that 300 mt by 2025 ?It may not arithmetically be 300 mt. But unless we have a bigger goal, it is difficult to achieve something. So even if not 300 mt, at

‘Indian steel industry may pick up from end-2017’

InTERvIEw

Survival and sustainability seem to be the buzzword for the steel industry, at present. Short-term measures like the

minimum import price (MIP) are welcome but cannot sustain the steel industry for a long period. Rather, it needs to innovate so as to be cost-effective and operationally efficient. While an upturn can be expected in another 12-18 months, Subrata Mitra, Joint Managing Director, M N Dastur & Co, warns that producers should

not miss the bus this time and be geared up to feed the market as soon as it picks up. In a freewheeling interview to Madhumita Mookerji of Steel Insights, he also feels North Africa, ASEAN and the Middle East should be the markets that will create demand.

Steel majors should focus on operational improvement, energy economy and environmental sustenance

We feel there will be ups and downs till 2017. But, end of 2017

should, hopefully, see a pick-up in demand. But, at this time, steel producers should not miss the bus, because once demand

picks up and they are not able to supply, then a down-cycle will set

in again

Today, iron ore is selling at a lower price only because the Brazilian ore companies’ planning went haywire. They thought, globally, there would

be a certain amount of production and they had drafted their mining plans accordingly .

44 Steel Insights, June 2016

Excerpts:

How do you see the industrial lubricants market emerging in India?The Indian lubricant industry caters to the needs of the automotive and industrial segments, both constituted in almost equal proportions. The global lubricants industry covers a volume of 37 million tons and total annual demand for lubricants in the South East Asian market is estimated at 2.2 million tons.

The estimated size of the domestic industry is more than `100 billion. Unlike

other major countries, where demand for lubricants has witnessed stagnation, the Indian lubricants market has posed a 5-7 percent growth.

Industrial lubricants comprise the bigger market segment with more than 54 percent of the total market share. Power generation, chemicals, railways, marine, metals and other manufacturing are the leading end-user industries, accounting for nearly 80 percent of the industrial lubricants consumption.

According to a study by Kline & Company, “Opportunities in Lubricants:

InTERvIEw

ExxonMobil sees scope for synthetic oil-based lubricants in future

The industrial sector accounts for about half of all the electricity consumed around the world – and for about 30

percent of primary energy use. Over the next three decades, demand for energy used by industries is expected to go up by 50 percent. With the global iron and steel industry getting increasingly competitive in terms of productivity, demands on an equipment’s speed and efficiency are unprecedentedly high,

placing higher load on the lubrication systems. This sector, with one of the harshest industrial environments, needs a lubrication system that delivers best performance in terms of high temperatures and heavy load protection for keeping machinery such as casters, rolling mills and cranes functioning 24x7. ExxonMobil’s application-specific expertise and close working relationships with the world’s leading OEMs enable it to provide customers with products that have global consistency in formulation and performance, help maximise productivity and boost energy efficiency, allowing for business sustainability, Imtiaz Ahmed, Mobil SHC Brand Manager- Asia Pacific, ExxonMobil Lubricants Private Ltd, tells Tamajit Pain of Steel Insights. The company offers a full range of lubricants for applications across passenger and commercial vehicles, industrial, marine and aviation businesses, catering to both the B2C & B2B sectors.

India Market Analysis”, the overall lubricant consumption in India is projected to grow at an annual rate of 2.5 percent over the next 5 years. The consumer segment is expected to grow the fastest at a projected 6.6 percent per year, while the commercial and industrial lubricant segments will exhibit a moderate growth of 2.3 and 1.6 percent per year, respectively.

The study further states that industrial lubricants is the largest market segment in India, accounting for over 54 percent of the total market. Power generation, chemicals, automotive and other manufacturing, railways, marine, and metals are the leading end-use industries, together accounting for nearly 80 percent of the industrial lubricant consumption.

How do you plan to increase your foothold in the steel sector, which is a growing market in India? The steel sector in India contributes nearly 2 percent of the country’s gross domestic product (GDP) and employs over 600,000 people. India produced 7.07 million tons (mt) of steel in January 2015, reporting the fourth highest production level globally which was 1.7 percent higher than the country’s steel production in the same month last year. With the sector growing at such a fast pace, the opportunity that it provides us with is immense.

The iron and steel industry, with one of the harshest industrial environments, needs a lubrication system that delivers best performance in terms of high temperatures and heavy load protection for keeping machinery such as casters, rolling mills and cranes functioning 24x7. With the global iron and steel industry getting more competitive in terms of productivity, demands on an equipment’s speed and efficiency have become unprecedentedly high, thus placing higher load on the lubrication systems as well as on the lubricant used. For nearly 40 years, ExxonMobil has been an industry leader in developing high-performance synthetic lubricants, offering innovations beyond the capabilities of conventional lubricants. Mobil synthetic lubricants are formulated for distinct advantages compared with mineral oils in severe conditions of the iron and steel industry which include:

66 Steel Insights, June 2016

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