ICRA RESEARCH SERVICES

INDIAN STEEL INDUSTRY

Weak demand and a shortage of iron ore continue to pose challenges

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Shankhadeep Mukherjee
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March 2013

Steel Feature March 2013

Table of Contents
Executive Summary ....................................................................................................................................................................................................3
Background ...............................................................................................................................................................................................................5
Demand Supply Scenario ............................................................................................................................................................................................6
Raw Material Scenario ...............................................................................................................................................................................................9
Effect on Indian Sponge Iron Industry ....................................................................................................................................................................... 15
Company Section ..................................................................................................................................................................................................... 17
JSW Steel Limited (JSW)................................................................................................................................................................................................................................ 18
Steel Authority of India Limited (SAIL) .......................................................................................................................................................................................................... 21
Tata Steel Limited (TSL) ................................................................................................................................................................................................................................ 24
Jindal Steel & Power Limited (JSPL) .............................................................................................................................................................................................................. 27
Bhushan Steel Limited (BSL) ......................................................................................................................................................................................................................... 30
NMDC Limited (NMDC)................................................................................................................................................................................................................................. 33
Monnet Ispat & Energy Limited (MIEL) ........................................................................................................................................................................................................ 36
Jayaswal Neco Industries Limited (JNIL) ....................................................................................................................................................................................................... 39
Kalyani Steels Limited (KSL) .......................................................................................................................................................................................................................... 42
Tata Sponge Iron Limited (TSIL) .................................................................................................................................................................................................................... 45
Indian Metals & Ferro Alloys Limited (IMFA)................................................................................................................................................................................................ 48

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Executive Summary
Continued weakness in domestic demand in Q3FY 13: Persistent slowdown in demand from the key end-user industries kept the consumption growth muted at 3.9%
during the period Apr-Dec 2012, reflecting a sharp deterioration from the 6.9% level recorded during the period Apr-Aug 2012. Upsurge in imports, which fed the
apparent consumption growth during the period Apr-Aug 2012, also witnessed some moderation during the next three months due to reduced differential between
international and domestic steel prices. Consequently, overall growth in imports stood at 15.5% in the period Apr-Dec 2012 as against 38.6% recorded during the period
Apr-Aug 2012. The finished steel production growth, which stood at 4.2% during the period Apr-Aug 2012, remained subdued in the next two months and picked up
some pace in November 2012 to register an overall production growth of 3.3% in the period Apr-Dec 2012. Given the expenditure control exercised by the Government
of India in the final quarter, ICRA believes that the overall steel consumption growth in FY 13 is expected to remain somewhat lower than the 5.5% growth levels
recorded in FY 12, which itself was significantly lower than 9.9% and 13.3% growth levels seen in FY 11 and FY 10 respectively. Over the medium to long term, ICRA also
expects that the demand growth for long steel products is likely to march ahead of the same for flat steel products, given the increasing focus on large infrastructure
investments by the Government and expected underperformance by the key consuming sectors of flat steel in the near to medium term, namely automobiles and
capital goods.
Pressure on steel price levels in the first half of FY 13 due to a surge in imports; small price hikes in recent months reflect international trends and cost pressures:
Prices of domestic hot rolled coil (HRC) products, where pricing is largely on an import parity basis, followed a declining trend in the first quarter of FY 13, due to
cheaper imports from Korea and Japan. A pickup in demand post monsoon led to the gradual improvement in prices during October 2012, but the prices started sliding
again in November and a large part of December due to weak domestic demand conditions. On the other hand, Chinese HRC prices dropped significantly in the first half
of FY 13 due to a sluggish demand, and have been strengthening thereafter due to an uptick in consumption. The approval for US$ 157 billion towards spending on
infrastructure projects by the Chinese Government in September 2012 also supported the rise in HRC prices. Although some of the Indian steel mills have hiked steel
prices in December 2012, January and March 2013 citing cost pressures, there are doubts over the sustenance of such hikes, especially in the flat product segment, due
to continued weakness in consumption pattern, and also because of the expected commissioning of significant steel capacity in the near to medium term in the country.
Restriction on mining activity in the major iron ore producing states continues to limit domestic supply of iron ore: Clampdown on illegal mining in Goa and Karnataka
by the Government of India and the Supreme Court respectively, and quantitative restrictions imposed by the Odisha Government have significantly curtailed the
amount of iron ore being produced in the country. Although the Supreme Court had allowed NMDC Limited to mine up to 1 million tonne (mt) per month and gave
permission to Category A mines to resume mining in September 2012, production in the state of Karnataka has been significantly lower than what has been approved.
Given that approved limits at present are below the estimated demand in the state, ICRA expects the steelmakers in Karnataka to operate at low utilization levels in the
near term unless they are able to procure iron ore from other sources in a cost effective manner. A series of orders issued by the State Government and the inquiry by
Justice Shah Commission also led to the stoppage of mining at a number of iron ore mines in Odisha in the third quarter of FY 13. Since iron ore produced in the state is
largely used in domestic steel mills and by sponge iron players, the reduction in iron ore output from Odisha is likely to significantly impact the availability for domestic
players, especially in a scenario when iron ore mining at Karnataka has also not gathered momentum. This has also led to an increase in demand for alternative sources
like pellets, which can replace iron ore lumps in the steel making process. Additionally, some large players also resorted to import of iron ore lumps and pellets.
However, with a sharp rise in iron ore prices by almost 70% after September 2012, cost of imported ore now is significantly higher than that of domestic ore, which may
render imports economically unviable.
The domestic sponge iron manufacturers are hit by the tightness in raw material availability in the country: A tightness in the availability of non-coking coal has
remained a challenge for Indian sponge iron players for quite some time now. In addition, the states of Karnataka and Odisha, which account for about 37% of the total
installed capacity of sponge iron in India, have been adversely affected by iron ore mining restrictions, as a result of which sponge iron production in these states has
declined considerably in the last few months. As per ICRAs estimates, the mining restrictions in Odisha itself are likely to lead to a production loss of over 10% of the
countrys overall sponge iron production in FY 12. In addition to limited availability, Karnataka based sponge iron players have also been affected by the high prices and

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Steel Feature March 2013

inferior quality of iron ore being offered in e-auctions. With falling realisations since September 2012 due to weak demand from secondary steel manufacturers, the
profitability of sponge iron producers continues to remain under stress, notwithstanding some softening of domestic iron ore prices since Q3FY 13.
Weaker sales realisations and rising capital charges eat into steel makers profits: In Q3FY13, demand slowdown from key consuming industries affected sales
volumes and also led to a softening in overall sales realisations of Indian steel producers. On the other hand, input costs remained at high levels, notwithstanding a
moderation in international coking coal prices, leading to a reduction in the operating profitability of most players. Besides lower operating margins, high capital charges
too have dented their net margins in Q3FY13. Going forward, ICRA expects the pressure on the profitability of steel players to continue in the near term, despite the
price increase effected by various players in recent months, because of cost pressures and continuing weakness in demand.
Impact of the Budget proposals: The Union Budget for 2013-14 did not have any major proposal that would significantly impact the domestic steel industry directly.
However, the thrust given on the housing and construction sectors is a positive from a demand perspective. On the other hand, the increase in freight rates proposed in
the Railway Budget is likely to increase operating costs substantially, since the steel business is highly material intensive in nature, and freight costs account for a
significant proportion of the overall costs of a steel manufacturer.

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Steel Feature March 2013

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