Speaking to CNBC-TV18 Seshagiri Rao, Joint MD & Group CFO at JSW Steel said that the company will see an impact due to higher coking coal prices in the coming quarter.
Coking coal prices have more than doubled from August 2016.
Domestic steel costs are at an 18 percent discount as compared to international prices
He expects domestic steel prices to go up in the first quarter of calendar year 2017.
Expect further pressure on EBITDA per tonne from the Rs 7,000/ tonne level in the second quarter of FY16, he said.
Below is the verbatim transcript of Seshagiri Rao's interview to Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Sonia: We just heard from JSPL that domestic steel prices have gone up on an average by Rs 2,500-3,000 recently and that is also because raw material prices have gone up quite a bit. So I wanted to start by asking you what the average coking coal cost have been for you in this quarter compared to USD 100 that it was in the previous quarter?
A: It has been more than doubled if you look at the coking coal prices they started going up starting from August and September. The impact of which started coming in but the full impact of higher coking coal prices, which are peaked over USD 300 that impact also is yet to come in the next quarter. So partially it has come in this quarter. It is more than double related to last quarter.
Sonia: What impact would that have on your EBITDA per tonne in Q3 and Q4?
A: There will be definitely a squeeze on margins because the full impact of increase in cost could not be passed on fully in the market partially it has been done. Internationally, the prices went up quite substantially. That is why if I compare today, the landed cost of import of steel vis-a-vis the domestic prices that we have discount of almost close to 18 percent. Therefore, we are not able to pass it on fully in this quarter to reduce the pressure on margin.
Latha: What will be the situation in early 2017? We are getting comments from the Chinese President that they are open to growth of less than 6.5 percent, Donald Trump is expected to give infrastructure a push perhaps. Net-net how will steel prices -- exactly these landed prices which have been the bane of the Indian sector behave in the first six months of 2017?
A: Even in the year 2016, everybody expected demand will fall dramatically. So that will lead to a global oversupply of steel therefore steel prices would fall but on the contrary has happened, the stimulus package which has been introduced in China kept the steel demand constant that has reduced the pressure and contrary to what everybody expected, the steel prices more than doubled, which we have seen around USD 270 lowest price, it went up above USD 500 still it is prevailing.
My view is at least in the next quarter, that is Q1 of 2017, there is still some steam in the steel prices to go up because even though coking coal prices got corrected to around USD 250 from its peak of USD 315-320, the full impact of coking coal and iron ore prices have still not passed on to the consumer. So the steel companies will still have to incur the incremental cost increases. Therefore, some steam is left in the steel prices. I expect steel prices to go up in Q1. After that there may be some correction in the steel prices in line with the raw material prices.
Sonia: Until you pass on that cost, how much do you think it could impact your EBITDA per tonne? In the previous quarter it was somewhere around Rs 7,000, even if we look at 10 percent cut, are we looking at Rs 6,000-6,200 per tonne in the coming quarters?
A: Q1 of this financial year we were at Rs 9,000, which fell to Rs 7,000 in Q2. So, there is definitely a pressure. I don’t want to give the number before announcement of our results so we don’t give EBITDA number but we focus on volumes, we have given a 15 million tonne sales guidance, we stick to that guidance. So we will be doing 15 million tonne of sales in this year but as regards to EBITDA, there is a pressure in this quarter and we expect some recovery in the next quarter.
Latha: Recovery in the EBITDA per tonne?
Latha: Demonetisation -- how have the past five-six weeks panned out, how much of demand has it hurt or margins?
A: November and December -- we have to look at it a little differently. In the month of November, retail sales were impacted quite severely. So, we have three segments of sales, one is OEMs, another is exports, third is retail. So OEM and exports were not affected in the month of November but retail we have seen a severe impact.
So, overall sales impact was around 10 percent in the month of November whereas in the month of December even though a slight recovery in the retail sales, we are seeing a pushback in the case of OEMs, their supply chains again pushback is coming to them, which is getting passed on to us. So impact we are seeing in December but a slight recovery in retail over November is what we have seen in the month of December but we expect in the next quarter because of remonetisation, which is happening should bring normalcy gradually in the next quarter.
Sonia: So if you have to meet your 15 million tonne target, the ask rate for the second half is slightly higher than the first half. In the first half you did about 7.2 which means that you will have to do 7.8 in the second half and given that retail sales were impacted in December, do you think you can meet that second half target?
A: Yes, that is why we have been giving guidance that 15 million tonne we will stick because wherever there is an impact, we will try to make it up in Q4.
Latha: That has factored in the slowdown?
Sonia: Are you looking at any kind of inorganic growth at this point in time, any of the steel plants either domestically or globally that has caught your attention to buy a stake in or to put any money into?
A: We have been looking at inorganic growth both in India and also overseas. So a lot of proposals we have been evaluating, we are open to that.
Latha: I think your name is mentioned practically in every steel company that is in distress, will we hear anything in FY17?
A: That is very difficult because JSW Steel is very cautious as and when acquisitions were done even though our name is associated with a several names but very few have happened in the past. Therefore, I don’t want to give a wrong guidance to the market, to the viewers that something will be announced soon. So we have been evaluating and unless we are very satisfied about the target and the returns to the shareholders, we do not rush.
Latha: But 2017 could be that year because you have waited that long, these discussions have been swirling since 2016 when the first SDR rules were announced by Reserve Bank of India (RBI)?
A: That is true but it is taking time.
Sonia: Would you be interested in acquiring any kind of stake or lending any kind of assistance to JSPL in the near future?
A: As we have already announced in the case of JSW Energy, there is already an agreement signed with them to take a stake in their power plant of 1,000 megawatt. That is in progress.
Sonia: And from the steel business?
A: I don’t think so.