Plan to expand capacity by 3 million tonne ahead: JSW Steel

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Seshagiri Rao, Joint MD and Group CFO of JSW Steel , in an interview with CNBC-TV18's Latha Venkatesh and Sonia Shenoy, gave his opinion on the recently concluded budget and road ahead for the company.

Below is the verbatim transcript of the interview. Also watch the accompanying videos.

Q: Positive news came from the budget that the export duty on ore being hiked. Does that act to your margins at all in this quarter?

A: This was the demand from the steel sector as value addition has to be done within the country. It is a very positive move in the budget. It has been increased from 5% to 20% on the fines. There won't be any hike in the iron ore prices which were expected in the domestic market. The availability may increase in the domestic market for the sector.

Q: What about the overall sectors? Raw material prices are increasing a lot and in response to that steel makers are not hiking prices as much. Is there a particular reason for that? Do you believe that perhaps it's because demand is not picking up that the hike in prices is not coming in tandem with the raw material hike?

A: In the last two months, steel prices have gone up and production also went up in the international markets. Production of 119 million tonne is the numbers of January. Particularly, in the case of US and Europe, the production went up quite substantially.

Right now, the steel sector is in the phase of consolidation, particularly the pricing scenario. We are seeing some correction in the international markets. Taking into account the raw material price increases particularly in coking coal, the prices have gone up by 46% from next quarter. Iron ore prices have gone up by 15% to 20%. We don't expect the steel prices to come down.

From the demand side particularly in India, the demand for first 11 months of the financial year has gone up by 10.8%, where as the production has gone up by 8%. Demand drivers continue to be robust, as far as the domestic markets are concerned.

Internationally, there is increased production from the advance economies, where the demand hasn't kept pace with them. In my view, the correction in production will happen in the next few months.

There will be a correction in the overall production and demand dynamics. The prices are not expected to correct too much because of the very high raw material cost pressures.

Q: How much do you think the prices will go up by? What kind of a price increase will the steel makers like you initiate?

A: If the increases in the raw materials take place from April 1, USD 225 of the coking coal price for Q4 is expected to go up in the range of USD 300 to 330. We are seeing a USD 100 increase in the coking coal price, which will translate to USD 80 per tonne of steel. Similarly, in the case of iron ore which will be up by 15-20%, it will translate again to USD 30-40 increase per tonne of steel.

There is a USD 100-120 increase in the cost of production from April, for the steel sector internationally. This will be the impact for a company which is not integrated. Taking that into account, the steel prices are not expected to come down. It has an upward bias.

Q: How much of USD 120 can be passed on without impacting demand?

A: In Japan, the quoting is almost close to USD 1000 per tonne from the current levels of USD 780-800. This can be passed on fully, or else, it would not be possible for the steel sector to continue production at the current pace.

Q: If you are unable, is it possible that the demand resistance from the buyers could lead to some trimming in terms of the raw material prices as well?

A: The demand may not be sustainable if the steel prices go up to USD 900-1000 per tonne. In this event, the marginal cost producers will reduce the production leading to lower demand for raw materials.

Raw material prices will come down and the steel prices will also get corrected. The margins on a sustainable basis would not get impacted. Due to that, there can be a lag impact.

Q: Could the next two quarters be tough for steel makers especially if they are not integrated?

A: If they are not integrated, then they are not efficient. The story is different with JSW Steel.

Q: What are you margins for the last reported quarter? What do you expect to do in this and the next quarter, the margin percentage?

A: We have had around 17% EBITDA margin for the last quarter. It will be better this quarter. In the next quarter, a lot of positive things are happening in JSW Steel. Our beneficiation plant will get fully commissioned. Expanding of our capacity by 3 million tonne will also be commissioned in April.

Our sinter plant is commissioned. There will be a huge amount of fuel efficiency and procurement cost of iron ore will comes down drastically. Taking that into account, a significant portion of cost increases will happen from April1.

It will get neutralised to a large extent on account of efficiencies which are coming into the company. The margins will improve from the current levels.

Q: You pointed out that the margins may see a slight improvement in the next quarter, but that is on expected lines because of the quarterly contracts signed by the steel company. What about the subsequent quarters? Do you see the margins dip significantly below 17% level or do you think that could be a cushion on the down side for margins?

A: For JSW specifically, the margins are not expected to fall from the current levels because of efficiencies coming in a significant manner in the next financial year. Captive coke is increasing for us from 80-100% and the cost of procurement or iron ore is coming down due to beneficiation plant.

We are getting our captive power of 100% fully. These are some of the efficiencies which are coming into the company, due to which the margins are not expected to dip in the next financial year from the current levels.