Steel demand remained subdued in Jan-June period: JSPL

Though steel demand remained subdued in the first half of current calendar year, it still outperformed global demand, said Jindal Steel and Power’s MD and CEO Ravi Uppal in an interview to CNBC-TV18.

Uppal further said that the firm currently has 2,500 megawatt of power and its plant load factors are at around 95 percent levels.

While expressing concern over state electricity boards (SEBs) precarious financial health, Uppal said power tariffs have been falling and are currently hovering at Rs 3.20/3.59/unir due to their (SEBs) inability to pay.

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Below is the edited transcript of his interview:

Q: Are you all facing a very similar situation, order pipeline falling 40 percent, various customers asking for renegotiation and causing working capital stress?

A: We are basically doing two distinct businesses. One of them is steel and second is power.

As far as steel is concerned, the performance has been quite satisfactory although the market conditions are not very favourable. For the last six-nine months, the demand for steel has remained fairly subdued. This is not only India specific, it is quite global.

As a matter of fact, in India the total demand for steel last year grew by 3 percent whereas globally the demand was negative. India and China were the only two countries where the demand growth was positive.

We believe that there is an upward movement now in United States (US) and China both and from next quarter, we should see some upward trend in the demand for steel. India definitely has a great demand propensity for steel. It is just that our infrastructure projects haven’t taken off and the manufacturing sector performance also leaves much to be desired. The demand for steel is very much linked to the growth in infrastructure and manufacturing industry. So once this starts looking up, I am sure that there will be complete recovery in demand for steel as well.

Q: What about the power space? We understand what is happening on the steel side of the business but JSPL also gets a significant portion from the power side, over there how is the situation and have things worsened?

A: Power sector is intriguing in some ways. On one hand we keep talking about the shortages that we have in power, on the other hand we have some pockets within the country where we are generating surplus power but there is not enough transmission capacity. That is number one.

Number two is that the electricity board’s financial condition is quite precarious and therefore they are preferring to do the load shedding than to buy the power and as you know that 85 percent of the power in this country is being sold through the state utilities, so unless the state utilities there has this restored, the subject of their buying power from the private operators will remain a bit of a concern.

The third thing that we need to address is that the southern part of the country is short of power. Many industrial states within Tamil Nadu and Andhra Pradesh are going without power upto 10-12 hours a day. In total there is a shortage of about 8,000 megawatt (MW). In some parts of India like Chhattisgarh, Gujarat and Orissa, we have surplus power but since we don’t have a sufficient transmission corridor, we are not able to transmit this power into the southern part of the country. I believe that there are some projects, which are under execution and they should be coming along latest by end of this year or early of next year. That should partly mitigate the issue and also create possibility for surplus states to export power.

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Q: Can you size up your own position for us? What is your power generation capacity at this point in time and how much is getting utilized?

A: We have about right now on total 2,500 megawatt (MW) and our capacity utilisation right now is quite good. It is more than 95 percent PLF on which we are running the power plants but the concern remains that the tariffs that we are getting on power not as good as they should be and they are constantly falling. Especially in the power exchange, the rates have been running low that is not because we have power all over the country, there are acute shortages, but electricity boards are refusing to buy.

Q: How much of your power is being sold through power purchase agreements (PPAs) and how much of it is merchant sales and in the merchant sales what is the average unit you are realizing in the quarter just gone by April-June quarter?

A: We are selling most of our power through the short-term and the medium-term PPAs and the bilateral agreements. When it comes to the average rate, their average rate right now is coming to about between Rs 3.20 and Rs 3.30.

Q: We have seen some progress on the power distribution companies (discoms) signing up with banks for a bailout package, Tamil Nadu is one of them, is Tamil Nadu one of your clients? Have you noticed any improvement in the buying of power by Tamil Nadu?

A: Yes, we are one of the suppliers to the state of Tamil Nadu. We have medium-term agreement with Tamil Nadu and we have been getting our payments in time and their signing up the agreements with banks is obviously a positive development.

Q: What is positive for you, receivables have fallen? You are getting payments faster?

A: So far we have been getting the payments well in time. So it is not an issue for us at this moment.

Q: Which are the discoms where you see a problem of receivables, what is the percentage of your receivables problem in terms of days or amount?

A: It will not be fair to single out any specific utility by name but there are utilities in the northern part of the country where the payment is still an issue. So there are delays in payments, sometimes the delay can be between three and four months.

Q: What about fuel supply-coal supply, is that up to your requirements because the major problem with JSPL was also that you were named in the show-cause notices for coal block allocation?

A: Our transfer operating is based on coal, we don’t have gas based projects so therefore we are not affected by the gas kind of problems.

As far as coal is concerned, so far we have our captive blocks. We are able to sort of meet our requirements for power generation out of them. Then we have a new capacity which is coming up and for which we have the coal linkage which is on the way.

As far as the coal blocks you mentioned about, our name has been mentioned, we have been doing the development of all our coal blocks to the best of our abilities and we have done better than anyone. You would appreciate that the speed at which we can move in the mining of from coal blocks very much depends on the external factors as well that we need some clearances like environment clearances etc which is not in our hands and some of them with the state authorities.

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Q: Can you draw up your trajectory of expansion, you said that expansions are on the anvil, have you placed orders for them, what is the timetable? Can you lay out?

A: Right now we have an additional capacity to the tune of 2,000 MW which is under execution. We are planning to commission all the four units during the current financial year. Minimum, we would commission about 1,800 MW and the fortune might spill into Q1 of next year. This basically means our total power generation capacity will go up to 5,000 MW. Some of the units we have commissioned in the record time. One of the units we would be commissioning in less than 30 months.

Q: No problem of finding buyers for that power or finding coal to run those plants?

A: Two of the units, we have a coal linkage. We are in the process of signing the fuel supply agreement (FSA). By the time, the units come up we should have the coal linked up. I must tell you that the coal that we are going to get from them as per the new fuel policy is going to get only 65 percent of our requirements. Rest of the coal we will have to source either through imports or buy through auction. As far as imports are concerned, either we will buy imported through Coal India or we will buy import on our own. So the balance amount we will have to be tied up which we are working on.

Q: That brings us to the problem of margins because imported coal will be slightly more expensive and incremental coal even from domestic sources will be expensive. So will you therefore be able to find buyers from discoms who as you say are still in dubious financial health?

A: Right now, we are bidding for long-term PPAs because of the fuel supply we are getting against the long-term PPAs. In the long-term PPAs, they are building in that if the coal is going to be imported, that portion is going to be covered against additional cost for the coal which will be compensated as per the agreement.

Q: The unit cost will go up to Rs 4?

A: I don’t know whether you know that we keep talking about the coal mines where production is not enough but the sadness of the situation is that we have huge piles of coal which are lying in the pitheads. The evacuation of coal is also a big issue which is a very seldom mention in the media. India is producing, we can produce still more. One of the things about the fuel supply agreement is talking about how we can distribute the shortages among various producers. What we need to do is to unshackle the sector and see that we give away the coal block to private sector and fix a timeline.

Q: Will you be able to sell 1,800 MW of power by end of FY14, will there be buyers because your costs are bound to be higher?

A: Country still had a huge shortage of power. People keep talking about a shortage of 12-14 percent. I very strongly defy that statement from anyone. I think the shortage of power in this country is a lot more than what is officially stated. So therefore, there is a huge need for power. The question is how do you sell the power to the user? If we sell through the SEBs, we have an issue but if you are able to sell it through privately on the transmission lines or through the users in the neightbouhrhood then I don’t see any problem in selling the power.

We will continue to work in a way that our power cost of production is kept at the bear minimum. If we are not able to sell on a bilateral basis and we have to sell it through the PPA route, we would like to make sure that our cost of import is definitely covered as per the PPA.

Q: Last quarter the power revenues were down close to about 12 percent, so given the constraints that you highlighted with respect to rakes and -transmission lines etc, can we expect another quarter or another few quarters of power revenues declining?

A: It depends on two factors. One is how many units we are able to sell and how many units we have been able to produce. Fortunately, for our units we have been able to maintain very high PLF and we have to able to dispatch but the rates have certainly been under pressure.

Therefore, they have had first impact on total revenue realization that we have had on power. But I do feel that with more transmission lines coming whereby we have a wider option of selling to the customers, we should be able to realize better rates. So in the quarters and the months to come, I definitely feel that the average net realisation of rate should be better than we have seen in the last two-three quarters.

Q: Can you quantify that, how much better?

A: It is difficult to quantify because there are so many variables we continue to impinge on this but I am quite positive that the rates will look up because some of the lines are getting commissioned where we will be able to deliver the power to the northern states as well as to some of the southern states.

Q: Have the promoters considered hiking stake in JSPL or have they already hiked stake and is a buyback perhaps under consideration?

A: I am not in a position to make any statement on that. We continue to look at various ways whereby we can enhance the value of our shareholders. That is a part of our effort all the time but specifically to your question, I am not in a position to answer at this point of time.