Positive mkt mood yet to affect economy: JSW Steel

Seshagiri Rao, joint MD and group CFO, JSW Steel explains to CNBC-TV18 that the turn in market sentiment has not resulted in any significant improvement of the economic environment on the ground.

Below is an edited transcript of the interview on CNBC-TV18. Q: Though the Q2 GDP at 5.3 percent was a negative and extremely tepid number, the stock markets seem to smell some kind of an improvement. The core sector data for October is at 6.5 percent and today the PMI of above-53 for November isn’t too bad. Do you think that the worst is over?
A: Though the sentiment appears to be reviving, there is no significant improvement at the ground-level. In October steel consumption went down as low as 2.2 percent and the results announced by the auto sector are not very robust and some companies have shown a declining trend. Overall, there isn’t any sizeable or perceptible improvement on the ground, but the sentiment is better than it was in November. Q: Do you think the NIB may not, perhaps, make a big difference?
A: In my view, the NIB's objective will remove key bottlenecks and will serve the purpose of implementation of projects by PSUs. I hope the NIB will also aid the private sector in completion of projects. Q: One of the key factors which stood out in the GDP data was the gross fixed capital formation which came in or recovered at around 4 percent for Q2 FY13. Where do you think the economy is at in the capex cycle at this point in time?
A: The construction and the real estate sector, though it is has dipped in the urban areas,  is quite robust in the rural and semi-urban areas. The trend is similar in the steel industry too with the demand for the TMT bars from these sectors in the rural and semi-urban areas being at adequate levels. So there is a huge constraint on liquidity in the marketplace which in turn is constraining demand and causing high interest rates. These are the two constraints that require to be tackled, otherwise the performance in the semi-urban and rural areas remains quite encouraging. Q: What exactly is JSW Steel's liquidity requirement at this point because you do plan to raise around USD 600 million from overseas by March 2013? Can you just list down your fund-raising plans and how the funds would be the utilised?
A: No, we are not conducting any major exercise to raise funds for our projects. We are engaged in re-financing to reduce the interest cost. So, the USD 600 million is being contemplated under the RBI window where it permitted raising of ECB to re-finance the rupee loans to achieve the overall reduction in cost.
We have approached the Reserve Bank of India for approval and once the approval is granted, we would like to raise money to repay or prepay the rupee loans in order to reduce the overall interest cost. Apart from this objective, we are not planning to raise any finance for any of our projects. Q: How much percentage of interest will it save in the coming quarters?
A: We are paying an average rupee interest rate of around 12 percent in India. Whereas it is possible to raise at 4-4.5 percent over London Inter-Bank Offer Rate(LIBOR) in the international market as far as the foreign currency is concerned. We have a natural hedge in terms of economic exposures on the entire sales revenue, so we will be able save a differential of almost 7 percent. Q: We understand that steel makers especially in South India are approaching the government because of the severe iron ore shortage in Karnataka. Are you part of any such representation? What is the extent of the mismatch of demand and supply of iron ore and at what capacity are your plants running?
A: The huge amount of shortage of iron ore not only restricted to South India, it is across India. Iron ore production is coming down because of the iron-ore mining ban and lower production by existing mining companies. That is the ironical problem for the steel sector in India where in spite of having large iron ore reserves, iron ore has to be imported.
This trend may continue if not corrected immediately that is why industry body the Karnataka Iron Steel Manufacturers Association (KISMA) recently met the steel ministry and demanded immediate steps to correct the situation particularly where NMDC has been prohibited by the Supreme Court to mine 12 million tonne per annum. The PSU is unable to sell whatever it produces due to pricing at unreasonable levels, in the market place. Q: Do you expect the situation to improve?
A: Today's steel industry requires 30 million tonne per annum of iron ore from Karnataka and against this NMDC has never produced more than 8 million tonne per annum. There are 10-11 category-A mines which are ready to operate subject to certain clearances and of these, four mines have already started. In all, the ten mines together can supply another 5 million tonne.
So, 8 million tonnne from NMDC and 5 million from the category-A mines add up to a total visible supply of 13 million tonne as against the total requirement of 30 million tonne.
So in phases, mining has restarted and iron ore has begun to come into the market. But the bottlenecks such as NMDC producing upto 8 million tonne, appropriate pricing and opening up of the balance category-A mines remain.