Big consolidation in domestic steel ind unlikely; global demand to rise: JSW Steel

Talking about stressed assets in the sector, he does not expect a big consolidation in the domestic steel industry but is unclear about how the NPAs will be resolved.

Below is the verbatim transcript of the interview.

Sonia: Do you agree that global demand has picked up because even when we spoke with Aruna Sharma, the Steel Secretary a while back, she indicated that in this fiscal there is an expectation that demand could go up by about 4-5 percent. What is your own view?

A: As far as global situation is concerned, in this year the global steel demand is expected to go up by 1.3 percent. So that is approximately 20-21 million tonne of the global steel demand growth. 2017 is characterised by the growth in demand for steel is by recovery in construction, infrastructure and real estate. Those are the sectors and machinery. Whereas 2016 it was majorly driven by automobiles and appliances. So there is a shift where investment cycle is coming back even globally because of recovery in the metals, mining and oil and gas.
So, therefore it is good for steel sector globally.

However, what is to be really noted is that the global steel supply also remains at very elevated levels. If I see 2017 first four months of the year, the growth in production is over 5 percent. However, what is comforting in this scenario is China where the stimulus packages which they have given inspite of their exports coming down at an average of around 85 million tonne in this year, they produced more than last year over 4.5 percent. Even then the exports are not going up, that means the steel demand within China is not flat as everybody anticipated. So, that is more than what everybody expected. So, that is comforting in the overall scenario of global steel production going up.

Steel demand remains at around 20 million tonne. I think here now we have to look at India, last year Indian steel demand grew by 2.6 percent so in this year definitely we are seeing economic activity in the solar, metro, and also in the affordable housing. These are the sectors where we are seeing a reasonable demand coming back. The piping sector for oil and gas pipelines, plus water pipelines, this demand itself we expect incrementally over 4 million tonne in this year. So, therefore Indian steel demand in the FY18, we expect in the region of around 5 percent over 2.6 percent of last year.

Neelkanth: Demand side I fully agree what you said. On the supply side within India something very interesting and I must say unexpected happened about two weeks back where a lot of companies were forced into the IBC, the Insolvency and Bankruptcy Code proceedings, and five out of the 12 are reasonably sized steel companies and with an aggregate capacity of about more than 20 million tonne because eventually these will be because if they are not resolved which I would say looks unlikely, would they come up for bidding and therefore do you see consolidation happening in the Indian industry and do you see yourself participating in that?

A: Today if these companies which are under stress, still they are operating, they are operating under hold on operations by the banking system. So, the working capital for them is being provided either by the banks or out of the cash flows of the companies. So, even assuming that it is referred to IBC, I expect the prepacked restructuring which is being worked out by the banks will get approved.

I am not sure that these companies could be available either for bidding by others so that aspect I think we have to watch. So, I don’t expect a big consolidation even assuming that these will be referred to IBC. The feedback which we are getting from the banking system, it is all prepacked restructuring which would go through this system.

Anuj: Just to extend that point, we are looking at some of the companies like say Bhushan Steel, Monnet Ispat, Electrosteel, I am sure you may not want to take names, but I am sure you would have looked at the assets. Do you think that they will fetch good price right now?

A: Today the way I think one has to look at, we have announced our brownfield expansion at our Dolvi, 5 million tonne we are implementing at Rs 15,000 crore. For 18 million tonne of our steel capacity, our total gross block is around Rs 63,000 crore. So, we are able to implement the projects at around Rs 3,000-3,500 crore per million tonne. So, therefore what is very important either in the acquisition or in the brownfield or greenfield is that how much capital we are investing per million tonne. So when there is volatility and highly capital intensive industry like steel, it is the most important factor that the capital allocation per million tonne is very important factor.

So, today when the EBITDA levels for non-integrated player where iron ore and coal is to be bought in the market, if the EBITDA is in the level of around Rs 6,000-7,000 per tonne, anything above these prices, even after restructuring of these companies, it will be very difficult to service the interest and repayment. So, that has to be kept in mind taking into account the EBITDA levels historically and then we have to look at either by JSW or anybody else, any investor or existing managements to service the outstanding debt of these companies.

Neelkanth: On domestic prices, one of the interesting things that has happened in the last two months is that with domestic prices now shifting below minimum import price (MIP), so it seems that we have actually a domestic oversupply. So, how does the situation evolve from here and as you were saying there is a pickup in global demand. In the coming months do you see exports coming back up again and global prices reviving again which will then relieve the pressure from domestic supply and if that does not happen, then how does the Indian industry again respond to this?

A: I think the way the global prices are to be looked at, the Free on Board (FOB) prices within the China is USD 440 today. If those steel has to come into India, the cost and freight (C&F) will be USD 465-470. At the same time, USA, the prices are USD 660 for HR coil. If I see Europe, it is USD 550. So these are the prices we have to look at when we say about domestic prices.

The MIP is not in operation at all today; MIP has gone. What is there today is anti-dumping and the safeguard duties. There the prices for HR coil is USD 489 including duties. So, if we look at from that point of view, domestic prices are in-line with what the landed cost of imports from China. There is no lower prices within India. However, the only point to which we have to understand if you look at flat and long, long prices are under more pressure because the infrastructure, construction, real estate in India is yet to pick up whereas the flat are more or less stable as far as Indian markets are concerned.

The domestic prices in my view are comparable with the landed cost of imports. We are seeing today in China, the prices slightly looking up for the last one or two days so I think there is a bottom already seen in the international prices particularly in China.

Latha: Just to complete the point you were making to Anuj about the proceedings in the bankruptcy court, going by your math you are saying that it is difficult for you to bid, is it likely that the same promoters are likely to come back with probably a bit of loans recast as cumulative preference shares or something like that, is that the more likely scenario to play out?

A: It is our understanding under IBC when the insolvency professional is appointed and the creditors committee is constituted, creditors committee along with resolution professional or insolvency professional as you may call, they will work out a package. That package if 75 percent of the lenders approve and then it goes to National Company Law Tribunal (NCLT) and NCLT approval comes in, so, that is the process I understand.

During this process, is there any possibility of any investor or interested party can submit a bid. If that bid -- how it will be evaluated, what is the criteria for evaluation of such bids, I am not sure about it, whether any criteria is stipulated, either by RBI or banking system, if any new investor or any interested party submits a proposal during this process, so therefore it is unclear today how this process will unfold. So, pending that I feel that only prepackaged restructuring will get through in this process.

Latha: In the intervening period when an insolvency professional handles it and probably the company is run with lesser intervention from the promoters, is there a chance that output will fall in Essar Steel and Bhushan Steel and therefore are companies like you likely to benefit? In the next two to three quarters should we see you cornering more market and therefore doing better in terms of revenues?

A: I will not see the production falling even in this process. These companies will continue to operate as I have been mentioning to you in the last two and half three years’ time when there is stress. Still there is under hold on operations, companies continue to operate. So, we are not worried about competition, that way even in the last year JSW Steel has shown 26 percent growth in production and 22 percent in sales. So, we continue to do well in spite of competition. However, because of this process, I don’t expect either production coming down in the market place.

Once this case is referred to the NCLT under IBC process, then who will operate during this period, as you all know that once a case is referred, the existing board will get suspended. So during that period whether existing management will continue to operate under hold on operations as it is being done today or anything else will be worked out is not clear at all. However, my understanding today is existing managements will continue to operate pending resolution within 180 days or 270 days as the case may be.