MC Interview| Will be watchful of steel supplies getting diverted to India as demand remains strong: JSW Steel CEO

The second quarter saw very strong volume growth, primarily driven by the Indian domestic demand. We saw total consolidated sales of 6.34 million tonne; the domestic demand was a big enabler. We saw a growth of 18 percent in domestic sales in the quarter on a QoQ (quarter-on-quarter ) basis. Our absolute EBITDA numbers have gone up by about 12 percent QoQ to Rs 7,886 crores, driven by a very strong domestic demand in infrastructure, manufacturing, renewable energy, consumption and services. In spite of challenges in the global economic environment, India has continued to outperform. We see that during the medium term, India will continue to do well. During this nation-building phase, India will require a lot of steel and the steel demand will, therefore, structurally reflect a good GDP growth. We see 8-10 percent growth in steel demand in India in the medium term.

Coking coal prices increased in the second quarter but were still lower than the highs seen earlier in the year. In Q2FY24, lower fuel costs benefitted the company’s bottomline. What’s the fuel cost outlook? What’s your strategy for securing supplies?

Coking coal prices have gone up substantially in the last 1.5-2 months. The cost of the coking coal will partly flow into Q3 and Q4. However, we do not think that this is sustainable and it will moderate; some moderation has been seen in the last few days. Also, the benefit of the price increases which had taken place in August, September and part of October will flow into October-December and would offset some of the cost increase. Therefore, going forward, I feel that aided by improved volumes during Q3, JSW Steel will continue to do well. As far as sourcing of coal is concerned, we continue to look at various sources internationally. We are also developing the domestic mines, which we had won in the last auction in India, and that would get us some more clean coking coal in the next 1.5 years or so. We will continue to look for strategic assets, either in terms of a stake or alliance, as long as the quality of coking coal meets the objective and as long as the commercial value makes sense.

How is the price outlook for the rest of the year? Do you see some margin pressure coming in in the third and fourth quarter of the fiscal?

Demand in H1 has been extremely strong. India demand was 14.8 percent; that has been the main driver. Therefore, the prices in the country also went up, inventories were restocked. I think the momentum of the demand will continue in H2. Seasonally, this is a better half and we should see better numbers. Our expansion in BPSL (Bhushan Power & Steel Ltd), which is now coming on stream in the second half, will benefit the volumes.

We had some maintenance shutdowns in our existing operations in Q2, which are all behind us. So we should see better capacity utilisation in our existing operations as well; volumes will be better in Q3 and Q4. In absolute numbers, we will certainly be better in terms of volume. It's very difficult to forecast the price or the cost of coking coal. That's why I gave you the input that while coking coal prices have gone up and it will reflect in the cost, it's impact will be offset to some extent by the price increase, which has taken place in August, September and part October.

What are you doing to secure coking coal supplies? Are you looking at any assets closely?

We are engaging with various asset holders. We are continuing to look at good quality coking coal, which can be blended at our works. But that, I think, we continue to scan the environment. We haven't yet found anything which is fitting well and near closure. If there is anything which comes up closer to time, we will look at it and announce.

Is there a change in plan with respect to Canada’s Teck Resources arm given the deterioration in relations between India-Canada? (Context: The company plans to buy a 20-40 percent stake in Elk Valley Resources Ltd, a metallurgical coal unit of Teck Resources.)

Our focus has not changed. I think the India-Canada situation will improve over time. We will continue to engage in discussions with the company and if there is value and merit in the asset, we will look at it.

Is there a timeline for concluding this deal?

It is difficult to say because the conclusion will have to happen on both sides. We will know this over time.

The geopolitical situation is becoming more unpredictable with disruptions like the Israel-Hamas war. What impact do steelmakers expect on global markets? 

If you look at the raw material prices today, the way the prices have moved in the last few months, it should reflect in the steel prices. So we would probably see some improvement in international steel prices going into the next two quarters. We also expect that the coking coal prices will moderate because of the kind of price increase, of more than $100 in the last one-and-a-half months, is high. I think some moderation has taken place in the last few days. Having said that, it's difficult to forecast the price. But I would say that the demand in the country in the second half, as I mentioned, will continue to be seasonally strong, and that would support a stable pricing environment.

JSW Steel has been focussing on the high margin value-added and specialised steel products. How is the price and demand outlook in that segment?

Our value-added and special products sales have gone up; in this quarter, we have done 62 percent of value-added and special products. It has grown by 15 percent to 3.8 million tonne plus. We continue to focus and develop clients in this category. Various developments with various clients are going on and R&D activities are going on. We will continue to focus on this area and that is yielding good results. We are expanding our capacities. We are making sure that our content in terms of the product mix has more value-added products which are required in the country and the world. Whether it's automotive or energy transition, or lower carbon emission steels, we continue to focus on those.

What sectors are driving steel demand in India? 

Infrastructure is a very big demand driver, the government push on infrastructure has especially been very productive. Manufacturing and energy transition segments have done well. We are seeing improvement in railways, in terms of rolling stocks and rail network. Warehousing, data centres playing into the demand. So we are seeing very broad-based demand across sectors. We see that infrastructure, manufacturing and consumption will be very strong demand drivers.

The government’s push on infrastructure has been a big driver. Are you anticipating a slowdown as we get into election mode?

In the medium term, an election year will not matter very much. The Government of India is very focused on the development of the nation. Therefore, infrastructure building is a very key factor of that development. The overall infrastructure pipeline, which we have seen frontloading in the first half, will continue to hold strong in the remaining few months as well.

You have said the company is looking at brownfield expansion and acquisitions. Reports suggest you are looking at some of the mines and assets of Vedanta that are on the block. Please share some perspective on that as well.

While we will  continue to have various options as we grow, our focus will remain to grow our brownfield capacities. As we had indicated earlier, our brownfield capacity expansion in Vijayanagar is on track and by March 2024, the 5 million tonne expansion should get completed. The BPSL (Bhushan Power and Steel Ltd) expansion is also on track and that should add 1.5 million tonne by the end of March 2024. We expect some de-bottlenecking at Vijayanagar again to play out in 2025 that would add capacities and take it to 37 million tonne in India and 38.5 million tonne globally. That would make JSW Steel one of the largest players globally as well. Going forward, we have opportunities of brownfield expansion in the existing locations; our focus would be to do that first because we have no specific investment cost in these areas. We will look at assets if they make strategic and economic sense, including any which may come up during this period of time.

The company had announced a capex of Rs 20,000 crore for FY24, how do we stand on that?

We have spent close to Rs 8,000 crores in the first half of this year and we continue to be focusing on this capex because all our projects, which are critical in nature, will continue to be monitored so that they are delivered on time. We will be in the range of Rs 20,000 crore for this year. Going forward, we will allocate capex prudently in a way that is value accretive for the shareholders. The efficiency of our executions has always been strong and that will deliver better shareholder value as we go forward.

How is your joint venture (JV) with JFE Steel in Japan coming along? 

The project right now is in various stages of looking at equipment and very much on track. We expect to complete that project in two and a half to three years’ time. As you know, CRGO (cold-rolled, grain-oriented) is a very closely guarded technology. We have the technology and we are looking at making a joint venture in India since there is very good demand. As we get more and more renewable energy and energy consumption, we will see CRGO demand increasing. Therefore, this capacity is a beginning and we expect to increase the capacity of CRGO in the coming few years.

Where do we stand with respect to debt levels and how is it likely to be for the rest of the year? 

We have closed the quarter with a debt of a little more than Rs 69,000 crores, primarily on the merger of JSW Ispat Special Products (formerly Monnet Ispat & Energy). However, our ratio of net debt-to-EBITDA has improved. We are at 2.52 by the close of this quarter as against 3.14 in the last quarter. We expect that while we allocate capital for growth, we will continue to be near this net debt-to-EBITDA ratio of 2.5. Our capex will be mainly driven by internal accruals. We will continue to refinance some of our debts and balance it out.

With the calendar year nearing its end and half of the financial year over, what do you see as the biggest challenge for the steel industry and how is JSW Steel planning to deal with it?

I think we are well placed. We are lucky to be in a country where the economic momentum is quite strong. Going forward into this decade, we see the economic momentum continuing; steel demand will also be very strong. I think structurally we see that the GDP to steel elasticity will be very high. During the nation building phase in Japan and China, we have seen an elasticity of 1.5. And if you look at the last two years, we have seen a very strong elasticity of steel demand to GDP of 1.8 and also in the last year. We feel that during this decade, steel demand will be good. Even if we take an 8-10 percent growth, we will continue to add 10 to 12 million tonne of demand every year incrementally. And by the end of this decade, that would add close to 100 million tonne of steel demand. So, we would need to increase capacities in India and that's exactly what we are focusing on. Our main strength is also an area where we need to be concerned about because the global situation, as we discussed, is a little challenging. We should be watchful of any trade flows, which are getting diverted to India because of a good demand in India and weaker demand elsewhere. We are vulnerable to some imports. So we will continue to watch and track that.

With carbon taxes on steel kicking in soon, are you having sleepless nights?

We are preparing quite well. The Government of India is preparing the blueprint quite well; there are 13 task forces that have been formed for improvement on various parameters. Our energy transition is driven by the Renewable Purchase Obligation and energy efficiencies are improving. Hydrogen Mission is another focus area. We already have the scheme of Perform, Achieve and Trade in place. Carbon capture and its use will be another area which we will continue to look at in India. We are taking equally good initiatives on our side. Circularity in terms of using more scrap and gasses and any generation of waste within the system. We will continue to look at disruptive technologies including hydrogen.

Every country has a different pathway. So we need to collaborate more to define and measure carbon. I think the measurement metrics will need to be defined by the world as a whole and we need to define the scope and boundaries better as we go into this regime of carbon taxes and carbon border management.