MC Interview | Global steel prices have bottomed out, but manufacturers to benefit from softer raw material costs: Jayant Acharya, JSW Steel

Global steel production is expected to moderate in the second half of 2023, which will support prices, which have bottomed out, JSW Steel Joint Managing Director and Chief Executive Officer Jayant Acharya told Moneycontrol in an interview. This, coupled with softer raw material prices, will benefit steelmakers in the coming months.

Acharya expects India's demand to remain robust.

The net profit of Sajjan Jindal-led JSW Steel  nearly tripled to Rs 2,248 crore in the first quarter of 2023-24,making its shares hit a 52-week high on the bourses after the results were announced on July 21.

Talking exclusively to Moneycontrol, Acharya said that by the end of the fiscal year, JSW Steel’s debt will reduce from Rs 66,797 crore as on end-June despite its expansion plans, as the company will finance a significant part of it from internal accruals. He also spoke about the company’s interest in NMDC (National Mineral Development Corporation), which is being divested by the government, about other acquisition opportunities, and more.

While challenges remain globally, declining inflation, and lower commodity and energy prices have supported recovery in some parts of the world. India's economic momentum continues to be strong, driven by both business and consumer sentiment. We see both manufacturing and services doing well. We also see a positive in the supply chain realignment taking place globally, which is favouring India.

If you look at steel, the industry has seen a slight moderation in production globally over the first five months of this calendar year. While China has gone up 1.6 percent, and the rest of the world has declined by 4.6 percent. But India has done quite well.

In the first quarter, India’s demand  has grown 10 percent to 30.3 million tonnes. Going ahead, we expect growth to remain  in the range of 8-9 percent, which would take the overall production to 130 million tonnes for the year.

Thus, India's demand will remain robust. China has had subdued demand but elevated production,  that has resulted in greater exports, which is a cause for concern. However, China has indicated that they would like to limit the production to 2022 levels, which means that there would be a moderation in the second half of this year. That should be a positive for the global steel industry.

Regarding raw materials, coking coal prices have moderated from the February and March highs. We expect the benefit of lower coking coal prices flowing into the second quarter.

Iron ore prices have not corrected to the extent expected, and we expect some softening in these prices in the coming months. Steel prices have largely bottomed out. The channel destocking that was underway has by and large been completed. Therefore, we should see better buying in the coming quarter.

Edited excerpts:

Your bottomline has grown almost three times in the first quarter from a year ago, but there is a sequential decline. What is the way ahead?

JSW Steel has performed quite well in quarter one. Our EBITDA margin is 16.7 percent, and we expect that the lower raw material costs will flow into Q2. In Q2, we should see improved volumes and cost benefits, which would help improve the current steel prices.

There are some concerns over inflationary pressures in the Indian market given factors like the floods in parts of the country. What is JSW's outlook on price, production, and demand in this market?

The concern is food inflation, but while the monsoon has been uneven, it has improved over the last few weeks. As far as the manufacturing space and the price of steel is concerned, I would say that steel prices in India have bottomed out, as it has globally. Therefore, we expect range-bound pricing going forward,  supported by lower raw material prices. That would be a positive. Demand is positive and as we head into the remaining nine months, we are quite hopeful of being able to meet the guidance we have given for both production and sales.

What is the sales guidance? 

It is 25 million tons.

Are you confident you will achieve it?

Yes. We added an inventory of about 3,00,000-odd tons in Q1, primarily because of the cyclone towards the end of June, which impacted our exports. It also impacted sales in western India, where the impact of the cyclone was felt. We should be able to liquidate this inventory in the coming months.

In CY (calendar year) 2023, JSW Steel bagged six iron ore and two coking coal mines in government auctions. How will this play out in terms of timelines and investments on the mines?

Strategically, we would like to secure our raw material supplies, and iron ore is our most important raw material. Therefore, we continue to look for assets which make strategic sense. Of the six mines acquired recently, we expect to operationalise four soon.

The other two, which are in Maharashtra, would require some exploration, but efforts are on to operationalise them as early as possible.

What would be the total investments on these mines?

I don't have the investment numbers off the cuff. Besides the iron ore mines, we are also investing in the coking coal mines, which are giving us a million tonnes of clean coking coal.

When you say that four of the iron ore mines will be operational soon, how soon is that?

We hope to operationalise two mines in Karnataka in less than a year, and have the one in Goa up and running by the middle of 2025.

You have a joint venture (JV) with JFE Steel in Japan. How is that coming along?

We have entered into a JV for CRGO (cold-rolled, grain-oriented) steel, which is high-end electrical steel that is technology intensive. We will be putting up a unit in India in collaboration with JFE, with an initial capacity of about 62,000 tonnes per annum,  and scale up.

This will be the first such facility here, and we see good demand for it. We continue to collaborate with JFE in various areas, for benchmarking and operations.

Are you looking at more such JVs or acquisitions? 

We continue to look for strategic assets. NMDC has opened their data room and we are looking at the numbers. In the medium term, we see a very strong opportunity to build capacity in brownfield projects. We have three sites today in JSW Steel where we can add brownfield capacity at a very low investment, and that would be our priority.

So NMDC is definitely on your radar…

We will not be able to comment on NMDC till we have the full data. But as I said, our brownfield ventures continue to be our focus in Vijaynagar, Dolvi and Jharsuguda.

On the one hand, you plan to invest in new mines and expansion. On the other, your net debt has gone up to Rs 66,797 crore in the June quarter, from Rs 59,345 crore in the quarter prior. How do you plan to navigate this?

Our net debt to EBITDA ratio has improved to 3.14 in Q1 FY 23-24 (from 3.2 in Q4 FY22-23). The debt has gone up In absolute numbers because of the working capital investment this quarter. Also, we could not monetise some of the inventory as export shipments were hit by the cyclone, as were sales in the western region.

Further, we have cut back on some of the higher cost coking coal, and that has released some working capital. We expect that these factors will to some extent reward us in the coming quarters. We hope  to keep our debt within manageable levels and be able to carry out the expansions planned. The expansion and the capex will be met mostly through internal accruals, along with some debt.

So you don't expect a significant increase in debt levels in the current fiscal?

There would be additional debt of about Rs. 3,000 crore due to the merger of Monnet Ispat and Energy with JSW Steel in Q2. However, we hope to liquidate some of the working capital (inventory) which has gone into the business in Q1, thereby reducing the debt, which will come down in the coming quarters  in spite of expanding our capacity by 9 million tonnes.

Decarbonisation is a big theme globally; carbon taxes will kick in soon. How prepared are you for it? 

We are serious about decarbonisation and are taking it up in phases. In the current first phase, we are taking up initiatives that are doable in the medium term, by 2030. We would shift to renewable energy as much as possible.  We already have 1,000 megawatts of renewable energy under construction in Vijaynagar, and some in Dolvi and Salem. Around 225 megawatts is already operational, and the balance would be completed this year. We will add further renewable capacity.

The second phase of decarbonisation will include the use of hydrogen, and carbon capture.

We will also be improving energy efficiencies in our steel plants, as well as process efficiencies, which includes technologies to upgrade the iron ore, use of lesser resources, and a circular economy.

You sound rather upbeat about opportunities in India. What makes you so bullish?

We see huge economic potential  in India spurred  by growing infrastructure. Its manufacturing is scaling up and the healthy bank balance sheets will enable more capex. Private consumption in India is set to improve, which will improve the employment and the per capita income. That would translate into economic growth and therefore greater steel consumption, whether it's automobiles, appliances, housing, or infra. You require steel for everything. Our capacities are in line to meet the demand, so we do not need to rely on imported steel for India.