The Indian steel industry is picking up. As exports open up, the second half of FY23 will be much better in terms of margins and volumes, Seshagiri Rao M.V.S., joint managing director and group chief financial officer, JSW Steel, said in an interview. He also discussed the impact of export duty on the steel industry, the global and domestic steel demand and pricing scenario, raw material prices, rising interest rates and the recessionary outlook. Edited Excerpts:
What is your view on the continuation of export duty, despite moderation in steel prices in India?
Along with the steel industry association, we made a representation to the government that steel prices have corrected by more than 20% in the domestic market, and the export duty is taking away the benefit of India leveraging the export opportunities, and the government should look at lifting the export duties. What we understand from the government is that it is totally a temporary measure and will not continue for long. We strongly feel that it should be removed and it cannot sustain for a long time.
How is both global and Indian steel demand panning out?
India’s growth story is quite intact. Whatever weakness was seen in the last quarter is in apparent consumption and not in real steel consumption. Destocking has happened at the user level, and there has been a buying slowed down. From this quarter, restocking will start. Already the enquiries have increased.
At the global level, the Chinese economy is getting more stimulated, and in its June quarter, steel consumption grew 13% over Q1. Demand has also improved in China, which consumes the majority of world commodities. We need to watch for Europe, which is slowing down, and energy prices are at unsustainable levels. In the US, there will be a growth slowdown. The global steel industry is responding with moderation in production. The June global production numbers also indicate a decline in production over May. China has also reduced production by 6 MT in June over May. With all this, the supply-demand balance will come.
Is there more downside to international and domestic steel prices?
China steel prices have normalised. They have fallen by about 20% to $632 a tonne for cold-rolled coils FOB. A lot of the stimulus is happening in China, which is why their domestic demand has grown while they are moderating production, too. That’s why we see stability in international prices. I don’t see a correction further down. And when iron ore is in the range of $95-100 a tonne and coking coal is in the range of $200-230 a tonne, then steel prices will not go below this level. If I take $632 a tonne and add freight, duty and other costs, our domestic prices are equal to the landed cost from China.
When should we expect some respite on the margins front?
In Q1, our margins were severely impacted to ₹9600 a tonne. One reason was cost pressure, and the second was one-off items, adjusted for which the margins were at ₹13,900. The impact of high-cost inventory will continue for two months of this quarter. The lower-cost raw material will benefit from September. So, even in the ongoing quarter, I do not expect a very big turnaround in margins. But we are very optimistic from October when the lower cost of raw materials will get reflected, and prices will stabilise. Exports should open up, and the second half will be much better in terms of margins and volumes. The second half always sees better demand momentum. Currently, we are seeing improved demand relative to in May and June.
Will rising interest rates impact steel demand?
We cannot say that it will not have an impact on auto loans, consumer durables loans and housing loans. But comparing it with the slump in Q1, there will be an improvement, notwithstanding higher interest rates.
India is still in a much better position. Our inflation is coming down, and the base effect will play in the following quarters. So, I don’t see very high-interest rates.
Since capex has been cut by ₹5,000 crore, which expansion projects will be curtailed?
We have not cut growth capex and sustenance capex. We have brought down special projects and discretionary capex. Our long-term plan of attaining 10 MT capacity expansion (7.5MT at Vijaynagar and 2.5 at Bhushan steel and power) remains intact.