“Domestic demand for steel at 7.5 per cent has lifted volumes. I don't expect a situation that could spark a collapse in prices,” says Mr Seshagiri Rao, Joint MD and group CFO, JSW Steel.

JSW Steel is poised to leapfrog to the top in the list of India's steel producers (by nameplate capacity), with 3.2 million tonnes of capacity being added to its Vijaynagar plant and the rapidly improving Ispat operations. We chat with the JMD and group CFO of JSW Steel, Mr Seshagiri Rao.

What are the major challenges the Indian Steel Industry faces?

Steel consumption is driven by infrastructure, construction and real estate spending. Even though flat steel consumption (used in automobiles and consumer durables) is expected to remain quite robust in India, these three sectors will be the major drivers of growth. The government needs to look at policy support to increase spending in the three segments. Logistical constraints in terms of rail-lines or roads for the shipment of ore and steel are among the bottlenecks the government also needs to address.

What are JSW Steel's expansion plans?

By the end of this month we expect to commission an additional 3.2 million tonnes of steel production capacity at the Vijaynagar plant. We have applied for permits to expand capacity to 16 million tonnes (from the current 10 million) and have the land for the same. We have also acquired 4,500 acres for a 10-million tonne steel plant at West Bengal, for which we hope to secure funding and commence by the end of the current fiscal.  

How are your turnaround plans for Ispat progressing?

We are looking to reduce our borrowing costs at Ispat. Getting the power plants, coke oven battery and pellet plants up and running are our focus and are the areas where the sustainable profitability comes from. So these facilities are to be setup and we are working on it.

How are JSW's mine expansion plans abroad coming along?

We have completed three export shipments at Chile of 63.5 per cent of beneficiated iron ore fines concentrate. We are hoping to export a million tonnes of ore this fiscal and want ramp it up to 5 million tonnes over a period of three years. We are also awaiting approvals for our coking coal mines in the US and hope too start actual mining in July. We expect to have access to seven mines and have planned to produce half a million tonnes this year and plan to ramp it up to 3 million tonnes over a period of three years.

How do you see domestic demand for steel evolving over the next few years?

The explosion in demand for steel over the last decade has been driven largely by flat steel demand. Now the other side of the story is picking up. Infrastructure spending not only from the government side but also from the private industry point of view is set to expand, with a lot of projects announced, even though there is some sluggishness this year. We expect it to pick up and give a push to demand for infrastructure, housing and other sectors.

How have you dealt with volatility in input costs, especially spikes such as those in coking-coal prices?

For imported coking coal particularly we have 1.5-2 months of inventory either at a port or at the site. Once the raw materials become indexed or are priced on monthly basis, in majority of the cases it is very difficult for the steel producer to take a risk unless there is a hedging mechanism. Steel producers more or less are talking about very short term price firmness instead of committing the price for a longer period of time.

How do you see pricing power in the steel sector at the moment?

Over the last three years, the steel price cycle has become increasingly short and is down to about 3-6 months. Today due to supply side constraints, pricing power is on the resource producer side (mining segment). How long the equation will remain this way is very hard to tell, but demand situation is a little sluggish globally.

It is a challenging environment but nobody is talking about domestic growth rates of less than 7.5-8 per cent which translates into healthy domestic volumes. I don't think the consumption story will collapse, even though there is caution on the investment cycle. But this 7.5 per cent is driven by agriculture and consumption. As long as these two are quite strong, I don't expect a situation that could spark a collapse in prices.

(This article was published on June 15, 2011)
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