JSW Steel has incurred a capital expenditure of ₹2,300 crore in the June quarter despite slipping into the red for the first time in four years. Domestic demand has hit a new low and leading economists are in consensus in predicting the worst is yet to come. BusinessLine spoke to Seshagiri Rao, Joint Managing Director, JSW Steel, on the way forward. Excerpts:
What led to the unexpected loss?
We had exported 57 per cent of production, largely in semis, such as billets, blooms and slabs where margins are low. As it is, realisation from exports is lesser than in domestic sales. Exports accounted for 13 per cent of sales in the June quarter against 2-4 per cent in general. Going forward, this will not be the situation. Domestic demand has started recovering. Generally, JSW produces four million tonnes and sells 3.8 mt per quarter. Last quarter, this was down by about 1 mt as the number of working days was also less due to the lockdown.
How do you see the concern on the second wave of Covid-19?
We have contained the impact of Covid-19 at our Vijayanagar plant and operations are normal. In order to clamp down on the spread of Covid-19, we have accommodated 13,000 employees, including temporary labourers, within our colony. We are not allowing anybody to go out or come in. We have created separate zones for loading and unloading. The virus spread is completely controlled.
What would be the impact of labour shortage?
We have no labour issue at Vijayanagar but it is a concern at Dolvi in Maharashtra. We had 15,000 people working on expansion at Dolvi; after Covid-19 it came down to 3,000. Now 4,900 people are working at the project site. People coming back are quarantined for 14 days before being employed. We hope to get all the labourers by this quarter end.
How do you see demand in the coming quarter?
The impact of Covid-19 varies in different places. Rural regions are less affected, compared to urban areas. The western and southern states are more affected compared to the North. We see better recovery in tier-II and III cities, especially on the retail side. Metro projects and construction in urban areas are getting labourers back and are restarting the projects. People in smaller cities are starting projects as they are not dependent on migrant labourers. We are seeing better demand for our roofing products and from solar products, besides drums and barrels, cylinders, packaging and tinplate.
How did you spend about ₹2,300 crore in the June quarter despite incurring a loss?
Of this, we spent ₹800 crore for iron-ore mines in Odisha and Karnataka. The balance was invested in downstream expansion projects. Our investment in mining will be complete with another ₹100 crore in Karnataka. We have also paid ₹1,200 crore as premium for iron-ore in advance. As and when we extract iron ore, the premium will be adjusted from the premium paid.
Will it be cheaper to buy iron ore from the open market, given the high premium committed in Odisha?
On the face, it may look so. We had committed 105 per cent premium and incur a mining cost. But we will bring down the cost by setting up our own logistics facilities. We spend 150 per cent more to transport the iron ore to the factory. We can optimise this cost if we own the mine. We will save 10 per cent by negotiating better prices with the railways. JSW Infrastructure has set up an 18 mt iron ore terminal at Paradip Port. This will further bring down the cost. If the mine is owned by others, then this optimisation is not possible because there is no surety on supply.
Is there a possibility to set up a pellet plant near the mine?
We have a pellet plant in Dolvi and Sinter plant at Salem. So, it does not make sense to reinvest in the same facilities in Odisha. It will make sense for Essar Steel (now ArcelorMittal) to put up a pellet plant at Bailadila iron ore mine in Odisha as they transport it all the way to Vaizag and Paradip for converting into pellets. Again, they have to carry the pellets to Hazira. The idea then made sense to transport one mt of pellets after conversion, than carrying 1.6 mt of iron ore, but for some reason it did not work well for them.
Is bank funding a issue for the sector?
The flow has definitely improved. But credit to the steel industry is still lagging. About 10 top rated companies are getting funding, but there 800 small steel companies which are still deprived of funding. Banks have become very cautious. So, there is a lot of scrutiny before lending. Overall exposure to the sector has not increased.
Is the high cost of funds a concern?
Yes. Despite RBI cutting the cost of funds, banks are not passing it on to industry, largely due to high NPAs. All the avenues of credit for the industry from mutual funds and NBFCs are shut. Insurance companies are very selective. Getting credit has become increasingly difficult. Now, the only source for borrowing are banks and they have become more conservative due to their past experience.
Will the merger of banks help in getting credit for steel companies?
The NPAs of banks will increase further due to Covid-19. Once the moratorium expires on September 1, we will see which are the companies that are not able to meet their obligations. Market estimates on expected NPAs range between ₹2-lakh crore to ₹10-lakh crore. Based on this NPA number, banks may need additional capital of $15 billion to $58 billion. The government will not be able to make this kind of capital infusion. There is talk of privatisation of banks, but I am not sure whether that will solve the problem.