BL Interview. Cut in global output will limit fall in steel prices: Seshagiri Rao of JSW Steel

Domestic demand has been buoyant, registering the highest-ever quarterly sales last quarter. It was up 47 per cent over the last year. In the first half, the demand grew 11.5 per cent, even though exports fell by 37 per cent in the previous quarter. Whatever we could not export, we have managed to sell them in the domestic market despite achieving extra production. We have reduced inventory by 4.35 lakh tonnes. The inventory on September-end was 1.86 million tonne and another 4 lakh tonne will be reduced this half-year. As of March-end, the stock was 1.35 mt. After the Dolvi expansion, the locations and units we sell has gone up. So inventory can be up to 1.5 mt. So we want to reduce the balance of 3.5-4 lakh tonne this half year. The normal inventory will be about 1.3-1.4 mt.

Yes, there could be some economic slowdown when RBI increases the rates, thereby reducing overall inflation. Government expenditure drives the economy in addition to machinery, automobile, consumer goods and packaging. There is a good demand from wind mill projects, with 140 tonnes of steel consumed for every MW of wind power produced. Retail sales went up 80 per cent sequentially. The government has recently increased the MSP prices on the back of a good monsoon. This should boost rural demand and keep the economy going, notwithstanding the hike in interest rates. Higher interest rates and inflation are not reflected in the volume’s overall momentum.

Credit growth. People are willing to borrow at the prevailing rates. Moreover, India is in a much better position in the global economy. If any corporate wants to raise money, an arbitrage available in the Indian market. This will drive the demand. When inflation is 8-9 per cent, and the interest rate is four per cent in the US, it is a negative interest of 4 per cent. Whereas in India, the interest rate is at 7 per cent with inflation around 7 per cent, making the real interest rate zero. There is no reason why our rupee should depreciate but weaken because of outflows from the securities market. FIIs are selling in the capital market not because they do not see any future here but to meet the redemption pressure of their investors.

There is no pressure on prices globally; it is stable with huge adjustments on the supply side. Many companies have declared shutdowns. Global steel production has come down by 68 mt in the first eight months of this year. Of this, 42 mt is from China and 26 mt from the rest of the world. When the global demand slows down, supply-side adjustments happens, with no pressure to sell the volumes. India is the bright spot among the global market, where the steel demand is growing at 7-8 per cent.

Similarly, in the Middle East, there is a growth of 3.5-4 per cent, and in ASEAN (Indonesia, Thailand, Vietnam, Philippines and Vietnam) the steel demand is growing at 6 per cent. There are opportunities for India to export if duties are removed. Traditionally, exporting countries such as Japan and Korea suffer due to high costs. In Korea, Posco has to cut production due to a major cyclone. About 29 per cent of steel companies in China are close to bankruptcy on low prices. So companies cannot continue if steel prices fall further. I believe the downside in steel prices is limited from here on.

With such a huge cut in steel production, it will remain range bound. China has reduced its output from 96 mt to 82-85 mt and its iron ore imports are lower than last year as its domestic production is increasing. China imported more coking coal than last year, but the supply was from Russia rather than Australia. over the previous eight months, China imported 10 mt of coking coal from Russia compared to 4 mt last year. Since the coking coal supply is controlled by few players globally it will not come down significantly. Coking coal prices had gone from $200 a tonne to $300 a tonne due to weather conditions in Australia. Following a 1.5 mt cut in coking coal supply from Canada due to a major accident, there was a sudden spike in prices, but it has come down ever since. Demand has slowed down due to the higher number of blast furnaces being shut down. Iron ore prices will remain range-bound between $85-$100 a tonne. It goes up when China announce a stimulus and falls after a few days as reality strikes.