This appears to be the third supercycle for commodities: Seshagiri Rao
JSW Steel, which reported 18% quarterly profit growth, expects demand for raw materials to remain strong for an extended period as the global economy recovers from the pandemic. Seshagiri Rao, deputy general manager and chief financial officer of JSW Steel group, said this may well be the third supercycle in the raw materials sector, led by demand from China and the United States. Edited excerpts from an interview:
Do you see the metals rally as sustainable?
Right now the demand is very strong. China, which consumes 55% of the total steel, is experiencing very strong demand, and at the same time, it wants to reduce its production, import more steel and export less and put restrictions on the steel exported in removing incentives. So in the future, China will disrupt the whole dynamics of the steel industry by exporting more steel may not happen. In addition, across the world, a large number of fiscal stimuli are distributed, resulting in infrastructure spending. The demand for steel from this point of view is therefore strong. Supply, however, is not increasing at the same rate. The reason is that each country wants to strengthen ESG control (environmental, social and governance). Thus, ESG control reduces production in different countries. All of this put together, demand is growing, but supply is not keeping pace. Therefore, steel prices, only on the speculative side, will be corrected. But I don’t think fundamentally a big correction will happen.
Would you call it a supercycle for raw materials?
Every three or four years the industry sees this kind of cycle. It evolves with the growth of the GDP in various countries. So this cyclicality remains in the steel sector. But supercycles, we saw it between 1970-86 and 2000-14. This appears to be the third supercycle.
When do you see supply catching up with demand?
In the history of India, there has been a lot of consolidation. It’s good for the industry. Previously, at the slightest downturn, the weaker players in the industry would sell steel at any price in the market to manage cash flow. This situation is no longer there and it is a good environment in which we operate. The slowdown began in 2015 when China started dumping steel around the world, which pushed steel prices down. Since then, we had not seen any investment in the steel sector in India or in the world. Thus, the total installed capacity in India has remained at the level of 130-140 million tonnes per year (MTPA). To date, the steel capacity is 142 million tonnes; of this amount, we will produce 103 million in 2020, with the industry operating at around 80% of its capacity. Thus, the capacity available to meet demand is around 10 to 15 MT maximum. The new capacity will come when we commission a 5 MTPA plant this year in Dolvi, Maharashtra. NMDC is also commissioning a 3 MTPA plant.
You announced a capex of ₹25,000 crore. How are you going to finance this?
We will invest ₹15,000 crore to increase the 5 MTPA capacity of our Vijayanagar plant, thereby improving mining capacities and efficiency to a capex of ₹3450 crore and are in the process of setting up a color coated 0.12 MTPA downstream facility at J&K for ₹100 crore. For this exercise, we will spend ₹6.385 crore. Of which we will spend ₹1,700 crore for the maintenance of the factories, with the remainder going to be invested in other projects in the factory. Of ₹25000 crore, we will spend ₹18,540 crore this year, which will be funded by internal accruals of ₹10500 crore and ₹7,800 crore per debt. In March 2021, our debt to Ebitda (earnings before interest, taxes, depreciation and amortization) is 2.61: 1 and debt to equity is 1.14: 1. We have indicated that we will not increase our debt to Ebidta in excess of 2.75: 1 and our debt to equity in excess of 1.75: 1. These are our financial policies in which we manage our policy of organic and inorganic growth, deleveraging and dividend.
Have your operations abroad benefited from the rise in the metals cycle?
We have made substantial investments in our steel plants abroad to reorganize our activities. We have invested $ 30 million in Mingo Junction and $ 150 million in the Bay Town plant, with another investment of $ 150 million in the pipeline. The redesign allowed us to have constant production at 1.5 MTPA Mingo Junction where we were unable to operate at full capacity. We have put the Mingo Junction plant back into service and could reduce our losses of ₹1,200 crore to ₹800 crore this year. This year, however, we have guided the production of 1 MT. The redesign helps us increase capacity utilization, which will help us sell more volumes and make more money. At the same time, the US markets look good and the prices are very attractive.
Iron ore exports are on the rise. What impact do you see on steel prices?
There are a lot of problems on the iron ore side. Last year iron ore production fell by almost 44 MT – to 202 MT in FY21 from 246 MT in FY20. At the same time, India exported 60 tons last year compared to 37 tons in FY20. Thus, there are 23 tons of additional exports from India with an overall deficit of 67 to 70 tons compared to the availability of iron ore the previous year. Thus, the steel industry suffered from the lack of iron ore and prices increased by ₹2560 per tonne from April 2021 to ₹6,560 now.
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