Investment in infrastructure by various governments and energy transition are driving demand for steel, says Seshagiri Rao
Seshagiri Rao, joint managing director and group chief financial officer, JSW Steel
Steel manufacturer JSW Steel recorded its highest quarterly net profit at Rs 5,900 crore in the first quarter of the financial year on the back of higher realisations from export and domestic markets. In an interview, Seshagiri Rao, joint managing director and group chief financial officer, JSW Steel, tells Ishita Ayan Dutt that the industry is going through a structural shift and demand is very strong globally. Post second Covid wave, there have signs of good recovery in June, he says. Edited excerpts:
JSW recorded its highest quarterly profit on lower volumes, what was the increase in realisations quarter-on-quarter?
The realisation, quarter-on-quarter, on a blended basis went up by 19 per cent. But it was much higher in global markets; in the US, it went up by 30 per cent, in Europe, by 40 per cent. In China, domestic prices went up by 4 per cent, but export FOB price, went up by 14 per cent. So across the world, prices went up.
In line with that Indian prices also went up, but it is still at a discount of 17 per cent to landed cost of imports.
How sustainable is the price rally?
In the first six months of this calendar year, global crude steel production went up by 126 million tonnes. Out of this, China produced 59 million tonnes more while the rest of the world produced 67 million tonnes more than the corresponding six month-period.
Globally, a huge amount of supply has come into the market. Despite that, prices went up by 70 per cent in the US and Europe in the first half; in China, it was up by 30 per cent.
There was some marginal correction in July, but in the last one week, we are seeing an uptick. This establishes that demand is very strong. Investment in infrastructure by various governments and energy transition are driving demand for steel.
You will find the same circumstances in India. We are very optimistic about a recovery in steel demand post second wave of Covid. Generally, this quarter is subdued because of intermittent activity in construction and infrastructure segments due to monsoons. I think, next quarter, there will be a boom.
Companies have lined up massive capacity expansion after deleveraging, is that a learning from the last up cycle?
Investment is coming in cautiously; it is not happening as it was in the previous cycle. Keeping healthy financials and a healthy balance sheet is the primary driver for any company before committing to future growth.
The pandemic has made bigger players stronger, will there be room for smaller and secondary players in a capital intensive sector like steel?
In the Indian market, primary players are mostly in the flat segment; secondary players are in the long side. The difference between hot rolled coil (flat) and TMT (long) in the US is about $1,000 a tonne. There is a huge difference in flat and long steel pricing whether it’s a developing market or developed. Even in this cycle, what has gone up, is flat.
Secondary producers are more concentrated in the long products commodity grade TMT. They are not making the kind of money that primary producers are making because of their presence in the flat and international market.
Secondary producers are affected on account of two reasons: high iron ore cost and working capital availability. Generally speaking, everybody is not doing well in the industry; there are players in the sector who are still suffering.
That is why iron ore should not be exported; it should be made available to Indian steel industry – both primary and secondary.
Is JSW looking to surrender mines in Odisha?
The question of surrendering does not arise. We will bid for mines when they come up for auction.
How have your subsidiaries and joint controlled companies fared?
Indian subsidiaries have done extremely well. In fact, the EBITDA from Indian subsidiaries was Rs 1145 crore against Rs 821 crore in Q4 of last year. So there was a shift of Rs 325 crore.
The US units contributed operating EBITDA of Rs 282 crores in this quarter as against a Rs 322 crore loss in the previous quarter. The Indian and overseas subsidiaries together contributed to the swing in consolidated EBITDA numbers.
In companies under joint control, Bhushan Power & Steel made a net profit of Rs 745 crore in Q1, Monnet Ispat, Rs 63 crore. Our proportion of profit from companies under joint control for the quarter stood at Rs 323 crore.
You have been shortlisted for Neelachal Ispat Nigam Ltd (NINL) and there are two other inorganic opportunities coming up in RINL and NMDC’s Nagarnar Steel Plant. Would you look at both?
We have an interest in both NINL and Nagarnar project. But as on date, there is limited information.
Neelachal just opened the data room for prospective investors. We are one of the companies shortlisted. We are examining and will take a call.
Nagarnar is an interesting project of 3 million tonne capacity. Nothing has started in RINL. But it has a large land bank and is port-based. It’s a 7 million tonne facility, which is very difficult to create. There will be interest if disinvestment happens.