A Review of developments in

The Global & Indian Steel Industry

Bi-monthly edition

Issue No. 5

July 2016 (for the period May & June 2016)

Strictly for internal circulation

Our eight Full Members are:

• Steel Authority of India Ltd.

• Tata Steel Ltd.

• JSW Steel Ltd.

• Rashtriya Ispat Nigam Ltd.

• Essar Steel Ltd.

• Jindal Steel & Power Ltd.

• Bhushan Power & Steel Ltd.

• Bhushan Steel & Strips Ltd.

Our six Affiliate Members are Monnet

Steel, INSDAG (Institute for Steel

Development and Growth), KISMA

(Karnataka Iron and Steel

Manufacturer’s Association), Gerdau

Steel, Visa Steel & Jindal Stainless.

About Indian Steel Association

GLOBAL DEVELOPMENTS

Source: The Economist Intelligence Unit, Global Forecasting Service

Growth Forecasts

2016 - 2020

As of June 24, 2016;

The assumptions for forecasts are available on the website of the Economist Intelligence Unit

In % 2016 2017 2018 2019 2020

IndiaReal GDP Growth 7.4 7.3 7.3 7.2 7.2

Inflation 5.1 5.4 5.1 4.5 4.6

ChinaReal GDP Growth 6.7 6.0 5.0 4.4 4.2

Inflation 2.3 2.1 2.5 2.0 2.4

U.S.AReal GDP Growth 2.0 2.3 2.3 1.0 2.1

Inflation 1.3 2.2 2.3 1.3 1.7

JapanReal GDP Growth 0.5 0.5 0.6 0.6 0.0

Inflation 0.0 0.5 0.3 0.6 1.4

Euro AreaReal GDP Growth 1.6 1.6 1.7 1.5 1.6

Consumer Price Inflation 0.2 1.2 1.5 1.5 1.6

4

Source: World Steel Association

Top Producing nations

As Per World Steel Association

According to World Steel Association, world’s top ten nations with regards to cumulative

crude steel output during Jan-May’16 is as follows:

Rank Nation Output (in ‘000 tonnes)

1 China 329,950

2 Japan 43,180

3 India 38,599

4 United States 33,072

5 Russia 29,159

6 South Korea 27,891

7 Germany 18,195

8 Turkey 13,624

9 Brazil 12,326

10 Ukraine 10,612

5

Source: World Steel Dynamics; More performance factor comparisons are also available

Best Three Worst Three

Operating Rate

(percent)

Austria 96.7 South Africa 67.4

South Korea 96.2 India 77.2

Germany 94.0 Brazil 77.4

Break-even Operating

Rate (percent)

Taiwan 52.4 Germany 96.2

India 54.3 Australia 87.0

USA 54.6 S. Africa 82.2

Steel Produced per

Steel Employee

(tonnes)

South Korea 2108.7 India 159.5

Japan 1881.5 Australia 239.4

Taiwan 1065.8 Russia 251.1

Yields (Shipment to

production; percent)

Australia 137.8 Sweden 88.6

Brazil 102.5 Japan 83.9

China 100.7 India 88.0

6

World Steel Dynamics

Country Analysis

Country Steel Performance Factor Comparisons for 2014

Source: World Steel Dynamics; Weighted Average Ranking 7

World Steel Dynamics

2016 Positioning of World Class Steel Makers

Source: World Steel Dynamics 8

USA HRB Price Vs World Export Price

and Spread

Source: World Steel Dynamics; In USD per tonne, including overhead 9

World Cost Curve for Hot Rolled Band

Source: SteelMint; NAR – Net As Received; FOB – Freight on Board; Prices in USD

Trend of South African Coal Prices

10

• Continuous rise in South African coal offers to India (Grade RB2; 5,500 kcal/kg NAR)

is being witnessed since Dec’15.

Source: SteelMint; Reference to 2.55 mm Hot Rolled Coil (HRC)

Global HRC Export Price Trends

11

• Indian HRC export increased in the month of May'16 in line with increase in global

prices.

• India exported around 150,000 tonnes HRC in the month against 20,000 tonnes in

Apr'16.

Source: World Steel Dynamics 12

CHINA Focus

Export Trends

China Exports of Steel Products by country (MT)

Source: World Steel Dynamics 13

CHINA Focus

Steel Product Import Vs. Exports

Source: World Steel Dynamics 14

CHINA Focus: Chinese Ex Works HRB Export Price

Vs Domestic Ex Works Price

Source: World Steel Dynamics 15

CHINA Focus

Imported Iron Ore CIF Price & Inventory at Chinese Port

Source: World Steel Dynamics 16

CHINA Focus

Trends & Forecasts

China Steel Products Real Consumption (MT)

China Steel Industry Forecasts (2012 – 2020; MT)

Source: Working Paper titled “Chinese Imports: What’s Behind the Slowdown? “, International Monetary Fund

Highlights of Working Paper on China

May 2016

17

Key findings for import slowdown by China:

• Weaker investment has been the main factor accounting for about 40-50 percent of the

import slowdown over the last two years.

Growth in Imports (in volume) • Weaker exports also account for

about 40 percent of slowdown, of

which about a quarter is due to

stronger exchange rate eroding

competitiveness in export sector.

• Substitution of imported

intermediate inputs with domestic

production has not been an

additional drag over this period but

it continues to slow import growth

at a constant pace.

Points highlighted above in italics have been reproduced verbatim

Source: U.S. ITC

Report on TPP By

United States’ International Trade Commission

18

The Statement of United Steelworkers to United States International Trade

Commission in its report titled ‘, TPP Agreement: Likely Impact on the U.S. Economy and

on Specific Industry Sectors’ dated May 2016:

• The Trans Pacific Partnership (TPP) will have a serious adverse impact on production,

employment and wages here in the U.S., thereby undermining our economy and our national

security.

• The TPP fails to promote the economic interests of the United States in a number of

fundamental ways:

1. The TPP fails to sufficiently advance labor rights and offers only false promises of progress.

The TPP provisions limit the ability to guarantee that International Labor Organization

(ILO) standards, as defined in the Conventions, will be the basis for workers’ rights in the

TPP countries.

2. The TPP will have a serious adverse impact on domestic manufacturing. The agreement

supports the global supply chains of multinational companies through continued

outsourcing of production and offshoring of jobs.

• The steel sector will also face additional problems as the TPP also fails to address rising global

over-capacity in the sector. This is the single greatest threat to commodity producers such as

steel. Additionally, Vietnam is able to continue its existing tariffs on the import of steel into its

market for 13 years while the U.S. market remains open to imports.

Source: Citigroup report dated June 23, 2016; Points highlighted above in italics have been reproduced verbatim

Investment Implications of BREXIT

June 2016

19

• The UK’s position in the EU will stay unchanged until exit procedures are completed, whichare likely to take two years once Article 50 of the EUTreaty is triggered.

Source: Citigroup report dated June 23, 2016; Points highlighted above in italics have been reproduced verbatim

Investment Implications of BREXIT

June 2016

20

• UK GDP: UK would go into a technical recession for few quarters, starting in Q3.

• GBP:With Brexit becoming a reality, a “leave” outcome will send GBP/USD lower to 1.25.

• UK Rates: UK yields may rise at the long end given higher political, fiscal and inflation risks.

• UK Credit: Lower margin sectors with a high proportion of sales exposure to the EU would be

most affected. More domestic oriented corporate bonds may also be impacted through the

potential slowdown in the UK economy.

• UK equities: While financials and real estate sectors may be hit hard, Banks and Insurance

shall be neutral. UK exporters may outperform relative to their counterparts in other

developed markets driven by a weak GBP.

• Global markets: While flight to safety flows is likely to lead to a correction in global equity

markets, a collapse in equity markets is not foreseen. Core bonds are likely to benefit in a

Brexit storm, as would other safe heaven assets such as gold, US dollar or JapaneseYen.

DOMESTIC DEVELOPMENTS

Source: Joint Plant Committee, Ministry of Steel (MIS & DO Reports); *Over same period last year

Status of India’s Steel Trade

22

Total Finished Steel

(Alloy + Non Alloy)April 2016 – May 2016

Qty (in MT) % Change*

Import 1.2 -29.3

Export 0.689 -11.7

• India remained a net importer of steel during April – May 2016

• Imports in May 2016 (0.546 MT) fell by 40.9 percent over May 2015 and by 16.5

percent over April 2016.

• Exports in May 2016 (0.38 MT) was up by 6.1 percent over May 2015 and

increased by 23 percent over April 2016.

Source: SteelMint

Coal Imports by India

23

• India imported around 219 MT

coal in FY16 (229 MT Pet coke

included).

• Total coal imports have

witnessed a fall of 4 percent in

2015-16 against the last fiscal.

• 95 percent of the coal imports

have been supplied from

Indonesia, South Africa,

Australia, USA, China and

Saudi Arabia.

• Indonesia remains the top

exporter of non-coking coal,

supplying about 117.7 MT in

2015-16.

Countries FY15 FY16 %Change

Indonesia 140.52 117.68 -16%

Australia 45.95 46.30 1%

South Africa 29.33 38.75 32%

USA 4.13 6.59 59%

N/a 9.38 5.42 -42%

China 2.68 3.12 16%

Saudi Arabia 0.15 2.45 1552%

Mozambique 1.90 2.42 27%

Russia 1.31 2.41 84%

Canada 1.17 1.29 11%

UAE 0.27 0.68 150%

Others 2.27 2.00 -12%

Grand Total 239.05 229.11 -4%

Source: SteelMint

Iron Ore Trends in Odisha

24

• Iron ore production in Odisha touched 75.7 MT in FY16. The production is expected

to touch 100 MT in FY17, as per estimates of the State Government.

• In reference to iron ore price trend in 2016, lump prices have declined by 7% and fines

prices have fallen by 17% till the beginning of Jun’16.

Source: Centre for Monitoring Indian Economy

Trends & Outlook of Steel End Use Sectors

25

• REAL ESTATE: The real estate industry is estimated to have added projects worth INR

327.2 bn in the financial year 2015-16. As per CMIE’s CapEx database, the industry will

make investments to the tune of INR 2.4 tn during 2016-18.

• INDUSTRIAL & INFRASTRUCTURAL CONSTRUCTION: After having risen be a

meagre 1.3 percent y-o-y in the December 2015 quarter, sales growth of the industrial &

infrastructure construction industry accelerated to 5.8 percent in the March 2016

quarter.

• DOMESTIC APPLIANCES: Domestic appliances manufacturers are scheduled to

commission projects worth Rs.37.1 bn during 2016-18. This is much higher than an

aggregate investment of Rs.13.4 bn seen during 2014-16.

• TRANSPORT: The automobile ancillaries industry is likely to commission 21 projects

during 2016-18, involving a total investment of INR 25 bn. Additionally, automobile sales

grew by 7.7 per cent to 2,150,177 units in May 2016. The two wheelers segment, which

accounts for a significant 81 per cent of overall sales, posted an 8.7 percent growth in

sales during the month.

Real Estate includes Housing Construction & Commercial Complexes; Domestic Appliances includes air conditioners & refrigerators, consumer electronics and others

Source: Centre for Monitoring Indian Economy

Trends & Outlook of Steel End Use Sectors

26

• MACHINERY:

o Projects worth INR 8.6 tn in the Indian engines industry are expected to get

completed during 2016-17, significantly higher than INR 3.2 tn worth projects

commissioned in 2015-16.

o In order to cater to the burgeoning demand for power, incremental power generation

capacity to the tune of 88.5 GW (gigawatt) is expected to be installed by the end of

the 12th five year plan (2012-2017). Output of boilers and turbines is expected to

grow by around eight per cent each in the year 2017-18.

o The generators, transformers & switchgears industry is likely to commission two

projects entailing an investment of INR 2.7 bn in 2016-17. In the following year

2017-18, one project worth INR 2 bn is scheduled to get completed.

o For the year 2016-17, output of total transformers is expected to grow by 8.2

percent. Production of power transformers is expected to rise by 8.3 per cent and

that of distribution transformers is likely to increase by 7.7 percent. For the

subsequent year 2017-18, transformers production is projected to grow by 10.1

percent.

o With respect to general purpose machinery projects worth INR 6.6 tn are scheduled

to get completed in 2016-17.This would bolster the demand for capital goods.

Source: Reserve Bank of India

Highlights of Financial Stability Report

of RBI dated June’16

Report released on June 28, 2015; Points highlighted above in italics have been reproduced verbatim;

*Interest burden is defined as the interest expense as a percentage of EBITDA;# Annual slippage was calculated as ratio of standard advances turning into NPAs during the period to standard advances at the beginning of the

period; GNPAs - Gross Nonperforming Advances

27

• A risk profile of select industries as at end March 2016 showed that iron and steel industry hadhigh leverage as well as interest burden*.

• The analysis of performance of the corporate sector in various industries in 2014-15 shows thatthe iron & steel and mining industries exhibited low profitability.

• Among the major sub-sectors within the industrial sector, ‘basic metal and metal products’accounted for the highest stressed advances ratio as of March 2016 followed by ‘construction’and ‘textiles’.

• Annual slippages# of major sectors/sub-sectors in December 2015 show that in terms ofoutstanding amounts, the iron and steel industry saw the highest slippages at 7.8 percentfollowed by textiles at 6.4 percent.

• A macro stress test of sectoral credit risk revealed that in a severe stress scenario, among theselect seven sectors, iron and steel industry (which had the highest GNPA ratio at 30.4 per centas of March 2016) could see its GNPA ratio moving up to 33.6 percent by March 2017 followedby engineering (from 10.9 percent to 15.9 percent) and infrastructure (from 7.1 percent to 13.4percent)

Source: Reserve Bank of India; Points highlighted above in italics have been reproduced verbatim

Highlights of RBI Monthly Bulletin

June 2016

28

• In May 2016, the manufacturing purchasing managers’ index (PMI) remained subdued onaccount of slowing output and export orders.

• Public investment, especially in roads and railways, is gaining strength, though the continuingweakness in private investment is of concern. Rising capacity utilisation should prompt privateinvestment.

• Some high frequency indicators for April 2016 point to a firming recovery, although it is stilluneven. Leading the upturn are cargo traffic at major ports, automobile sales (especially two-wheelers and three wheelers), commercial vehicle sales, passenger air and freight traffic,cement production and steel consumption.

• Exports declined for the seventeenth consecutive month in April in US dollar terms in spite ofa modest increase in volume. Exports of engineering goods declined for the ninth straightmonth.

• Imports fell sharply and across constituents – 25 items accounting for a share of 87 percentin total imports recorded a decline; POL imports also declined, essentially reflecting lowerprices. Accordingly, the trade deficit narrowed sequentially and was less than half its level ayear ago.

• Domestic conditions for growth are improving gradually, mainly driven by consumptiondemand, which is expected to strengthen with a normal monsoon and the implementation ofthe Seventh Pay Commission award.

POL - Petroleum, Oil and Lubricants

Source: Reserve Bank of India

Rates at Reserve Bank of India

June 2016

CRR – Cash Reserve Ratio; SLR - Statutory Liquidity Ratio

CurrencyDate

June 29, 2016

I USD 67.7443

1 EUR 75.0200

1 GBP 90.4928

100 YEN 66.2100

Policy Repo Rate : 6.50%

Reverse Repo Rate : 6.00%

Marginal Standing Facility Rate : 7.00%

Bank Rate : 7.00%

Reference Rates

Policy Rates Reserve Ratios

CRR : 4%

SLR : 21.25%

29

Lending/ Deposit Rates

Base Rate : 9.30% - 9.70%

Savings Deposit Rate : 4.00%

Term Deposit Rate > 1 year : 7.00% - 7.50%

THANK YOU

On behalf of Indian Steel Association,Ms. Ashima Tyagi

DISCLAIMER

The material in this presentation has been prepared by Indian Steel Association (ISA) and is a general background information reviewing the status of the

developments in the global and Indian steel industry as at the date of this presentation. This presentation is strictly for internal use of all the member

companies of ISA, whose names have been stated in the presentation.

Information is given in summary form and does not purport to be complete or all inclusive. The information has been sourced from independent third party

databases, knowledge sources and news reports, and the authenticity of the same has not been independently verified by ISA.

Additionally, any third party forecasts on financial or economic parameters, projections or estimates should not be construed as an investment advice or a

recommendation to any ISA member. Recipients of this presentation from member companies of the ISA should each make their own evaluation of the

contents and adequacy of the information contained in the presentation.

ISA does not undertake any obligation to publicly release any changes to any revisions, modifications or forward looking statements in the subsequent

editions of this bi-monthly presentation. Unless otherwise specified, all information is for the period May & June 2016.