4 Steel Insights, February 2015

COnTEnTs

35 | COVER STORYMMDR Ordinance paves way for transparencyIndia to see auction of 199 non-coal mines.

19 | FEATUREIndia retains fourth position in world steel order in 2014 India may take up the third position enjoyed by U.S. in couple of years.

40 | INTERVIEWPositive real estate sentiment gaining ground “Real estate industry is waiting for some macro level shake up with new govt at helm.”

16 | FEATURESteel Import curbs on anvil Govt exploring possibility of raising import duty on various kinds of steel, including stainless steel.

12 | FEATURE India Ratings maintains negative outlook on steel Gradual demand growth will be offset by global overcapacity and cheap imports.

6 Goa mines expected to start ops, exporters seek cut in duty

10 RBI surprise rate cut unlikely to aid steel growth in Q4

17 Unprecedented iron ore crisis hitting Indian steel industry: Assocham

18 Cheaper imports force stainless steel-makers to cut prices

19 Sponge iron offers reach rock-bottom 21 Bearish trend pulls down ferro alloy offers 22 Coking coal price ease in January 23 Lack of demand pulls down prices of imported

met coke 24 Flat products segment occupying key position 26 Realty players want govt stress on

infrastructure 27 Car sales hit excise hike bump 29 India Ratings revises auto industry outlook 31 CV sector bottoming out; recovery to be slow:

India Ratings & Research 32 Great expectations from Budget 33 DIPP moots scrapping of import duty on metal

scrap 42 Govt plans four steel plants 42 Steel Min launches rolling facilities of RSP

plate mill 43 MMDR Act Ordinance set to change mineral

availability scenario 45 Major ports’ iron ore handling at 13 mt in Apr-

Dec 46 Railways’ Dec iron ore handling up 6.89%

m-o-m 47 Global crude steel production rises 2.44% in

December m-o-m 48 Tata Steel’s Q3 sales up 3.05% y-o-y 49 JSW Steel consolidated Q3 net down 30% 51 JSPLreleasesfirstbusinesssustainability

report

6 Steel Insights, February 2015

Goa mines expected to start ops, exporters seek cut in duty

Steel Insights Bureau

Goa has removed a two-year ban on iron ore mining and expects mines to be up and running by March or

April at the earliest, industry sources said. India was once the world’s third-largest

iron ore exporter and Goa its biggest exporting state. The return of Goa’s iron ore exports could further pressure global prices to hover around five-and-a-half year lows due to oversupply.

Sources said: “It is now up to mining

companies to obtain environmental clearances from New Delhi to start work. It is possible that the mines will be active in a couple of months as we have acted fast on renewing the leases.”

“March or April in the best-case scenario or else it could go to October because of the (June-September) monsoon rains.”

Goa used to export about 50 million tons of iron ore a year before the mining ban was imposed in 2012 after a government report on illegal mining.

The ban in Goa and curbs in other

sPECIAL fEATuRE

producing states like Karnataka and Odisha have made India a major importer.

India’s imports hit a life-high of 8 million tons in 2014, far above the 3.1 million for 2012, according to data available with Steel Insights.

That has worried Prime Minister Narendra Modi’s government, which issued an executive order to revive the mining industry by quickly renewing old leases and auctioning out new ones, scrapping a previous method of selective allocation.

Mining industry sources said the executive order and revoking of the ban in Goa suggests that “things are looking up”.

But even if mining resumes in Goa, falling prices of iron ore and an export duty of 30 percent will make exports uncompetitive for many companies in the state.

Meanwhile, media reports said around 12 million tons of low-grade iron ore have been stuck at Indian ports for months, stranded due to hefty export taxes and plunging prices, which make higher quality ore more appealing to buyers.

10 Steel Insights, February 2015

fEATuRE

Steel Insights Bureau

Raghuram Rajan announced his first rate cut on January 15 since being appointed the Reserve Bank of India

(RBI) Governor in August 2013. The move prompted a near-unanimous opinion that this could be the beginning of a new easing cycle.

However, he held interest rates steady at 7.75 percent on February 3 after easing the monetary policy just three weeks ago leaving its next move probably until after the government presents its annual Budget on February 28.

Instead, the Reserve Bank of India cut the statutory liquidity ratio (SLR) — or the amount of bonds that lenders must set aside — by 50 basis points to 21.5 percent of deposits from February 7, prodding banks to increase lending.

“Banks should use this headroom to increase their lending to productive sectors on competitive terms so as to support investment and growth,” the RBI said in a statement.

The RBI also announced a slew of initiatives to develop markets, including

allowing foreign institutional investors to re-invest government bond coupons even when their investment limits are exhausted.

The RBI said in its statement that it wanted more comfort that inflation would continue to ease and that it would await action from the government regarding the country’s finances.

“Given that there have been no substantial new developments on the disinflationary process or on the fiscal outlook since January 15, it is appropriate for the Reserve Bank to await them and maintain the current interest stance,” the central bank said.

Comforted by falling world oil prices and inflation slowing, the RBI had surprised investors with 25 basis points cut in the repo rate on January 15, even though investors were expecting the central bank to embark on an easing cycle at some point during the early months of the year.

The RBI clearly saw little point in waiting any longer to reduce borrowing costs in an economy that was struggling to gather momentum.

Markets are pricing in more interest rate

RBI surprise rate cut unlikely to aid steel growth in Q4

cuts over the rest of the year given inflation is expected to remain subdued on the back of a plunge in global crude prices and bigger-than-expected falls in domestic vegetable and fruit prices.

Consumer prices rose 5 percent in December, well within the RBI target of 6 percent by January 2016.

Bankers and market players have already started factoring in a deep cut in the repo rate this year, with estimates ranging from 50 bps to as much as 125 bps. HDFC Bank and Standard Chartered said they expected at least two more rate cuts, totalling 50 bps, this year. Others, such as Morgan Stanley, put the figure at 125 bps.

While two government banks, Union Bank and United Bank of India, have reduced their base rates by 25 bps, most other banks have said it is only a matter of time before they cut rates and that their asset-liability committees would meet soon to take a decision on the matter. YES Bank said it would cut its minimum lending rate by the end of this month.

Corporate leaders expect more rate cuts in the coming months to help revive growth and start projects. Godrej Group Chairman Adi Godrej said while the rate cut would lead to increased investment and demand for residential housing, automobiles, consumer durables, etc, which were financed by banks, a further rate reduction of 300 bps was required during the year.

The central bank, of course, sought to link further moves in this regard to government action on stemming the fiscal deficit and addressing infrastructure bottlenecks.

In this context, analysts said Budget 2015-16, to be presented in February-end, could decide the course of monetary policy through its stance on fiscal consolidation.

In a bid to counter sagging growth and demand in the economy this measure might be too little too late. The steel sector has been plagued by lack of demand owing to the absence of new infrastructure projects and dearer credit sapping construction activity. Steel consumption growth in India has crawled at a meagre 1.4 percent (April-December) leaving the market oversupplied and prices dipping. The fourth quarter of 2014-15 (January-March) is typically a period of accelerated demand, owing to project completion deadlines but this year is likely to be uncertain, feel some steel industry insiders.

12 Steel Insights, February 2015

fEATuRE

Steel Insights Bureau

India Ratings & Research has maintained a negative outlook on the steel sector for FY16 as it believes it will continue to

face challenges. Also, the benefit of gradual domestic

demand growth will be offset by weak product pricing capability caused by global overcapacity and cheap imports.

The agency has also maintained a negative outlook on its rated steel entities for FY16 in view of their high financial leverage. Some of the rated steel producers require significant deleveraging to maintain their ratings.

Improved demand outlook

India Ratings expects domestic steel demand to improve in FY16 based on higher GDP growth. This will be driven by the government’s on-going initiatives to clear infrastructural bottlenecks, introduce structural reforms in the mining sector and the expectation of a benign inflationary

environment. Demand growth is likely to be in the range of 5.5-6.0 percent in FY16 compared with the growth of 1.3 percent in the eight months of FY15.

Steel prices to remain subdued India Ratings expects steel prices to remain restrained in FY16 due to a global weak steel pricing trend, increasing cheap imports, low raw material prices and prevailing overcapacity within domestic producers. While a significant improvement in steel pricing is unlikely in the short term, efficient cost control and free cash flow generation through higher value-added products would be key for companies to mitigate the risk of a prolonged price recovery. Global overcapacity led to a correction in steel prices during 2014 and import competition and lack of demand drivers within the country kept domestic steel prices low.

OvercapacityIndia Ratings opined that the sector will continue to face overcapacity in FY16 in view

India Ratings maintains negative outlook on steel

of new capacities of 12-14 million tons (mt) to be added and gradual demand growth. Indian steel producers, in anticipation of significant demand, have almost doubled their capacities over the years. The overall crude steel capacity increased to 102mt in FY13 from 56.8mt in FY07. In 2014, domestic demand was mute and steel producers were grappling with excess capacity while steel prices remaining weak. Capacity use was below 80 percent in FY14 in line with FY13.

Liquidity pressure to continueThe advantage of a modest domestic demand uptick, low raw material prices and softening of interest rates will be negated by an increase in the interest cost of steel producers with additional capacities becoming operational. This is likely to continue to keep the liquidity of the steel producers tight. A better product mix and level of integration with raw materials shall determine the expansion of margins. The inability of steel producers to hike prices will also limit expansion in the EBITDA margins.

Falling rupeeIn case of a depreciating currency, steel producers being heavily dependent on imports for coking coal will fail to benefit from low raw material prices. Expansion of margins will thus be limited. Global steel overcapacity will limit the headroom for exports and steel producers are likely to concentrate on domestic markets. Imports of finished steel, however, will reduce with the rupee depreciation and thus support consumption of steel produced within the country.

Credit profileAgainst the backdrop of modest margins, India Ratings expects credit metrics to remain weak in FY16. Expected softening of interest rates will however support the interest coverage and reduce the cost of working capital funds. Balance sheets of major domestic steel producers are highly leveraged due to the capex undertaken over the last three to four years. The working capital requirements are likely to increase even more with additional capacities of a few major steel producers becoming operational in FY16.

34 Steel Insights, February 2015

MMDR Ordinance paves way for transparencyTamajit Pain

The year 2015 brought with it a new and very significant development in the iron and steel industry in India.

At the very beginning of the year, in January, the Ordinance for auction of iron ore and non-coal minerals got the government and President’s nod along with the auction of coal blocks.

The Ordinance would pave the way for introduction of competitive bidding for allocation of iron ore and other non-coal mines.

It will also enable creating District Mineral Funds for the welfare of the project-affected people.

The need for taking the Ordinance route was felt as the government was finding it difficult to allocate mines because the mines ministry could not table a Bill in the Winter Session of Parliament to amend the Mines and Minerals (Development and Regulation) Act, 1957.

Industry body Federation of Indian Mineral Industries (FIMI), however, has been

opposing the auction route, saying it would sound the “death knell” for the industry and may lead to cartelisation and waste.

While a draft Bill was put up on the ministry’s website for public comments, the Mines and Minerals (Development and Regulation) (Amendment) Bill, 2014, could not be tabled during the Winter Session of Parliament that ended in December of 2014.

The Ordinance would also enable greater decentralisation of power to states for allocation of resources.

COvER sTORy

Steel Insights, February 2015 35

The mining sector has been facing several issues like ban for the past few years.

The previous UPA government had also brought a Bill in 2011 to amend the Act. But the Bill lapsed with dissolution of the previous Lok Sabha.

Mines Minister Narendra Singh Tamar had earlier said the amendments were required to kick-start the sector by removing bottlenecks that are preventing the industry from becoming a growth-multiplier in the country.

However, FIMI contended that the auction route was not pursued in any resource-rich country as it may result in cartelisation and monopolistic practices.

The auction route May also lead to selective mining while leaving low-grade minerals in the ground, wastage of resources and inflate the cost of the final product, making it uncompetitive vis-a-vis imports, it had said.

The draft MMDR Bill proposes higher prison term and hefty penalty of `5 lakh, 20 times higher than the fine prescribed in the existing Act for violating terms of mineral excavations.

Though mining is a state subject, the Bill has sought to empower the Centre to prescribe different terms and conditions for auctions of different types of minerals and their application to different states.

It aimed at attracting private investment and latest technology as well as eliminating administrative delays to enable expeditious and optimum development of mineral resources of the country.

It also looks at paving the way for leases to be easily transferable.

India to see auction of 199 non-coal minesNarendra Singh Tamar, the Union Mines Minister, said the government is likely to auction 199 mines of various minerals such as limestone, manganese, iron ore and bauxite in its first phase of auction after the promulgation of the mining Ordinance.

“Around 199 cases of various states would be ready for auction with some effort. But such auctions would also depend on the finalization of modalities for conducting auction and subordinate rules therein,” he said.

The government promulgated the Mining & Mineral Development Regulatory

(MMDR) Amendment Ordinance, 2015, under Article 123(1) of the Constitution on January 12 in a bid to give a major fillip to the stagnated mining sector. This auction process will not be applicable to coal, lignite and atomic minerals.

Addressing a meeting of mines ministers and secretaries from across the country in Delhi recently, the minister said that auction will bring in greater transparency and higher revenues for the states.

“A lot of homework will be done. Our intention is to start auctioning as soon as possible,” he said after a meeting on the Mines and Minerals (Development and Regulation) (Amendment) Ordinance, 2015 with the mines ministers of states.

The 199 mines, which can be auctioned, are located in the mineral-rich states of Karnataka, Madhya Pradesh, Odisha, Gujarat and Maharashtra and contain minerals such as iron ore, bauxite, limestone and manganese ore, he said.

The rules and modalities of the auction would be brought out soon in consultation with the states and “it cannot be done tomorrow”, Tamar added.

He said that, “In the second session, there will be secretary-level talks to decide a single way forward.”

Under the new law, all the mineral concessions will be granted through the auction route only.

He added: “We have started preparing rules of the Ordinance and auction paper. As soon as they are ready, we will send these to the states.”

Commenting on the demand of certain states for a larger share for their District Mineral Foundations (DMF), he deflected the demand, saying that that there will always be two opinions after the promulgation of the Ordinance.

Tomar said: “The government has to

look after everybody’s interests. Not only are we trying to boost the mining industry and employment, but are also trying to safeguard the interests of people and locations being affected by mining. The present provisions are strong enough to protect everybody’s rights.”

He further added: “The auction route will bring some transparency but somebody may get hurt too. We have to make a choice: We want transparency or profit. We have to choose one way.”

The Odisha government, however, demanded that POSCO be allocated mines. “POSCO should be given a mining lease on the recommendation of the state government,” the state’s steel and mines minister Prafulla Kumar Mallik said.

The mines Ordinance states that a company be given a mine through auction, unless it has already got the concurrence of the Centre or a letter of intent from states for an allocation.

Though POSCO has a memorandum of understanding with the Odisha government that assures allocation, it perhaps does not possess any letter of intent from the state.

Mines Secretary Anup Pujari said that from now on all mines would be allocated through the auction route only, but in cases where the Centre has given concurrence or the states have conveyed “letter of intent by whatever name it is called” to allottees, seamless transaction can happen in those cases.

Parameters for auctionThe new mining law empowers the Union government to prescribe any relevant parameter for bidding of mineral concessions. According to the recently promulgated Ordinance, this could be a share in production or a payment linked to the royalty or any other parameter the Centre wants to prescribe.

While auctions would be the only way forward for state governments to award mineral concessions, the Union would prescribe the terms, conditions, procedures and, bidding parameters for different categories. Such a methodology could differ according to the type of minerals, size and area of the deposits, a state or a combination of states.

“This is a wonderful piece of legislation.

Around 199 cases of various states would be ready for auction

with some effort. But such auctions would also depend on the finalization of modalities for conducting auction and subordinate rules therein.

COvER sTORy

Tear along the dotted lineTear along the dotted line

66 Steel Insights, February 2015