Crisil report on steel Industry 2012

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Report from CRISIL on steel Industry

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Crisil report on steel Industry 2012

  1. 1. alDistributionhtsreserved. Industry outlook on Steel industry Only–NotForExternabyCRISILLtd.AllrighForInternalUseOCopyright©2011 1
  2. 2. Key discussion points Indian steel demand to be muted over the next 2 years – End user demand for steel in India affected by the economic slowdown. alDistributionhtsreserved. Global flat steel prices set to decline in 2012 & 2013 Gl b l i f i ki l t d li d t k d d d l Only–NotForExternabyCRISILLtd.Allrigh – Global prices of iron ore, coking coal to decline due to weak demand and over supply – However, domestic price of flat and longs to remain firm ForInternalUseOCopyright©2011 Profitability of players across the value chain to under pressure – Demand-side concerns will be exacerbated by • temporary shortage of both iron ore and non-coking coal in the domestic market Need for pelletisation in the Indian context 2 Need for pelletisation in the Indian context
  3. 3. India steel demand to moderate in near term; pick up from 2013-14 St l ti tt 2011 12I di t l d d O tl k Steel consumption pattern: 2011-12India steel demand: Outlook Automobile 11% Capital goods 6% alDistributionhtsreserved. Others 33%Pipes & Tubes 10% 44 66 70 74 95 Only–NotForExternabyCRISILLtd.Allrigh Infrastructure 21% Industrial Construction 19% 44 2006-07 2011-12 2012-13E 2013-14P 2016-17P ForInternalUseOCopyright©2011 Domestic demand for steel in the interim has been hit by; – Lower demand from end-user sectors (namely construction automobiles and consumer E: Estimated; P: Projected Source: JPC, CRISIL Research Source: CRISIL Research – Lower demand from end-user sectors (namely construction, automobiles and consumer durables) Domestic steel demand expected to pick up from 2013-14 onwards – Execution of infrastructure projects expected to gain traction 3 – Execution of infrastructure projects expected to gain traction – Pickup in domestic and export demand expected in the automobiles sector
  4. 4. Demand assessment framework Industrial Infrastructure Industrial construction Pipes & Tubes Automobiles Real estate OthersEnd-use segments alDistributionhtsreserved. Assessment of steel product intensity - per capacity (e.g. 1 mtpa plant) e.g. steel, cement - per unit e.g. auto, construction equipments, railway (per km), real estate (per sqft) - per Rs invested e.g. ports, airports, roads Average tonnage of steel products Plates HRC Structural GP/GC TMT CRC Only–NotForExternabyCRISILLtd.Allrigh Investments made Size of the end Capacity additions Supply / new development during Output / production during the year ForInternalUseOCopyright©2011 during the year (e.g. airports, ports) Size of the end- use sectors during the year (e.g. steel, cement) development during the year (e.g. real estate) during the year (e.g. automobile, pipes and tubes) Product level steel demand Aggregation of steel product demand from various end-use sectors N t CRISIL Research’s estimate of steel product demand and end-use pattern Note: Infrastructure includes roads & highways, power, ports, airports, railways, water supply & irrigation, urban infra Industrial construction includes – oil & gas, steel, automobiles, petrochemicals, textiles, fertilisers, etc.
  5. 5. Flat steel demand to grow at 8-9% over FY 2013-17 • Investments in oil & gas, water and irrigation • Oil & gas pipeline to increase Pipelines Flat steel consumption pattern: 2011-12 alDistributionhtsreserved. g p p from 53,677 km to ~72,000 km Pipelines, 18.2 Oil & Gas, 4 9 Consumer durables, 8.8 Others, 14.5 Only–NotForExternabyCRISILLtd.Allrigh • Cars and UVs: 15-16% CAGR • Commercial vehicles: 12-13% CAGR Automobiles 4.9 Automobiles, 18.8 Capital goods, 6.1 ForInternalUseOCopyright©2011 Flat steel demand: 49-50 million tonnes by 2016-17 Source: CRISIL Research • Oil & gas refining capacity ~250 million tonnes by 2015-16 Oil & gas tonnes by 2016-17 Flat steel share to be ~52% of total consumption • Investment growth of 8% (~ Rs 7.3 trillion) Oil & gas 5
  6. 6. Within flats, CR coils demand to outpace others 11 5% CAGR 5 5% CAGR Consumer Packaging, 11 Others, 12 Capital goods, Packaging, 6 Others, 9 ~8.5% CAGR ~11.5% CAGR ~5.5% CAGR alDistributionhtsreserved. Manufacturing , 25 Consumer Durables , 12 Residential Industrial Construction, 23 Capital goods, 10 Others, 22 Consumer Capital goods, 10 Others, 20 ~7.5% CAGR Only–NotForExternabyCRISILLtd.Allrigh CR il GP/GC Automobiles, 37 Residential Construction, 38 Pipes, 15 Automobiles, 13 Automobiles, 15 Oil & Gas, 11 Consumer durables, 10 ForInternalUseOCopyright©2011 CR coils (24%) GP/GC (14%) Construction, 36 Pipes, 34 Indian Flat steel market HR Coils (47%) Plates (14%) 6 (33.7 mn tonnes)
  7. 7. Long steel demand poised to grow at 6-7% over FY 13-17 Over Rs 35 trillion to be spent on infrastructure Long steel consumption pattern: 2011-12 • 75-85 GW of capacity additions expected • Investment growth of 14-15% (~Rs 11Power Over Rs 35 trillion to be spent on infrastructure Long steel consumption pattern: 2011-12 Industrial Railways, 2.0 Others, 17.6 alDistributionhtsreserved. trillion) • Focus to improving road network, to drive investments Industrial construction, 30.3 Capital goods, 6.1 Automobiles, 4.4 Pipes, 1.6 Only–NotForExternabyCRISILLtd.Allrigh Source: CRISIL Research investments • Investment growth of 12-13% (~Rs 7.7 trillion) Roads O R 12 5 t illi t b t i d t i l Infrastructure , 38.1 ForInternalUseOCopyright©2011 Subdued investment climate to translate to muted growth in the short- medium term • Oil & gas refining capacity ~250 million tonnes by 2015-16Oil & gas Over Rs 12.5 trillion to be spent on industrial construction medium term Long steel demand: 44-45 million tonnes by 2016-17 C ti f l t l 48% f • Investment growth of 8% (~ Rs 7.3 trillion) • ~Rs 1.1-1.2 trillion of investment to flow in steel sector Steel Consumption of long steel: ~48% of total 7 steel sector
  8. 8. Huge capacity additions over the next 5 years Capacity additions (in mn tonnes)Capacity additions (in mn tonnes) • Capacity • Location • Product type Company announcement Company 2010‐11 2011‐12 2012‐13E 2013‐14P 2014‐15P 2015‐16P 2016‐17P SAIL 13.6 13.6 17.2 21.2 21.2 21.2 21.2 TataSteel 6.8 6.8 9.7 9.7 9.7 12.7 12.7 JSWSteel 7 8 11 0 11 0 11 0 11 0 13 0 13 0 alDistributionhtsreserved. • Land acquisition • Environmental clearance • Financial closure Project progress JSWSteel 7.8 11.0 11.0 11.0 11.0 13.0 13.0 RINL 3.3 3.3 3.3 6.6 6.6 6.6 6.6 JSPL 3.0 3.0 3.0 4.6 4.6 4.6 4.6 BhushanSteel 2.2 2.2 2.2 4.7 4.7 4.7 4.7 MonnetIspat 0.3 0.3 1.5 1.5 1.5 1.5 1.5 Only–NotForExternabyCRISILLtd.Allrigh • Policy framework • Macro-economic conditions Other factors MonnetIspat 0.3 0.3 1.5 1.5 1.5 1.5 1.5 NMDC ‐ ‐ ‐ ‐ ‐ ‐ 3.0 Essar 8.6 10.0 10.0 10.0 10.0 10.0 10.0 JSWIspat 3.3 3.3 3.3 3.3 3.3 3.3 3.3 BhushanPowerandSteel 2.3 2.3 2.3 2.3 2.3 2.3 2.3 ForInternalUseOCopyright©2011 Source: CRISIL Research Capacity additions over the next 5 years Others 27.1 28.1 29.1 30.1 31.1 32.1 33.1 Total Capacity 78.3 83.9 92.6 105.0 106.0 112.0 116.0 30-35 mn tonnes of crude steel capacity to materialise vis-à-vis announcements of over 60 mn tonnes – Many players focusing on setting up capacities in value added products Majority of additions coming up in 2012-13 2013-14 & 2015-16Majority of additions coming up in 2012-13, 2013-14 & 2015-16
  9. 9. Domestic demand-to-capacity rates to moderate India: Demand supply and demand to capacity rates 82 85 89 88 84 83 85 90 90.0 100.0 90 120 (per cent)(million tonnes) India: Demand, supply and demand-to-capacity rates alDistributionhtsreserved. 9 6 3 6 0 4 9 6 4 0 6 0 6 3 5 5 01 04 82 78 83 85 60.0 70.0 80.0 30 60 90 Only–NotForExternabyCRISILLtd.Allrigh 4 5 6 6 7 7 7 8 9 6 6 7 7 8 9 9 1 1 50.0- 2008-09 2010-11 2012-13P 2014-15P 2016-17P Finished steel demand Total finished steel capacity Finished steel demand / capacity P: Projected ForInternalUseOCopyright©2011 Finished steel capacity of 28-30 million tonnes expected over the next 5 years – Incremental demand to be lower at 26-28 million tonnes Source: WSA, CRISIL Research – Large companies adding most of the capacities (SAIL, RINL, Tata Steel, Bhushan, JSPL) Steel players will need to focus on exports, to maintain operating rates – Large integrated players will be able to export as they are cost-competitive – Small & mid-size players will operate at lower utilisation 9
  10. 10. Global demand outlook – Steel 1.20 x 1 01 x 1 12 x1 03 x 2006 2011 2012E4% CAGR 1.01 x ~1 % 2016P 1.12 x 3-4% CAGR2013P 1.03 x 1-2% alDistributionhtsreserved. 1,373 mt 1,392 mt 43 3 1,602 mt 1,430 mt Only–NotForExternabyCRISILLtd.Allrigh India ROW 91 67 64 36 5 96 70 67 37 5 11 5 77 91 3 46 33 1 1,142 mt 10 72 71 38 5 7-9% CAGR 5-6% 3-5% ForInternalUseOCopyright©2011 2 5% EU (27) US Japan 624 15 3 91 14 6 96 725 16 1 18 8 12 0 79 6 14 8 1 3 5% CAGR~2.5% China 624 638 725 378 654~2% 3.5% CAGR Global steel demand: 2-4% CAGR over next 5 years – Developing and emerging economies to drive demand 10
  11. 11. China and India account for bulk of global steel capex 1 993 t 2 201 t 1.1 x O tl k Gl b l d d t it ti 327 421 84 116125 160 1,993 mt 2,201 mt~2% CAGR ~7% CAGR Outlook: Global demand-to-capacity ratio 83 76 68 73 74 73 73 78 80 100 2 000 2,500 (per cent)(million tonnes) alDistributionhtsreserved. 841 884 459 458 158 161 327 ~1% CAGR 16 00 20 11 76 97 37 22 83 04 04 23 93 43 15 01 68 20 40 60 80 500 1,000 1,500 2,000 Only–NotForExternabyCRISILLtd.Allrigh 841 2011 2016P China EU NAFTA Japan+S.Korea+Taiwan India Row 1,31 1,30 1,22 1,41 1,47 1,49 1,53 1,72 1,58 1,70 1,80 1,92 1,99 2,04 2,11 2,20 - 20 - 500 2007 2008 2009 2010 2011 2012E 2013P 2016P Crude steel demand Crude steel capacity Demand to Capacity (RHS) ForInternalUseOCopyright©2011 205-215 million tonnes to be added globally China India to acco nt for 36 % of the total addition (Asian dominance P: Projected Source: WSA, CRISIL Research E:Estimated, P: Projected Source: WSA, CRISIL Research China, India to account for ~36 % of the total addition (Asian dominance to increase to about 65%) Global operating rates to not near pre-crisis levels (2007) even by 2016 11
  12. 12. Global input costs to moderate in 2012 &13 I i t l d (Million tonnes) 2008E 2009E 2010E 2011E 2012E 2013P Trade import demand 845 934 979 1,031 1,032 1,052 Trade exportable supply 820 932 1,011 1,029 1,073 1,162 Iron ore prices to cool down: – new mining capacities; and Iron ore trade flow Company Country 2011 (mn tonnes) 2013 (mn tonnes) Vale Brazil 358 445 alDistributionhtsreserved. p pp y , , , , Surplus/(deficit) (25) (3) 32 (2) 41 110 Contract price ($/tonne) 92 61 110 140-150 115-125 105-115 P : Projected, E : Estimated Source: UNComtrade, CRISIL Research – moderation in global steel Vale Brazil 358 445 BHP Billiton Australia 153 223 Rio Tinto Australia 262 298 Fortescue Australia 55 155 Only–NotForExternabyCRISILLtd.Allrigh demand ForInternalUseOCopyright©2011 (Million tonnes) 2008E 2009E 2010E 2011E 2012E 2013P Contract price ($/t) 293 129 191 289 209 175-185 In 2012 and 2013: Prices to correct as supply eases and demand moderates Coking coal trade flow P : Projected, E : Estimated Source: CRISIL Research 12
  13. 13. Global HR steel prices to soften Gl b l HR t l i tl kGlobal HR steel price outlook 8 9 695800 1,000 ($ per tonne) Pre-crisis: prices soared on demand Crisis: prices crashed from peak, with demand slowdown Post-crisis: prices on rise with rise in demand and input cost Steel prices to moderate on account of weak demand and lower input costs alDistributionhtsreserved. 115 102 233 168 187 275 200-210 180-190214 206 388 302 383 534 410-430 370-390 520 588 879 469 614 695 590 545-565 200 400 600 800 Only–NotForExternabyCRISILLtd.Allrigh P: Projected 99 104 155 134 196 259 210-220 190-200 115 102 - 2006 2007 2008 2009 2010 2011 2012P 2013P Total iron ore cost Total coking coal cost Total raw material cost HR Steel (CIS, FoB, Black Sea) ForInternalUseOCopyright©2011 Domestic HR steel price outlook j Source: WSA, CRISIL Research Year Domestic prices (Rs/tonne) Domestic long steel price outlook Year Domestic prices (Rs/tonne) 2010-11 36,500 2011-12 42,769 2012-13P 43,000-44,500 2013-14P 42,000-43,500 2010-11 36,812 2011-12 39,575 2012-13E 39,000-40,500 2013-14P 37,500-39,000 13 Source: CRISIL Research Source: CRISIL Research
  14. 14. Domestic iron ore market in the middle of a clean-up drive State wise production break up: 2011 12 (170mt) India: Iron ore production (in mn tonnes) Jharkhand, 12% Others, 2% State-wise production break-up: 2011-12 (170mt) India: Iron ore production (in mn tonnes) State 2009‐10 2010‐11 2011‐12 2012‐13 2013‐14 Odisha 79 76 68 50 55 Karnataka 44 38 14 12 18 alDistributionhtsreserved. Odisha, 40% Chhattisgarh , 18% Goa 39 37 34 15 ‐ Chhattisgarh 26 29 31 33 35 Jharkhand 22 23 20 24 32 Others 9 5 3 4 4 Only–NotForExternabyCRISILLtd.Allrigh Karnataka, Goa, 20% Total 219 208 170 138 144 Total excludingGoa 180 171 136 123 144 Domesticdemand 112 120 125 130 137 ForInternalUseOCopyright©2011 8% Domesticdemand 112 120 125 130 137 Surplus/Defecit 68 51 11 ‐7 7 Source: Ministry of mines, CRISIL Research Source: Industry, CRISIL Research Indian iron and steel companies to face an acute shortage of iron ore in 2012-13 – many facing closure, others experiencing low utlisation levels 14 Supply situation expected to be marginally better during 2013-14
  15. 15. Domestic iron ore prices to remain firm (1) In $/tonne 2012E 2013P CFR price at Indian port 120 110 Domestic iron ore lump price alDistributionhtsreserved. Add: Lump Premium 10 10 Add: Port + Handling charges 4 4 134 124 In Rs/ tonne 2012-13E 2013-14P Only–NotForExternabyCRISILLtd.Allrigh In Rs/ tonne 2012-13E 2013-14P Exchange rate (Rs/USD) 54 53 Iron ore import parity price 7,236 6,572 E:Estimated; P: Projected S I d t CRISIL R h ForInternalUseOCopyright©2011 Source: Industry, CRISIL Research Prices of lumps in the domestic market set in line with import parity: – Global iron ore spot prices taken as a proxy and– Global iron ore spot prices taken as a proxy and – A premium of 10-15 $/tonne is usually considered while signing contracts Lump ore prices in India to increase by 12% y-o-y in 2012-13 15 – and decline going forward on account of a dip in international prices
  16. 16. Domestic iron ore prices to remain firm (2) In $/tonne 2012E 2013P CFR price at Indian port 120 110 Iron ore fines prices in India: Various methodologies Import parity price Import price alDistributionhtsreserved. CFR price at Indian port 120 110 Add: Port + Handling charges 4 4 124 114 In Rs/ tonne 2012-13E 2013-14P Exchange rate (Rs/USD) 54 53 I i t it i 6 696 6 042 Export parity price Domestic price range Only–NotForExternabyCRISILLtd.Allrigh Iron ore import parity price 6,696 6,042 Outlook: Domestic iron ore fines prices Export parity price - 1,000 2,000 3,000 4,000 5,000 6,000 7,000 Rs/tonneIn $/tonne 2012E 2013P CFR price at Chinese port 120 110 ForInternalUseOCopyright©2011 Outlook: Domestic iron ore fines prices 1,600-1,800 2,300-2,500 2,400-2,600 2,200-2,400 2 000 2,500 3,000 (Rs/ tonne) Less: Sea freight 15 15 FoB price at Indian port 105 95 Less: Port + Handling charges 5 5 Less: Export Duty(30 per cent) 32 29 68 61 1,600 1,800 - 500 1,000 1,500 2,000 In Rs/ tonne 2012-13E 2013-14P Exchange rate (Rs/USD) at Rs 54 and Rs 53, respectively 3,672 3,233 Less: Domestic freight (export specific) 1,800 1,800 Iron ore import parity price 1,872 1,433 16 2010-11 2011-12 2012-13 P 2013-14P Iron ore fines (62% Fe) E:Estimated; P: Projected Source: Industry, CRISIL Research
  17. 17. Domestic iron ore and coal prices to increase further in 2012-13 Iron ore contract prices DomesticIron ore contract prices - Domestic Thermal coal prices - Domestic 3,500-4,000 5,000 (Rs/ tonne) 4,700-4,900 6,400-6,600 7,200-7,400 6,500-6,700 5,000 6,000 7,000 8,000 (Rs/ tonne) alDistributionhtsreserved. 2,505 1,000 3,000 2010 11 2011 12 2012 13P 2013 14P 1,600-1,800 2,300-2,500 2,400-2,600 2,200-2400 - 1,000 2,000 3,000 4,000 2010-11 2011-12 2012-13 P 2013-14P Only–NotForExternabyCRISILLtd.Allrigh Note: Lumps are Sponge iron grade CLO (Calibrated Lump Ore), 65% Fe Source: Industry, CRISIL Research 2010-11 2011-12 2012-13P 2013-14P E-auction non-coking coal (Rs/tonne) Source:Industry, CRISIL Research Iron ore fines (62% Fe) Iron ore lumps ForInternalUseOCopyright©2011 Supply situation in the domestic iron ore market is expected to improve marginally during 13-14 – Prices are expected to go down with the increase in supply However, non-coking coal costs to remain firm 17
  18. 18. Small & mid-size players margins to remain under pressure Ch i t d i t t t f ll d di l 2009-10 2012-13 E Iron ore Changing trends in cost structure of small and medium players 6 120 2013-14P 10 56011 600 alDistributionhtsreserved. Non-coking Coal Iron ore 5,634 (19-20%) 6,120 (21-22%) 9,520 (22-23%) 10,560 (25-26%) 9,008 (21 22%) 11,600 (27-28%) Only–NotForExternabyCRISILLtd.Allrigh Power Scrap 2,122 2,728 (9-10%) 3,023 (10-11%) 3,654 (8-9%) 4,840 (11-12%) (22 23%) 3,640 (8-9%) 4,964 (11-12%) (21-22%) ForInternalUseOCopyright©2011 39,500-40,500 25 000 25 500 Excise duty Other 5,500 (19-20%) (7.5) 37,500-38,500 5,500 ( 13-14%) 4,300 (10.5%) 5,500 ( 12-13%) 4,500 (10.5%) 39,500 0,500 EBITDA/tonne Rs 3,000-3,500 Operating margin 6-8% 25,000-25,500 EBITDA/tonne Rs 3,500-4,000 Operating margin 12-13% Operating cost 3 ,500 38,500 EBITDA/tonne Rs 3,000-3,500 Operating margin 6-8% 18 42,000-43,00028,000-29,000Realisation 41,000-42,000
  19. 19. Long prices to remain firm in 2012-13 Trend in domestic flat and long steel prices*Trend in domestic flat and long steel prices 42,769 43,000-44,500 42,000-43,500 45,000 50,000 (Rs/tonne) alDistributionhtsreserved. 34 330 37,810 32,313 36,354 39,575 39,000-40,500 37,500-39,00031,790 36,544 31,833 36,500 30,000 35,000 40,000 Only–NotForExternabyCRISILLtd.Allrigh 34,330 32,313 25,000 , 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13E 2013-14P HR Coil TMT ForInternalUseOCopyright©2011 Traditionally, prices of long and flat steel products have moved in tandem *Long prices are those of primary steel manufacturers; secondary players sell at a discount owing to differences in quality E: Estimated; P: Projected Source: Industry, CRISIL Research – Trend has reversed in 2011-12: Higher domestic iron ore and non-coking coal prices Domestic long steel prices to stay firm over next 2 years 19
  20. 20. Structure of steel industry in India Steel Industry Large Integrated Players (Mainly produce flat steel) Small and mid-sized Players (Mainly produce long steel) alDistributionhtsreserved. ( y p ) (Mainly produce long steel) With Mine (WM) Without Mine (WoM) Small Integrated (SI) Small Non- Integrated (SNI) Re-Rollers (RR) Only–NotForExternabyCRISILLtd.Allrigh Captive availability of iron ore and coking coal mines Non availability of captive iron ore, coking coal mines Have backward integration with respect to iron making manufacture steel from steel intermediates and scrap Buy semis and converts into finished long steel ForInternalUseOCopyright©2011 BF – BOF process EAF/ IF Processprocess Process Hot metal/ pig iron/ scrap Hot metal/ Sponge iron/ scrap/ pig iron 20 Note: BF-BOF: Blast Furnace-Basic Oxygen Furnace; EAF: Electric Arc Furnace; IF: Induction Furnace
  21. 21. Large players to face margin pressure in 2012-13 L l O ti fit iLarge players: Operating profit margins 40.0 50.0 (per cent) 19‐20 20‐21 16‐18 15‐17 80 100 (as a % of sales) EBITDA Margin alDistributionhtsreserved. 25.7 21.9 19.8 17.510.0 20.0 30.0 9 10 6 7 15 15 2 2 34 31 63 64 20 40 60 Raw material costs Salaries and wages Power and fuel Only–NotForExternabyCRISILLtd.Allrigh WM: SAIL, TATA Steel WoM JSW Steel 0.0 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 WM WoM 22 24 11 12 6 7 ‐ 2012‐13E 2013‐14P 2012‐13E 2013‐14P Withmine Without mine Other expenses WM: SAIL, TATA Steel W M JSW St l ForInternalUseOCopyright©2011 Players with mine WoM: JSW Steel E: Estimated; P: Projected Source: CRISIL Research WoM: JSW Steel E: Estimated; P: Projected Source: CRISIL Research – 2013-14: Marginal improvement in margins due to decline in coking coal costs Players without mine – 2013-14: Margins to continue to remain under pressure owing to supply constraints in the domestic raw material market 21
  22. 22. Cost pressures to impact OPMs S ll d id i d l O ti fit iSmall and mid sized players: Operating profit margins 16 20 25 (per cent) alDistributionhtsreserved. 14 6 10.2 6-8 6-8 3 5 1-3 1-3 3 4 3.7 1 2 5 10 15 Only–NotForExternabyCRISILLtd.Allrigh E:Estimated; P: Projected 1.5 3 4 1-2 1-2 0 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12E Mar-13P Mar-14P SI SNI RR ForInternalUseOCopyright©2011 High input costs (iron ore and non-coking coal) to impact margins Source: CRISIL Research – Iron ore mining ban in Karnataka and ban on illegal mining in Orissa and Goa to hit smaller players – Current shortage of non-coking coal coupled with CIL’s price hike will put further pressure on margins 22
  23. 23. Key messages Domestic demand growth to remain muted; long-term growth intact Domestic capacity to outpace demand through FY13-FY14; alDistributionhtsreserved. – Operating rates to decline from 87% (2011-12) to 78% (2013-14) Flat steel prices to decline but long steel prices to remain firm Only–NotForExternabyCRISILLtd.Allrigh Flat steel prices to decline, but long steel prices to remain firm Domestic iron ore and non coking coal prices to remain firm due to s ppl iss es ForInternalUseOCopyright©2011 supply issues Margin pressure to remain through FY13-FY14 23
  24. 24. Need for pelletization I i th t b th G t t d t il bilit f i t thIncreasing thrust by the Government to ensure adequate availability of iron ore to the domestic steel industry and promote export of value added products: – Ad-volerum export duty on iron ore fines increased to 30% (Union Budget – 2012-13) – No export duty on iron ore pellets alDistributionhtsreserved. No export duty on iron ore pellets – Import duty reduced (Union Budget – 2012-13) on the capex incurred for setting up pellet plants • Imported parts account for 10-12% of total setup costs With high-grade lumpy ores rapidly depleting, pelletizing is becoming paramount Only–NotForExternabyCRISILLtd.Allrigh With high grade lumpy ores rapidly depleting, pelletizing is becoming paramount – Steep rise in the prices of raw materials for DRI & Pig Iron production – Indian steel making capacity to reach ~110 mt by 2015-16, translating to huge demand for iron ore Improved productivity and efficiency with superior reducibility behavior of pellets ForInternalUseOCopyright©2011 Improved productivity and efficiency with superior reducibility behavior of pellets compared to lump ore in – Rotary kiln • Use of pellets to translate to savings of Rs 2,900-3,500/ tonne – Blast Furnace • Use of pellets to translate to savings of Rs 2,300-2,800/ tonne No losses in handling iron ore as pellets do not break during transport or handling 24
  25. 25. DRI- cost savings and capacity additions Without pellet With pellet Lump ore 17.1 17.2 20.0 (mn tonnes) Pellet capacity additions by DRI players alDistributionhtsreserved. p Rs 6,550/t Iron ore fines 2 300 2 400 *1 050 8.0 10.7 13.9 10.0 15.0 Only–NotForExternabyCRISILLtd.Allrigh I/O norm 1 65 Iron ore ll t 2,300-2,400 *1.050 Pulverised coal (33-35 kgs) 550-650 4.5 0.0 5.0 2010-11E 2011-12P 2012-13P 2013-14P 2014-15P 2015-16P ForInternalUseOCopyright©2011 1.65 pellet 3,900-4,400 550-650Heavy oil (16/18 litres) Electricity (55-60 kWh) Other costs 200-250 250-300 1.5 DRI - Pellet Cost Rs 10,800/t of DRI Other costs 250-300 Lump ore Rs 7,200- 8,000/t of DRISavings of upto-> Rs 2,900-3,500/ tonne 25 of DRI Lump ore 6,500-6,600 0.2 of DRIg p , ,
  26. 26. BF- cost savings and capacity additions Without pellet With pellet Lump ore alDistributionhtsreserved. p Rs 5,300/t Iron ore fines 2 300 2 400 *1 050 Only–NotForExternabyCRISILLtd.Allrigh I/O norm 1 7 Iron ore ll t 2,300-2,400 *1.050 Pulverised coal (33-35 kgs) 550-650 Savings due to reduced coke intake ForInternalUseOCopyright©2011 1.7 pellet 3,900-4,400 550-650Heavy oil (16/18 liters) Electricity (55-60 kWh) Other costs 200-250 250-300 1.5 intake Rs 800-900/t Cost Rs 9,000/t of hot metal Other costs 250-300 Lump ore Rs 6,200- 6,700/t of hotSavings of upto-> Rs 2,300-2,800/ tonne 26 of hot metal Lump ore 6,500-6,600 0.2 metal g p , ,
  27. 27. Pellet vs Sinter U f ll t dditi l R 500 700/ t f h t t l l ti tUse of pellets save an additional Rs 500-700/ tonne of hot metal relative to sinter feed Consequently, incremental capacity additions in pellet more than the capex i i t i alDistributionhtsreserved. in sintering Pellet capacity additions by BF players Sinter capacity additions by BF players Only–NotForExternabyCRISILLtd.Allrigh 41.7 49.7 50.0 60.0 (mn tonnes) 60 3 62 6 69.1 77.8 84.0 84.0 80.0 100.0 (mn tonnes) ForInternalUseOCopyright©2011 17.5 27.7 33.7 33.7 10.0 20.0 30.0 40.0 60.3 62.6 20.0 40.0 60.0 0.0 2010-11E 2011-12P 2012-13P 2013-14P 2014-15P 2015-16P BF - Pellet Source: Industry, CRISIL Research Source: Industry, CRISIL Research 0.0 2010-11E 2011-12P 2012-13P 2013-14P 2014-15P 2015-16P BF-Sinter 27
  28. 28. Summing up: Pelletization to cut ore costs by 10-20% Iron production alDistributionhtsreserved. DRI BF DRI players primarily use iron ore lumps BF players primarily use iron ore a mix of Only–NotForExternabyCRISILLtd.Allrigh DRI players primarily use iron ore lumps Current mix Lump 90% BF players primarily use iron ore a mix of lumps and sinter Current mix Lump 43% ForInternalUseOCopyright©2011 Pellet 10% Use of pellets to translate to savings of Sinter 47% Pellet 10% Use of pellets to translate to savings of Rs 2 300 2 800/ tonne of hot metalRs 2,900-3,500/ tonne of DRI Future Mix (2015-16) Lump 70% 2,300-2,800/ tonne of hot metal Future Mix (2015-16) Lump 32% Sinter 36% 28 Lump 70% Pellet 30% Sinter 36% Pellet 32%
  29. 29. Miners: Forward integrating into pellet manufacturing owing to the regulatory climate EBITDA/ tonne Moisture at 5% 3.7 4.4 7.8 2 years ago 1 year ago CurrentlyChanging landscape for exporters: iron ore fines Rs 600- 1,000/ tonne alDistributionhtsreserved. 58.8 District mineral fund tax (equal to royalty) Administration and selling expenses Royalty Export duty 5.0 30.0 3.7 3.0 37.5 Only–NotForExternabyCRISILLtd.Allrigh 16.0 - 5.0 3.7 2.0 Forest Development tax Demurrage Handling charges at port Railway freight T t t il t ti 32.8 5 0 21.3 - 20.0 ForInternalUseOCopyright©2011 7.0 3.7 Transport to railway station Mining and processing cost 7.0 3.7 7.0 3.7 Assumptions: 1) Iron ore has an Fe content of 63% 2) Exchange rate : Rs 55/ USD 3) Iron ore fines price: Rs 120/ dry metric tonne Currently, miners getting an EBITDA/ tonne of Rs 3,500-4,500 on pellets – Robust demand and better realizations from the domestic market N t d t ll t Source: Industry, CRISIL Research 29 – No export duty on pellets
  30. 30. ~55 mt of pellet capacity to be added over the next 5 years Steel players to add 46 million tonnes 47 6 58.8 66.9 60 70 80 (mn tonnes) Steel players to add 46 million tonnes alDistributionhtsreserved. Steel players 22.0 35.7 44.4 47.6 10 20 30 40 50 Only–NotForExternabyCRISILLtd.Allrigh Total pellet capacity ~85 mt by 2015-16 0 2010-11E 2011-12P 2012-13P 2013-14P 2014-15P 2015-16P Steel - pellet additions Miners to add 5 million tonnes ForInternalUseOCopyright©2011 Miners9.1 11.1 11.1 8 10 12 (mn tonnes) Miners to add 5 million tonnes 5.9 5.9 5.9 0 2 4 6 8 Standalone pellet plants 30 0 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 Miners - pellet additions Source: Industry, CRISIL Research plants (6.4mt)
  31. 31. About us CRISIL LimitedCRISIL Limited CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. We are India's leading ratings agency. We are also the foremost provider of high-end research to the world's largest banks and leading corporations. CRISIL Research CRISIL Research is India's largest independent and integrated research house We provide insights opinions and analysis on the Indian economy alDistributionhtsreserved. CRISIL Research is India s largest independent and integrated research house. We provide insights, opinions, and analysis on the Indian economy, industries, capital markets and companies. We are India's most credible provider of economy and industry research. Our industry research covers 70 sectors and is known for its rich insights and perspectives. Our analysis is supported by inputs from our network of more than 4,500 primary sources, including industry experts, industry associations, and trade channels. We play a key role in India's fixed income markets. We are India's largest provider of valuations of fixed income securities, serving the mutual fund, insurance, and banking industries. We are the sole provider of debt and hybrid indices to India's mutual fund and life insurance industries. We pioneered independent equity research in India, and are today India's largest independent equity research house. Our defining trait is the ability to convert information and data into expert judgements and forecasts with complete objectivity. We leverage Only–NotForExternabyCRISILLtd.Allrigh our deep understanding of the macroeconomy and our extensive sector coverage to provide unique insights on micro-macro and cross-sectoral linkages. We deliver our research through an innovative web-based research platform. Our talent pool comprises economists, sector experts, company analysts, and information management specialists. CRISIL Privacy Notice CRISIL respects your privacy. We use your contact information, such as your name, address, and email id, to fulfill your request and service your account ForInternalUseOCopyright©2011 p y p y y , y , , , y q y and to provide you with additional information from CRISIL and other parts of The McGraw-Hill Companies, Inc. you may find of interest. For further information, or to let us know your preferences with respect to receiving marketing materials, please visit www.crisil.com/privacy. You can view McGraw-Hill’s Customer Privacy Policy at http://www.mcgrawhill.com/site/tools/privacy/privacy_english. Last updated: April 30, 2012 Di l iDisclaimer CRISIL Research, a division of CRISIL Limited (CRISIL) has taken due care and caution in preparing this Report based on the information obtained by CRISIL from sources which it considers reliable (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. This Report is not a recommendation to invest / disinvest in any company covered in the Report. CRISIL especially states that it has no financial liability whatsoever to the subscribers/ users/ transmitters/ distributors of this Report. CRISIL Research operates independently of, and does not have access to information obtained by CRISIL’s 31 y y Ratings Division / CRISIL Risk and Infrastructure Solutions Limited (CRIS), which may, in their regular operations, obtain information of a confidential nature. The views expressed in this Report are that of CRISIL Research and not of CRISIL’s Ratings Division / CRIS. No part of this Report may be published / reproduced in any form without CRISIL’s prior written approval.
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  33. 33. Site-wise capacity additions Site wise capacity additions (in mn tonnes)Site-wise capacity additions (in mn tonnes) Company Site Nature Crude Steel capacity IISCO Brownfield 2.2 Rourkela Brownfield 2.0 Bhil i B fi ld 2 1SAIL 7 2 t alDistributionhtsreserved. Bhilai Brownfield 2.1 Durgapur Brownfield 0.3 Bokaro Brownfield 1.0 Jamshedpur Brownfield 2.9 Orissa Phase 1 Greenfield 3.0 SAIL TATA 7.2 mt 5.9 mt Only–NotForExternabyCRISILLtd.Allrigh Orissa Phase 1 Greenfield 3.0 JSW Vijaynagar Brownfield 2.0 RINL Vizag Brownfield 3.3 JSPL Angul Phase 1 Greenfield 1.6 Bhushan Steel Angul Brownfield 2.5 ForInternalUseOCopyright©2011 Source: CRISIL Research Monnet Ispat Raipur Brownfield 1.2 NMDC Nagarnagar Greenfield 3.0
  34. 34. Delayed capacity additions adds up to ~28 mt Delayed capacity additions (in mn tonnes)Delayed capacity additions (in mn tonnes) Company Site Nature Crude Steel capacity OrissaPhase 2 Brownfield 3.0 J d l G fi ld 5 0 Tata 8 mt alDistributionhtsreserved. Jagdalpur Greenfield 5.0 Vijaynagar Brownfield 3.0 Salboni Phase 1 Greenfield 3.0 Jharkhand Phase 1 Greenfield 3 0 JSW 6 mt Only–NotForExternabyCRISILLtd.Allrigh Jharkhand Phase 1 Greenfield 3.0 Raigarh expansion Brownfield 2.0 SAIL Bokaro Brownfield 2.0 Posco Dhinkiya Greenfield 4 JSPL 5 mt ForInternalUseOCopyright©2011 Source: CRISIL Research Posco Dhinkiya Greenfield 4 ArcelorMittal Torpa Greenfield 3
  35. 35. Iron ore supply in Karnataka in mn tonnes 2010 11 2011 12 2012 13E 2013 14Pin mn tonnes 2010‐11 2011‐12 2012‐13E 2013‐14P NMDC 7 7 7 7 Other miners 31 7 5 11 Total 38 14 12 18 alDistributionhtsreserved. They will be allowed to start mining under the following conditions: • Validation of mining plan Similar processes to be followed as with Category ‘A’ mines. In addition, they have to meet conditions like depositing the penalty for illegal mining, as •CEC has recommended for both penalty and cancellation of Only–NotForExternabyCRISILLtd.Allrigh 14-15 mt in 10-11 • Validation of mining plan • Acquisition of forest and environmental clearances • Reclamation and Rehabilitation of the affected areas p y g g, decided by the court . leases for these mines • Decision still pending ForInternalUseOCopyright©2011 Category A Category B (72 mines) Category C 12-13 mt in 10-11 10-12 mt in 10-11 166 mines g y (45 mines) g y (49 mines) 35 166 mines surveyed
  36. 36. Iron ore supply in Orissa – Operations without requisite clearances – forest, environment, pollution control board, operating mine beyond the deemed lease period, overproduction beyond limits allowed by Mining Plan, irregularities in transport – missing dispatch certificates, overloading of material, theft, etc. Irregularities in iron ore mining in Orissa alDistributionhtsreserved. Captive mining (~30 mt of 68mt) As per the Government of Odisha circular dated 3rd Oct 2012 Only–NotForExternabyCRISILLtd.Allrigh Merchant mining divided into two broad categories First 30 years of lease period (28 mn) – The mining lease to be renewed provided it is being used for captive purpose by the lessee. – The area to be renewed shall be limited to the captive requirement of 30 years of the existing capacity of the lessee ForInternalUseOCopyright©2011 Crossed the 30 year lease period (10 mn) Allowed to do merchant sale requirement of 30 years of the existing capacity of the lessee. – The balance land shall be reserved for the Odisha Mining Corporation. As per the Government of Odisha circular dated Not allowed to do merchant sale in mn tonnes 2010 11 2011 12 2012 13E 2013 14P p 5th Dec 2012 – 50% of the production of merchant miners, not put to captive 36 in mn tonnes 2010‐11 2011‐12 2012‐13E 2013‐14P Total 76 68 50 55 use, to be sold to the standalone end users within the State. – To be effective from the month of Dec 2012

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