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Metal firms pin hopes on infrastructure push by government

Though some pick-up in domestic demand is expected in 2015, the outlook for metals sector remains muted, say analysts.

A paucity of iron ore due to restrictions on mining, a slowdown in China which has dampened steel prices and continued sluggishness in the domestic economy made 2014 a tough year for steel companies in India. Though some pick-up in domestic demand is expected in 2015, the outlook remains muted, say analysts.

“The year was very challenging for all metal companies—raw material supply, global demand crunch and weakening of China hardly provided any impetus for growth,” said Purushottam Agarwal, vice-president (project advisory and structured finance)-metals at SBI Capital Markets Ltd.

The steel sector, Agarwal said, is hoping for an infrastructure push from the Narendra Modi-led Union government, which can raise domestic demand.

The single-most important factor which affected steel companies in 2014 was iron ore shortage, which forced India’s top two private steel companies—Tata Steel Ltd and JSW Steel Ltd—to import the raw material. Tata Steel’s captive ore supplies were hit by the mining ban in Jharkhand and Odisha, while JSW Steel was affected by the inability of miners in Karnataka to raise output to 30 million tonnes per annum (mtpa) permitted by the Supreme Court.

“Tata Steel imported iron ore for the first time. It is ironical that, as a country, we have to import iron ore despite having some of the best iron ore reserves in the world. India is the fourth largest producer of steel in the world and also its third largest consumer,” said T.V. Narendran, managing director of Tata Steel India and South East Asia, in a year-end statement.

He further said policy clarity and stability, especially on mine-lease renewals and forest clearances, are key to ensuring the growth of the steel industry.

“We are hopeful that the government will address the concerns of the steel industry in this regard in the new year,” said Narendran.

JSW Steel faced similar challenges, though the proximity of its plants to ports helped when it went for substantial imports.

The company operates a 10 mtpa steel plant at Vijayanagar in Karnataka, a 1 mtpa steel plant at Salem, Tamil Nadu and a 3.3 mtpa steel plant at Dolvi in Maharashtra. JSW Steel did not respond to an email sent on Monday seeking its comments on the year gone by.

“While the company managed to sustain its rate of growth in the last quarter, JSW faced pressures due to a fall in the price of steel in the international market, mainly due to a slowing China,” said Goutam Chakraborty, metals analyst with brokerage Emkay Global Financial Services Ltd.

Thanks to the crunch in local iron ore supplies, prices of iron ore and consequently steel, stayed high in the domestic market, even though global prices have fallen sharply.

According to Bloomberg, the China price of 62% Fe grade spot iron ore fines fell by more than half from $134.72 per tonne on 2 January 2014 to $66.4 per tonne on 25 December 2014. This also triggered a drop in global steel prices. Bloomberg data show that the spot price of hot-rolled steel sheets in China have fallen to $487 per tonne on 26 December 2014, from $579 per tonne from 2 January 2014, a fall of 16%.

Indian ore prices, however, rose during the year.

The price for Indian iron ore fines, as charged by state-owned miner NMDC Ltd rose from Rs.2,700 per tonne ($45 per tonne) in January 2014 to Rs.3,100 per tonne ($50 per tonne) in December 2014, according to a report by brokerage Motilal Oswal Securities Ltd.

Hot-rolled flat steel prices in India have fallen marginally from Rs.38,400 per tonne ($640 per tonne) in January to Rs.33,500 per tonne ($540 per tonne) in December, but remain at least 10% above prices in the international market.

“The difference in steel prices in the domestic market led to imports from Japan, South Korea and an almost dumping from China, fostering an unwanted competition for steel companies in India,” said Agarwal of SBI Capital Markets.

This made matters worse for steel companies, which were already struggling with weak domestic demand. A.S. Firoz, chief economist at the joint plant committee (JPC), a statistical body of the ministry of steel, said steel consumption during April-November 2014 grew 1.3% from the year-ago period. “On a long-term basis, in a developing market, steel consumption should grow at a rate of 1.1 times the GDP growth. Therefore, the current rate of consumption is very low,” he said, adding that steel production rose 2.5% during April-November 2014.

To be sure, state-owned Steel Authority of India Ltd (SAIL), the country’s biggest steel maker, remained relatively insulated due to the long-term nature of its contracts, said Chakraborty, adding that its main challenge is to maintain margins.

Aditya Birla Group’s Hindalco Industries Ltd faced uncertainty after three of its mining leases were cancelled, casting a question mark over the viability of its two main smelters at Mahan and Hirakud. The company was also fined Rs.500 crore for illegal mining at its captive blocks. However, stable aluminium prices in a year of falling commodity prices acted as a cushion for Hindalco, said Chakraborty of Emkay.

An email sent to Hindalco on Monday didn’t elicit a response from the company.

Standalone miners—NMDC with mines in Karnataka and Chhattisgarh and Sesa Sterlite Ltd with mines in Goa—struggled through the year as well.

An analyst from a domestic brokerage, who declined to be identified, said that while NMDC still has not reached its targeted capacity of 10 mtpa in Karnataka, Sesa Sterlite has failed to start exports of iron ore from Goa. “This is eating into their revenues and the situation is not likely to change in 2015,” he said.

A mail sent to both the companies on Monday remained unanswered.

Still, analysts see some improvement in the operating environment for metal and mining firms in 2015 if the government speeds up infrastructure projects and the re-allocations of cancelled coal blocks go through smoothly.

“You don’t require special focus on individual companies. All that is needed is a framework of policy which ensures that imports of commodities abundantly available in India do not happen as we are not only losing foreign exchange; we are also losing jobs,” said Harish H.V., partner with Grand Thornton India Llp. He added that a push for roads, bridges and highways, would help revive demand.

Firoz from the steel ministry’s JPC said growth in demand for steel and other metals should be investment-driven and not consumption-driven.

“The intensity of investments from the government and corporates will decide whether the metals industry will see a turnaround,” he said.

The article appeared in Mint. The article can be found here.