It saw participation from the ISP (Integrated Steel Players like SAIL, JSW etc) and Secondary Steel manufacturers (DRI, IF, EAF route) as well as Government Official representing the Ministry of Steel.
If you missed part 1 of the series, it is highly advisable to read it first in order to better understand the industry.
Part One Link- Understanding How The Indian Steel Industry Works – Part 1
We have tried to be descriptive at the same time crisp in order to save a lot of time on hearing the hour-long video’s.
Our video summary on Mrs Aruna Sharma (Steel Secretary) is of paramount importance because her stance throughout the event showed confidence and a feeling of commitment from the Government.
Steel Secretary Aruna Sharma – Your Money In Steel Sector Will Not Sink
She began her presentation by saying that the presentation is targeted to all holders of funds who have not thought of investing into the steel sector. She further added that it is her responsibility to showcase all opportunities that lie in the steel sector.
GOI has come up with two policies, NSP (National Steel Policy) and Mandatory Procurement of Steel by the Government and its Agencies for steel made in India for all their investments. This robust support by the govt will ensure that major tenders go to domestic steel manufacturers and it will also make FDI go up.
She said that the share between MSME and ISP will not change much, keeping a target of 300 mt in mind by 2030, currently, ISP’s (SAIL, Tata Steel, JSW etc) have close to 40% share in the steel sector and rest is divided among the MSME or secondary steelmakers.
India already has 126 mt of installed capacity and in Fy17-18 the steel ministry expects 80-85% of utilization.
SIMA – Sponge Iron Manufacturer Association,
link – http://www.spongeironindia.in/, go through the member area.
Further, the hon secretary talked about MSME Definition for Steelmakers to change from the general to a specific where a steelmaker should have a CAPEX of at least 2000 crore and turnover of 1000 crore, this categorization will give a boost to investments happening in MSME sector.
Domestic steel consumption has already gone up by 4.3 % in the first quarter. She further stressed on the pace of growth the country has seen in the recent past with consumption rising from 60 kg per capita to 64 kg’s and she did pointed out that it took 7 years for india to rise from 50 kg per capita to 60 kgs per capita and only 1 year to touch 64 kgs.
Rural consumption has only been 10 kgs per capita and now companies like Godrej are coming up innovative steel products to boost steel consumption along with industry incumbents like SAIL, JSW, Tata steel etc.
She then listed out bullet points to describe how the steel sector would be made stable for next 10 years by bringing input cost lower and help it to come out of the cycle-
- For coking coal, the ministry has already disaggregated the coking coal auction from normal coal auction, and now it is with industry to react to it. Earlier coking coal was being sold with normal coal and going forward they hope to reduce coking coal import dependence by 20% from current 85% but she did say we as a country are not blessed by high-quality coking coal.
- Washeries have been permitted. Washeries are basically used to reduce ash content in coal which helps in a gain of Heat Value of coal.
- Further coal ministry has also disaggregated sponge iron auction for coking coal vis-a vis for power. Sponge iron manufacturers are able to bid separately for coal auction.
- Iron ore and Pellets – The biggest breakthrough has been the permission given by the railway to construct slurry pipelines along the rail lines and this will bring down the cost of fines from Rs 400 to Rs 50 and it will be reflected in the logistic cost of steelmakers.
- With increased focus on slurry pipeline construction and heavy export duty on iron ore, pellet makers need not look back.
- NMDC and Railway have shown interest in investing in slurry pipelines for fine transportation as it would help them reduce wagon making cost. Private steel makers like JSW and Essar steel have invested in slurry pipeline projects.
- Iron ore Pricing- Iron ore is deregulated and with the supreme court judgment, the ministry has an opportunity to rewrite the MMDR Act and intervene into the rules of MMDR Act (Read it Below). A report has to be formulated by the end of October, and ministry is confident that whatever new regulation comes up, it will only ease the 2020 iron ore mine auction and this will make iron ore price more predictable.
- Natural Gas- Natural gas has been in contention for a very long time and natural gas is important in the manufacturing of high-quality steel like- auto steel and also the secondary steel makers manufacturing through the DRI route or pellet manufacturers are looking ahead for natural gas availability. Natural gas is going to come up in the GST regime very soon and the moment it comes in GST regime, it will come down to 5% rate under the New GST regime.
- Availability of natural gas at an Affordable and Assured cost is being negotiated with the ministry of petroleum and natural gas. Affordable rate of $5.41 has been worked out by GAIL India, which is quite reasonable.
- Cost of Power- Government of Punjab has come up with a policy to make power available at Rs 5 per unit to steelmakers specially to secondary steel manufacturers.
- Import Duty- The ministry is trying to do away with import duty on coking coal, because of very high duty revenue collected of the order of 800 crore, the department is a little shy to do away with the revenue entirely but talks are on. If the Revenue Department sees additional revenue flowing into the accounts of government after the GST implementation, then they will not shy away from doing away with the import duty.
Aruna Sharma addressed the mutual funds and said that your exposure to the steel sector is negligible and further you are flushed with funds in the recent past as people are shying away from fixed deposits. She said that mutual funds have the wherewithal to go through the phase of equity.
She assured that the steel sector is one sector where your money is not going to sink, a majority of the plants are EBITDA positive in the range of 20 plus Percent, the worst Bhushan steel is at 23% and Essar and Electrosteel are also at 20%.
In her view, the balance sheets are highly leveraged but assured steel sector will be resolved quickly. Mutual funds capital will be safe provided it is given at an affordable rate of interest, you cannot be erratic about the interest rates especially with a sector like steel where the prices have to be on par with the international prices.
It is capital intensive business and she made a statement that 17-18% EBITDA is something the steel sector can always guarantee, it will never come down below 18% EBITDA, with such an EBITDA your interest rates cannot be more than 7%. More than 7% interest rate is not at all sustainable and in order to pay 8-9% of interest cost steel makers EBITDA has to be 21-23% which is very difficult.
Ministry has a whole is trying to increase the domestic consumption so that realization is more and more.
Government hopes the steel capacity in the country will touch 150 mt by 2020 from the current levels of 126 mt and to touch 300 mt by 2030 will depend on two factors –
- Domestic consumption
- Rate at which credit will be made available to the steelmakers
Ministry is pushing to increase per capita steel consumption in the country but the credit terms is in the hand of the lenders (banks and funds).
The NPA in Secondary Sector is less than 10% and exposure of credit to secondary sector is very low and we are talking of plants with less than 5mt capacity, you can imagine the credit exposure needed for secondary sector because we have 11 clusters in the country contributing 55% of 85 million tonnes and going forward it will continue to provide the same. She said this to the bankers and lenders to make fund flow easy to this sector and make it the topmost agenda.
So lenders should not ignore this sector specially the mutual fund lenders, who are flushed with funds and they should provide funds to the ISP’s and Secondary steel manufacturers at 6-7% rate of interest.
Quality of steel produced by the secondary steel makers is of the highest standard because the steel ministry has the highest BIS standards (33+3) and few more are in the offering and it is applicable to all manufacturers, so in the sense that secondary sector steel quality has been taken care of, they cannot produce substandard goods in the market.
BIS standards for steel
Aruna Sharma stressed again on the bankers to help in easy fund flow to the MSME’s and secondary steel manufacturers, she pointed out that it takes 2000 crore/million tonne for secondary sector to make a steel plant whereas an integrated plant (SAIL, JSW, Tata steel) requires 6500 crore/ million tonne.
She stated “ This is one sector for 10 years I can guarantee is not going to look back”, and it is upto to you to join the celebration and join it to give a boost also.
During the Q&A, one gentleman asked the Honorable Secretary to express views on the MSME sector regarding quality standards, pollution etc, and in reply she repeated that the DRI route (secondary sector) if you compare with the Blast Furnace route (ISP) is less polluting and with BIS standards in place you can ensure high-quality steel also. The Secondary sector will be able to compete on all tenders along with the ISP and would not be left behind for quality and pollution norms. You cannot have only ISP fulfilling the much-needed capacity of 300mt by 2030.
Secondary sector by definition includes all plants (intermediary or ISP) with a capacity of less than 5mt per annum.
Credit exposure to the secondary sector as a whole has been low and time has come to look upon this sector and this was targeted to the fund houses sitting in the auditorium.
One gentleman from the audience representing the Raipur cluster which has about 300 manufacturers and a cluster capacity of 5 mt of steel said that currently the small steel makers who add so much to the employment are rated BBB rated because they do not have captive iron ore mine, and in last 10 years in the downcycle about 80% of the small steelmakers have not been rated below BBB and that’s commendable.
The gentleman believes the secondary steel makers will get greater push once the MMDR act and iron ore pricing issue resolves. He spoke a great length on non-coking coal resolution, (1:00:56)
Non-coking coal- the issue has been resolved, 25% of non-coking coal has been reserved for the secondary sector and of that 25%, 10-12% is consumed by the secondary steel sector, which they use for captive power generation and sponge iron making (DRI route). The secondary indian steel sector is free of imports issues.
She made assuring statements on land bank availability across the country and mentioned that the crux would be the linkage of iron ore mine to the steel producing plant and in the new MMDR policy they are discussing separate auctions for the miners (NMDC) and end users (steelmakers like SAIl, JSW etc).
On a question on anti-dumping duties and MIP (Minimum Import Price) on steel imports, she clarified that MIP’s are temporary in nature whereas anti-dumping duties are long-term measures and right now there is an anti-dumping duty on 124 items and would continue for the next 5 years and can be extended further if required.
The next video summary covers views of Chairman of the largest PSU bank in the country – SBI.
Arundhati Bhattacharya – Steel Sector Should Not Expect Any Interest Rate Cut
The session was essentially about cost of capital, the moderator of the session Mr. Saraswati Prasad who is the financial advisor to the ministry of Indian steel industry kicked started the session by highlighting the CAPEX required for a 1 million tonne capacity expansion which is of the order of Rs 6,500 crore and interest cost prevailing today at full capacity utilization is Rs 6,500 per ton.
Mrs. Bhattacharya in defence for all banks clearly said that interest rates are a bugbear for all borrowers and interest that banks pay to depositors is bugbear for all banks, and in a country like India banks are de facto social security net, which essentially means that a lot of Indians after they retire live on interest they receive on deposits they made to the banks.
In a country like India, a bank procures its resources (money) from individuals in the range of 97% unlike the banks in developed countries where resources of a bank (money) come from both deposits from people and markets.
So when the central bank lowers rate (REPO rate cut of the RBI) and if you are an overseas bank in the US, you are able to transfer the benefit to the borrowers by reducing cost of capital but in India where 97% of resources are from deposits, you are not in a position to reduce the cost of capital in line with the REPO cut because your depositors will flee away, so whatever cut you see from the banks is only on the 3% of the resources sourced from market borrowings.
Only fixed deposit interest rate cuts are in line with the REPO rate cut by the Central Bank and the banks have brought it down from the high of 9% to 6% today, now if you bring it down further than you are adding catalyst to the agitation of the people who see banks as villains of peace.
This gives an understanding why you should not expect significant interest rate cuts for any borrower in India (steel, cement, Infra, real estate etc).
Mrs. Bhattacharya said that on a home loan portfolio the bank is able to give 15 years to 30-year loan at 30 bps above the MCLR rate but for steelmakers, i am giving at a much higher rate, why is that? The reason is very simple, for the home loan portfolio, the NPA rates are 0.54% whereas NPA’s in the steel sector are as high as 19%.
She further said that NIM (Net Interest margin) of SBI is in the 2.5% range and if the NPA’s in the home loan portfolio are in the .5% range, the bank still makes a 2% profit.
She agreed that, there was a time when the PSU banks were seen as pillars of growth and pseudo-Government Entity but it was long back, today PSU banks are told that if you need capital, you better earn it by showing us that you are efficiently using the existing capital.
And even when you think of raising capital from the market you are questioned on exposure to various sectors and remedies employed to deal with the huge NPA mess in the steel sector.
She however regarded the steel industry to be an important pillar of the economy in terms of employment generation, especially by secondary steel producers.
So how should we go about meeting these challenges (NPA, cost of capital, cyclical downturns etc)
She then talked about ways which could help the Indian Steel industry–
- Margin Expansion – Because of wafer-thin margins the industry is not able to support itself in a downturn.
- Transparency – Transparency of data is another issue which she believed should be looked into, she said that there is a lot of fudging happening and this is one reason bankers have stopped trusting the steelmakers.
- Equity Infusion – More equity infusion has to happen in the industry because without it you will go down in the downturn.
- Business Model – Have a business model which shows that you have enough margin to undertake some R&D because it is a problem of the industry that it is very slow in modernizing itself.
- Modernization – Modernization of plants is of paramount importance.
- Collaboration – Collaboration of smaller units to take advantage of each other’s strength. Smaller units can collaborate on R&D, marketing etc.
Steelmakers can ask the govt for help not on interest subsidy but on things like giving Infrastructure status to the industry, which would essentially help the steel manufacturers to raise capital for longer terms.
She however stood firm on the fact that don’t expect interest rate cuts for your Industry, it won’t happen.
She showed her belief in the upside of the industry and said that we have to look into matters which are holding back this industry.
On a question from the audience on how would banks come out from the mess? Mrs. Bhattacharya said, there is a significant difference between the earlier cycle and this cycle-
- Anti-Dumping duties are in place
- Quality Control Certifications on Imports are in place
These initiatives are of paramount importance according to Mrs. Bhattacharya to support the industry. Other positives by the govt are initiatives to increase the usage of steel in the construction of houses, roads etc and preference is given to domestic steel manufacturer for tenders.
She said we are comfortable in providing you loans on condition that you have to show up in your conservative business model that in spite of all the difficulty, you have margins in the business which will enable you to withstand downturn and improve efficiency and if this behavior can be shown by smaller steel manufacturers then banks have no issue and will support the industry.
Today the steel industry is at the mercy of Iron ore miners and coke miners in Australia, she wanted more collaboration there, she however pointed out that initiatives like “Reverse Auction” are in place but the players are killing themselves by bidding aggressively to win the mine that it becomes uneconomical for them to extract minerals.
She is banking on an uptick in demand for this steel cycle to revive.
One gentleman in the audience threw light on industry dynamics and said that if the power cost is reduced by Rs 1 per unit, then this saving adds Rs 1000 extra EBITDA to every ton of steel produced (37 min, see video).
Another Gentleman in the audience spoke about Banks recovering their due interest from the manufacturers by giving Loans (fresh loans) and then withdrawing money from the freshly infused capital to recover the due interest and then show it as a profit-making business in the books. (41 min, see video)
To this blame Mrs. Bhattacharya said that the moment we infuse capital, our meter starts running and if you have a time overrun, you will definitely have a cost overrun, cost overrun is the interest expense and the inflation and if you have a delayed project of 3 years, you will have a stressed project and the bank cannot turn off the interest meter. (43 min, see video).
A very interesting question came from the audience on the ‘Credit Appraisal’ mechanism by rating agencies, the gentleman said that currently rating agencies have rated secondary steel manufacturers (IF, EAF, DRI) BBB just because they don’t have captive iron ore and coke mines but the secondary manufacturers don’t actually need captive mines, and this norm of the credit appraisal makes them to pay higher interest for all their borrowings. (48 min, see video).
Mrs. Bhattacharya also stressed on the steel manufacturers to bring down the receivable days as it would be an efficient use of capital and bring down the cost of capital.
Mrs. Bhattacharya throughout the session sounded tough on steelmakers and continuously spoke of challenges lying in front of the banks for cleaning the NPA mess especially from the steel sector.
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