This appears to be the third supercycle for commodities: Seshagiri Rao
PremiumEarlier, at the slightest downturn, weaker players would sell steel at any price. That situation is not there anymore
JSW Steel, which reported an 18% growth in quarterly profit, expects demand for commodities to stay strong for a sustained period as the global economy recovers from the pandemic. Seshagiri Rao, joint managing director and group chief financial officer of JSW Steel, said this could well be the third supercycle for the commodities sector, led by demand from China and the US. Edited excerpts of an interview:
Do you see the rally in metals as sustainable?
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Right now, demand is very strong. China, which consumes 55% of the total steel, sees very strong demand, and at the same time, it wants to reduce production, import more steel and export less in addition to putting restrictions on exported steel by withdrawing incentives. So, in the future, China disturbing the whole dynamics of the steel sector by exporting more steel may not happen. Besides, across the world, a huge number of fiscal stimuli are being doled out, leading to infrastructure spending. So, steel demand from that point of view is strong. The supply-side, however, is not increasing at the same pace. The reason being every country wants to increase scrutiny on ESG (environmental, social and governance). So, the ESG scrutiny is reducing production across various countries. All this put together, demand is increasing, but supply is not keeping pace with it. Therefore, steel prices, only on the speculative side, will get corrected. But I don’t think that fundamentally a big correction will happen.
Would you term this a supercycle for commodities?
Every three-four years, the sector sees this kind of cycle. It moves along with GDP growth in various countries. So, that cyclicality remains in the steel sector. But supercycles, we have seen between 1970-86 and 2000-14. This appears to be the third supercycle.
When do you see supply catching up with demand?
In the India story, there is a lot of consolidation that has happened. It is good for the industry. Earlier, at the slightest downturn, weaker players in the industry would sell steel at any price in the market to manage cash flow. That situation is not there anymore, and it is a good environment that we are operating in. The downturn started in 2015 when China started dumping steel into the world, which brought down steel prices. Since then, we had not seen any investment in the steel sector in India or globally. So, the total installed capacity in India remained at the level of 130-140 million tonnes per annum (MTPA). As of date, steel capacity is 142 million tonnes; of this, we will produce 103 million in 2020 as the industry operates at around 80% capacity. So, the capacity that is available to meet demand is approximately another 10-15 MT maximum. The new capacity will come when we commission a 5 MTPA plant this year in Dolvi, Maharashtra. NMDC is also commissioning a 3 MTPA plant.
You have announced a capex of ₹25,000 crore. How will you fund this?
We will be investing ₹15,000 crore to expand capacity by 5 MTPA at our Vijayanagar plant, enhancing mining capabilities and efficiencies at a capex of ₹3,450 crore and are setting up 0.12 MTPA colour-coated downstream facility in J&K for ₹100 crore. For this fiscal, we will spend ₹6,385 crore. Of which, we will spend ₹1,700 crore towards maintenance of the plants, and the rest will be invested in other projects in the plant. Of the ₹25,000 crore, we will be spending ₹18,540 crore this year, which will be financed through internal accruals of ₹10,500 crore and ₹7,800 crore through debt. As of March 2021, our debt to Ebitda (earnings before interest, tax, depreciation, and amortization) is 2.61:1, and debt to equity is 1.14:1. We have guided that we will not increase our debt to Ebidta beyond 2.75:1 and debt to equity beyond 1.75:1. These are our financial policies within which we will manage our organic and inorganic growth, deleveraging and dividend policy.
Have your overseas ops benefited from the upcycle in metals?
We made substantial investments in our steel plants overseas to revamp operations. We invested $30 million in Mingo Junction and $150 million in the Bay Town plant, with another investment of $150 million in the offing. Revamping has enabled us to have a consistent production at 1.5 MTPA Mingo Junction where we were unable to operate at full capacity. We recommissioned Mingo Junction plant and could reduce our losses from ₹1,200 crore to ₹800 crore this year. This year, however, we have guided 1 MT production. Revamping is helping us increase the capacity utilization that will help us sell more volumes and make more money. At the same time, US markets are looking good, and prices are very attractive.
Iron ore exports are up. What impact do you see on steel prices?
There are a lot of problems on the iron ore side. Last year, iron ore production came down by almost 44 MT—at 202 MT in FY21 against 246 MT in FY20. At the same time, India exported 60 MT last year against 37 MT in FY20. So, there is a 23 MT of incremental exports from India with an overall shortfall of 67-70 MT relative to iron ore availability in the previous year. So, the steel industry suffered due to a lack of iron ore and prices have gone up from ₹2,560 per tonne in April 2021 to ₹6,560 now.
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