Expertspeak. More pain for metals and mining

From rusty to lustrous and losing sheen again, the metals and mining sector was on a roller-coaster ride this year. Jayanta Roy, Senior Vice President at ICRA Limited, feels that the sector may continue to face some pain for a while. Roy has an aggregate work experience of 24 years, of which close to 20 years is with ICRA. Excerpts from a chat with BusinessLine .

What is the outlook for the steel segment?

The first quarter this calendar year was challenging for steel makers. But the imposition of minimum import price by the Government aided prices in later quarters. Globally, steel prices went up as Chinese demand remained resilient on the back of a booming property market. Accordingly, steel production in China was not cut as originally expected. Chinese hot rolled coil (HRC) export offers went from a low of $260-270 per tonne in February to over $400.

Steel demand growth in India was, however, not high; it was only 0.5-0.6 per cent until July, but shot up to double digits thereafter. I am unsure how well this will hold up. Construction and infrastructure account for 60-65 per cent of the demand in India, and more drivers are needed here. The Auto sector has been growing, but only accounts for 10-12 per cent of total steel consumption in the country.

Two, demonetisation can also be a dampener. The end-use sector which to my mind will see a large impact will be real estate and construction where labour payments tend to be settled in cash; the cash crunch may affect long steel demand. Three, there is more capacity in the current year after the commissioning of projects, including those of JSW Steel and Tata Steel. On an average, steel units in the country are operating at around 80 per cent capacity utilisation levels and I expect that the demand-supply gap will likely widen for the worse in the near term.

How about the price situation of raw materials such as coking coal?

Raw material costs shot up recently. Spot prices of prime hard coking coal — a key ingredient for making steel through the blast furnace route — zoomed from around $90 per tonne in August to upwards of $300 per tonne at present. One reason is the action taken by China to reduce coal output by clamping against small and polluting mines and reducing the number of working days in a year.

While China’s coal output has reduced by about 10 per cent in 2016, steel production has not gone down. The increase, although small at 0.4-0.5 per cent, caught many off guard and there is a 20 per cent jump in Chinese coking coal import. At the same time, many high-cost mines in the US and Canada closed down and supply has not kept pace with this rising demand. There may also be some element of speculation in the market as well.

What is your view on global iron ore prices?

Again, like coking coal, resilience in Chinese demand has boosted iron ore prices. From a decade low of $37 a tonne in December 2015, prices increased to over $70 in the current year, doubling from the previous low of December 2015. The thrust on infrastructure investment in China may continue in 2017 aiding iron ore prices.

On the supply side, unlike coking coal, seaborne iron ore supply is plentiful. Iron ore mines in Brazil and Australia, to the tune of 200-300 million tonnes per annum (mtpa), are expected to become operational in the next 2-3 years. Some of these mines, for instance the ones being set up by the likes of Vale, are likely to be very cost-competitive, at $15-20 per tonne cash cost of mining. Commissioning of these low-cost supplies could weigh on iron ore prices in the medium to long term.

Local iron ore prices often diverged from global prices. Is this likely to be the case?

The divergence in the past was mainly due to various mining bans. There is currently an upper cap on mining in some States. In Karnataka, the limit of 30 mtpa is leading to higher prices locally, especially after JSW Steel commissioning its brown-field steel capacity in the first quarter of 2016-17. If the overall cap is relaxed, prices in Karnataka may ease. But in States such as Odisha, there is a supply glut, which is pulling down iron ore prices. While local demand for iron ore is not too robust as yet, there are some positives on the export side. One, the Railways removed the dual pricing policy for local use and exports. Two, export duty was removed on low grade ore of 58 per cent Fe and below, improving our competitive position in seaborne trade.

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