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Where are steel prices headed?

Published on Fri, Feb 18, 2011 at 14:44 | Updated at Fri, Feb 18, 2011 at 15:05 | Source : CNBC-TV18

In an interview with CNBC-TV18, Seshagiri Rao, JSW Steel and Neeraj Singal, Bhushan Steel & Strips, speak about steel prices and
give their outlook going forward.

Below is a verbatim transcript of their interview with CNBC- TV18's Latha Venkatesh and Anuj Singhal. Also watch the
accompanying videos.

Q: The markets were speaking about a fall in demand in December and a certain robust improvement in January, how are
you estimating the steel demand within the country to grow and therefore want can be the impact on prices?

Rao: Yesterday, the consumption of steel for the calendar year 2010 was released by world steel association. Steel is a global
commodity. Therefore, we cannot isolate India and look at. We have to look at world as a whole. The global steel demand has gone up
by 13% in the year 2010. So, there is a huge revival in the advanced economies and the consumption levels across all the continents in
the world.

Last year, the demand has gone up by 9-10% in India. We are seeing the demand coming back from construction, real estate sector.
One side, the flat product demand from automobiles, consumer durables and white goods continue to be robust. The other demand for
long product is picking up. So that is a positive signs we are seeing.

Also, restocking is happening because steel prices are going up and the raw material prices are expected to be reset at higher levels in
the next quarter. Assuming that the prices of steel will go up in the next quarter, there is restocking which is happening in a big way
across the industry. So, all this put together, we are seeing a huge amount of demand in the market place.

Q: We have some data to say that steel output also in January 2011 hit all time highs, it stood at 5.9 million tonne. So, if
supply is matching demand which it would because there is still a lot of unutilised capacity. What is the scope for any
increases in price? Even if the raw material prices increase, how much will steel makers be able to pass it on?

Rao: What is relevant to note is imports are also falling. If you see upto December, the total imports into India was 5.8 million tonne of
steel. Every month we are importing almost close to 8 lakh tonne of steel, but it is coming down because international prices are higher
than the domestic prices. The imports into India from overseas are falling. Thats why you find the local demand is increasing, local
production is increasing to meet the growing demand and imports are falling.

Domestic prices are at lowest level today relatively to what is happening in the international markets. Particularly, if I see the US, where
the HR coil price is close to USD 1,000, it is inching up towards that, domestic Chinese prices are going up, European prices are going
up. So, all this put together, the imports would further fall as far as Indian markets are concerned, domestic production will go to match
the increasing demand in India.

Q: There is quite a bit of difference that exists now between domestic prices and both Chinese prices and even European
prices for that matter. For how long do you see that difference sustaining?

Singal: Presently, the international prices are around USD 880-890, which was till January 12th about in the range of USD 700-720. As
the announcements have been made by the major producers like Arcelor and all that, April prices would be around USD 900. Presently,
our Indian price of hot rolled coil (HR coil) is about in the range of USD 760-780. So, there is definitely a scope of a increase in price
may be in March, if not March then definitely in April.

Part of it is coming not only because of the input cost. The coking coal prices are still high and they are not likely to be coming down
and iron ore prices are also touching all time high about USD 190. Our Indian steel prices are very well aligned with the global prices.
So, if the Indian prices dont increase then the producers will have no other option, but to export in the international market.

On the other hand, if the prices are inline then the imports will happen. So, we are virtually operating at the level of international prices
how it moves. It may be a lag of one month or so in terms of the pricing, but finally it comes to the same level.

Q: JP Morgans report says that there is absolutely no scope of price hike in India. So, what's the disconnect here? Do you
really a see some scope of price hike from current levels or is it true that all price hike was not absorbed by the markets
first up?

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Singal: The increases in prices happened very frequent. If you look from January till now, the price increase which has happened is
about Rs 6,000 and which was quite a steep increase from all standards. So, at the moment, what is happening, people are still feeling
that it may not sustain. So, people are very jittery in stocking. But since there is no lag in the raw material prices, nowhere it looks like
the prices will come down of coal and iron ore. So, there maybe a small increase in March, but definitely in April there will be a big
increase, if the trend continues like this.

Q: Just to continue with what the JP Morgan report says, it says that since September 2010, domestic production has been
higher than consumption with a cumulative difference of USD 3 million tonne over the last five months. The report goes on
to say they believe that this problem of increasing domestic supply from higher production is going to worsen over the next
12 months because of some capacities coming on stream. Therefore, would the next couple of quarters be quarters of
crunching margins?

Rao: I dont expect the supply outstripping the demand. As I gave the number of the imports into India is close to six million tonne,
whereas the domestic demand is growing by 10%. If I take the total domestic consumption, it around 60 million tonne. So, the
incremental demand itself for the next year will be close to six-ten million tonne.

In addition to the incremental demand, the imports may not happen into India because of more supply is coming. JSW Steel is
expanding by three million tonne which will get commissioned by April. Similarly, some other companies also will expand capacities.
So, new supply will come into the market. But to that extent, that will replace the imports which have happened in the year 2010-11
and the incremental demand. So, therefore, I dont find a surplus situation going forward.

Q: Just to talk about your company a bit now. You have acquired Ispat of course and Bellary also. Is there any further
inorganic move that you are planning?

Rao: No. We are not planning any such inorganic move. Today, including our expansion at Vijayanagar and three million tonne Ispat,
we are close to 14 million tonne total capacity. So, we will be focusing now to set up the project in West Bengal. So that we will be
doing in the next financial year.

Q: What kind of margins do you expect at all in the next couple of quarters? Would you be able to maintain the 25% plus
margins that you reported in the last quarter?

Rao: As far as costs are concerned, there is a upward pressure on the cost. Coking coal prices are going up and the iron ore prices
are going up, they are historically again at higher levels. So, taking that into account from April onwards cost pressures will increase.
At JSW, we have commissioned our beneficiation plant so that will make us to procure low cost iron ore, low grade iron ore.

In addition to that, we will have the complete captive coke oven batteries meeting our entire requirement of coke, there wont be any
imports. So, taking that into account there are some benefits in the cost side which will come but that may not neutralize fully the
increase in cost, but there will be a huge amount of volume growth to the extent of 40% in the next financial year. So, taking that into
account an absolute number, you will find a very good increase in the overall EBITDA and profitability for the next financial year for
JSW.

Q: In terms of pure realisations it could be a tad lower?

Rao: As you would see now the pricing of raw materials has become quarterly and they may become monthly. So, in line with that the
price of steel also will move in sympathy with the prices of raw materials. Therefore, I dont think the margins will undergo a dramatic
change in upwards or downwards, accepting the efficiency which JSW is bringing in towards that, the margins will improve.

Q: Do you think that steel makers will be really in a position to pass on the raw material cost? Do you suspect that you will
have to take a bit of the hit on your margins and not really pass on all the rights?

Singal: I expect that we should be in a position to pass on the cost because it is happening globally, its not that it is centric on India.
The coking coal prices, iron ore prices are affecting the global prices of steel. So, I feel that we will be definitely in a position to pass on
the increase cost to our customers which is primarily the automotive and the white good industry. Fortunately, all these industries are
doing very well and they can well absorb the increase. I dont think that there will be any impact on the realisation for the steel
companies in the next quarter.

There is a general upward pressure on steel prices and that has been exacerbated by the recent floods in Australia which has made a
lot of the raw material costs go up. Where are steel prices headed from here on, what can the international prices go to and what will
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be the impact on Indian steel prices?

In an interview with CNBC-TV18, Neeraj Singal, MD, Bhushan Steel and veteran JJ Irani, Director, Tata Sons, speak about steel prices
and give their outlook going forward.

Below is a verbatim transcript of their interview with CNBC-TV18's Latha Venkatesh and Anuj Singhal. Also watch the
accompanying videos.

Q: How much do you think Indian companies could be hit by these Australian floods, considering that cooking coal prices
have gone up by USD 40-50?

Irani: Coal is dealt with in two ways; one is the spot basis and the other way is through contracts. I think the ones who are getting it
through contracts, long-term contracts would be better protected. The ones who are importing on a spot basis, ship by ship, will
certainly be impacted because the prices gone up considerably, is approaching USD 300 a tonne now, cooking coal.

Q: Will there be an additional impact on iron ore prices globally?

Irani: No, India does not import any iron ore. And quite a few of the steel companies have their own iron ore. Some who buy, have to
buy it at the international prices, but nothing is imported. So, I dont think the impact of iron ore will be so severe. But the impact of
cooking coal will be there. I think there will be an increase in the cost of production, and of course the steel companies will try to pass
that down to their customers.

Q: How much do you think the cost will increase? How much of cooking coal are you importing from Australia at this point
in time? How much will be the impact of that on prices and how much will you have to increase the prices in order to
compensate that?

Singal: We import on a long-term basis. As Dr Irani said there are two ways of importing cooking coal, one is the spot basis and the
other is the long-term. Definitely, we dont have any domestic supply of cooking coal. We import 100% of our requirement. And we have
long-term contracts with the large companies in Australia for cooking coal. A situation where if the floods are continuing, then it will be
a cause of concern because the quantity may reduce. But, otherwise, the cost is going up definitely. At present, the spot basis is
about USD 350, but I think it should stabilize about USD 300.

I hope that we will be able to pass it on because it will be globally for the whole world, because Australia supplies for the whole the
cooking coal. So, the prices of the steel will have to rise up for worldwide. So, I dont see much impact on the bottom-line of the
company because all the steel prices definitely are going to go up.

Q: What could be the trend of steel pricing? Do you think they will go up sharply or do you see some calibrated moves?

Irani: I think steel prices will certainly go up, but not very sharply because internationally the steel industry is still not doing too well.
So, the steel companies cannot really afford to hike the prices too far. If the price difference between engine steel available
domestically, and what is obtained by import goes up, then of course the import of steel might start. So, I dont think the local
companies also will go in for any sharp increases. But as I said, gradual increases, month by month, is definitely on the cards.

Q: There will be a buyer resistance at some point, after all a lot of the final consumers of steel are consumer durable
companies, infrastructure companies, will there not be a buyer resistance? Is it not inevitable that steel companies are
going to face a crunch in margins?

Singal: Definitely, the steel industry as far as the flat products are concerned, where we are majorly into, our business is basically in
the flat product segment, it depends on the automobile industry and the white goods industry. If they are doing well and for them the
import of steel is not that important a component because it maybe mass consumption, but its not the full value of their product. Lets
say in car, the steel is only about 400 kg. But if the prices are to go up, we have no choice, but to pass on the prices to them. I think
the car industry or the automobile industry and white goods industry and construction is also relatively doing quite well. So, I do not
see a problem in passing on the prices to our customers.

Q: Lets say current pries maybe around USD 750 or so, what could be the range in 2011 going forward?

Singal: Now, the international prices landed in India are around USD 780 and domestic price also is about USD 780 and already
international prices have gone up by another USD 20-40. So, I think there would be another increase by March.

As Dr Irani said that till the time prices of the Indian prices are lower than the international price, there is no problem and that is exactly
what is happening that our prices in India are lower than the international price. So, internationally the prices in the next month if things
continue like this, it should be touching around USD 830-840. So, there would be a may be price increase next month again.

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Q: What do you think will be the range in 2011?

Irani: We are talking about hot rolled band, I suppose, which is the bellwether type of material and I think it is now well past USD 600
and it might approach USD 700. I think a comfortable range would be in the region of USD 650-700 for the next few weeks at least.

Q: What about margins? Do you think you will be able to raise prices substantially or at least to match the input cost you
wont have to take any hit on the margins or you think some hit on the margins will come?

Singal: Maybe in the short-term, maybe for one-two months, since there is always a time lag between the price increase of the raw
material and the finished goods, maybe for a month or two, but long-term there is no other choice but to pass on the prices to our
customers. In November the price of hot rolled coil was around USD 630-640 internationally, today it is about USD 780 and Indian
prices are also in the same range. If the prices are further going up then definitely the Indian prices would also go up. Since the input
costs are going up, so its not a question of absorbing these costs because these costs are very abnormal hike and it is for everybody.
So, it has to be increased.

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