Discover How Dropping Input Expenses Could Be the Silver Lining in the Cloud of Falling Steel Prices

The dynamic duo leading JSW Steel Ltd, Joint Managing Director and CEO Jayant Acharya, are optimistically predicting that a dip in the cost of raw materials will effectively counterbalance the downward trend in steel prices. Acharya holds the opinion that steel prices have reached their lowest point in various regions of China, as well as other corners of the globe. He suggests that this favorable pricing atmosphere is generating a wave of renewed confidence throughout the international steel market. Here's a spirited breakdown of a recent interview with Acharya:

Amid the challenge of decreasing steel prices and rising coal costs, how did JSW Steel fare in Q1?

JSW Steel admirably navigated the trials of Q1. The surge in coal costs we saw earlier in the year was factored into the cost structure for Q1. We offset the $11 per tonne increase in coking coal prices over Q4 by adjusting our blend. Even with higher iron ore costs, we managed effectively using an improved product mix. The value-added component in our sales went up to 61%. Additionally, our Q4 decisions to undertake slightly pricier export orders and executing them in Q1 helped balance out costs. As a result, our earnings before interest, taxes, depreciation, and amortization (Ebitda) per tonne jumped to ₹12,345 in Q1 from ₹12,151 in Q4. However, volumes did drop due to price reductions leading to channel destocking. Inclement weather led to a build-up of inventory at ports due to delayed vessels. We plan to resolve this issue over the coming quarters.

As for India, the growth story is promising. We anticipate an increased steel demand of 10-11 million tonnes this year, bringing the total demand to exceed 20-130 million tonnes.

How will the Chinese steel market and pricing impact steel manufacturers going forward?

Despite a surge in production, domestic demand in China was lagging behind. Both manufacturing and real estate sectors reported weak demand. Nonetheless, exports from China saw an increase. Following the Chinese government's directive to keep production at 2022 levels, some regions have declared their intention to moderate production. This could potentially result in a monthly reduction of 10 million tonnes in China's production, a positive sign for the global steel industry.

Pricing across various parts of China and the globe appears to have reached rock-bottom, ushering in a more positive price environment. This, coupled with China's slowing economic growth and low inflation rates, indicates a potentially favorable policy support for the steel industry.

What's the anticipated trend for raw material prices as we transition into Q2?

During February-March, coal prices were approximately $346 a tonne, but our Q1 costs were reduced to around $285 a tonne, courtesy of an improved blend. With the current coal price hovering at about $230 a tonne and further reductions expected, our coal costs could drop by another $45-50 a tonne. Although iron-ore costs haven't dipped as expected, we anticipate more substantial corrections in Q2 that will further drive benefits. A decrease in steel prices during Q2 will likely be compensated for by these lower input costs, especially as the volumes recover with channel destocking and bottoming out of steel prices.

What's the progress on integration and development of the acquired mines?

During Q1, our captive mines supplied a considerable 45% of our iron-ore needs. Currently, we have 13 operational mines, nine in Karnataka and four in Odisha. With six more untapped mines and an additional one for Bhushan Steel and Power Limited (BPSL) set to join, we'll have seven more mines in the pipeline, many of which will be operational within a year. We're also investing in slurry pipelines in Odisha and pallet plants to further trim our operating costs.

How is the export situation looking, and what's the forecast for future quarters?

Exports have maintained a steady rate of 15% over the last two quarters, and we aim to keep this ratio consistent in the upcoming quarters. Our total export numbers for FY24 are projected to surpass last year, which saw the effect of a higher export duty.

How are the capacity expansions progressing?

We're smoothly proceeding towards our target of expanding to 37 million tonnes per annum. This includes a 9 million tonne increase from the current 28 million, with 5 million at Vijayanagar, 1.5 million at BPSL, and an additional 1.5 million at Vijayanagar through enhanced blast furnace capacities. Alongside this, we're also working on increasing capacities at various other facilities. The BPSL expansion of 1.5 million tonnes should be wrapped up by Q4. The previous BPSL expansion of 3.5 million tonnes is already on the rise and will contribute to increased volumes during FY24.

We've earmarked ₹20,000 crores for capital expenditures (capex) for FY24, of which we've already expended around ₹4225 crores in Q1. Most of the capex is being covered through internal accruals. Our net debt to equity ratio currently stands at 0.96x, and the net debt to EBITDA has improved from 3.2 times in the previous quarter to 3.14 times in Q1, despite the ongoing capex.

Source : ​Livemint