We are seriously contemplating on introducing an energy surcharge linked to the base price of coking coal, says Seshagiri Rao, JMD & group CFO, JSW Steel
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JSW Steel Ltd, the flagship business of the diversified JSW Group, posted its highest quarterly profit of ₹7,179 crore in the second quarter, up 350% from a year earlier. However, the impact of rising input costs was visible in its operating performance. Seshagiri Rao, joint managing director and group chief financial officer, JSW Steel, elaborated on his company’s plans to counter the increase in input costs. Edited excerpts from an interview:
Energy commodity prices have been going up. How is your company addressing this?
This is an exceptional situation where coking coal prices have gone up 300% from $120 per tonne to $400 per tonne in a short span of time; every day, the prices are moving up by $10-20 per tonne, which is very high volatility in prices. So, we are seeing what is the prevalent mechanism globally to deal with such volatility. In the US, for instance, steel prices are linked to scrap prices. Scrap prices go up and steel prices go up and vice versa. Recently, we have observed that in the European market, when energy prices are going up, one of the major steel companies introduced energy surcharge of €50 per tonne. Though this concept is not there in India, we are seriously contemplating on introducing an energy surcharge linked to the base price of coking coal. If the coking coal price goes up, the surcharge will increase; if it goes down, it will decrease. Of course, this is subject to customers accepting it. We have to consult our original equipment manufacturing customers and take their views before we implement it.
Any other measures that you are taking to mitigate costs?
Yes. One is that we have completed our Dolvi plant expansion. This will help increase volumes. When the expansion is operational fully, the cost will be much lower. Because the existing operations are all gas-based whereas the new facility is not gas-based, cost will be lower by 15-20%, so the benefit of lower cost will also come in. Also, our overseas operations have started doing well. It contributed ₹485 crore in the second quarter to our earnings against ₹280 crore in the first quarter. That will further increase due to increment in the volume capacity utilization in the overseas market.
Lastly, the iron ore price reduction that happened partially in both September and October will come in. Even though this has not happened to the extent it has happened globally, the benefit will be there. These are some of the neutralizing factors that will reduce the cost to some extent.
Are Chinese policies impacting the steel sector?
There are completely different dynamics that are playing out in China and outside China based on which the Chinese policies are getting calibrated. One is the common prosperity and the second is decarbonization. Basis these two, they are putting in policies in a manner that they limit production of steel, limit exports and move into high-end value-added segment. The impact is that new property investments started falling and that had an impact on overall steel demand in China. In the last one year, steel demand has fallen by 23% in China. However, in the rest of the world, demand is strong mainly due to revival in manufacturing, investments by the government, energy transition, lower interest rates and high amount of liquidity, ensuring and influencing revival for steel.
According to the World Steel Association, steel demand would come down by 1% in China, translating to 10 million tonnes (mt) of lower demand in China, while the rest of the world will see steel demand grow by 11.5%, translating to 90 mt. This means there is an incremental demand of 80 mt, which will translate to 4.5 times of growth in steel demand. Therefore, as far as the steel demand dynamics is concerned, China is not an influencing factor.
So, how do you see the steel demand and supply situation panning out?
Indian steel consumption in the first six months of this financial year was 49 mt against 36.5 mt in the previous year. That means we have consumed almost 13 mt more steel in the first six months of the year. Even though the second quarter was subdued, our expectation is that post-monsoon, the construction and infrastructure sector will pick up. We are already seeing traction in the residential sector side and the government expenditure side.
In the second half, we see that there will be an acceleration in steel demand in India. There is a huge opportunity to fill up the space being vacated by China in the export market, particularly in Asia. And India can fill up that gap.
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