JSW Steel is a long-term bet that needs many pieces to fall in place

JSW Steel aims to increase its capacity to approximately 50 MT by 2030. (Photo: Bloomberg)
JSW Steel aims to increase its capacity to approximately 50 MT by 2030. (Photo: Bloomberg)

Summary

  • Fulfilling capex plans will require at least 1 trillion, with the company reportedly seeking loans exceeding $750 million. There is a lot at stake over the next five years as the company looks to scale up

Recent reports that companies such as JSW Steel, Tata Steel, are all bidding enthusiastically in coal auctions have surprised nobody, as steelmakers globally strive to secure supply chains and achieve significant scale.

Indian steelmakers are particularly well-positioned, benefiting from several long-term advantages. JSW Steel, as one of the largest in the country, stands out among its peers in the industry.

Currently, India boasts an annual steel production capacity of around 160 million tonnes (MT), with JSW contributing approximately 28.5 MT to this total. (Tata Steel's overall capacity is larger due to its operations in Europe).

All major steel producers have aims to expand, with plans of potentially increasing domestic capacity to about 300 MT by 2030. This expansion is driven by a policy focus on infrastructure and construction, sectors expected to push demand up by around 9% per annum compounded. Steel's role in construction is irreplaceable.

The supply chain involves iron ore, which India has in plenty. The process of turning iron into steel is energy-intensive, necessitating captive power and, consequently, driving demand for power. A significant portion of this power is expected to come from thermal sources, hence the keen interest in thermal coal auctions.

JSW and the other large steel plants also have plans to go zero carbon and deploy renewable energy, but that is a long way into the future. JSW, for example, is looking at zero carbon by 2050.

Steel production also requires blending a specific quality of coking coal with iron in blast furnaces. With about 90% of its coking coal imported, India faces a challenge as the demand for this resource is projected to surge with rising steel production.

JSW Steel’s ambitions revolve around major capacity expansions in steel, gaining control of captive thermal coal, and overseas tie ups/ acquisitions to gain access to coking coal (as well as thermal). These are all long gestation projects and capital intensive.

Despite excellent earnings and a solid balance sheet, substantial investments are necessary for JSW Steel's future plans.

The company aims to increase its capacity to approximately 50 MT by 2030, including a 50% expansion at its Vijayanagar mill. By the end of fiscal year 2024-25 (FY25), it is targeting a capacity of 38 MT.

It’s also looking at building an entire new complex at Paradip Odisha at a cost of 65,000 crore, which will include a steel plant with a capacity of 13.2 MT, a captive power plant, captive jetties with cargo-handling capacity, a cement manufacturing unit, etc. Port facilities would considerably ease logistics.

JSW is eyeing stakes in overseas coal mining operations. There are reports that it is seeking a 20% stake in an Australian coal mine Blackwater, which is run by Whitehaven Coal. This could cost around $1 billion. JSW Group already has investments in Australia which give it access to two coal mines.

Other expansion plans include a 5,500 crore, grain-oriented electrical steel manufacturing facility through a joint venture with Japan’s JFE Steel Corp in Karnataka. Grain oriented steel is critical for grid applications since its used in transformers.

In Q3FY24 , the company reported consolidated revenues of 41,940 crore and net profit of 2,415 crore, with sales volume at around 6 MT and production of 6.9 MT. In FY23, it had logged consolidated revenues of 1.67 trillion.

Fulfilling these capex plans will require at least 1 trillion, with the company reportedly seeking loans exceeding $750 million.

JSW Steel shares have done well in the last year, as profitability has risen. But the stock is a long-term bet for investors since there will be a lot at stake over the next five years as the company looks to scale up.

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