Indian Steel Industry

2. Indian Steel Industry A Rating Perspective

3. Contents Indian steel perspective CARE’s steel rating methodology

4. Key characteristics: • High inter-linkages between global and the domestic steel manufacturers, suppliers and consumers. • Globally, steel continues to remain a highly capital-intensive industry, and prone to significant cyclicality. • The sector remains vulnerable to increasing cost-side pressures, which impinge upon the margins and profitability of large and small sector participants across the value chain. • Other influencing factors: • Production shift bias towards China and India • The bargaining power of the iron ore and coking coal majors. • China is expected to remain a net exporter, at least in the medium term • the mature economies have not seen their consumption grow to any level of sustainability

5. Global Steel Industry: Journey till now… Source: CARE Research The last decade of the global steel industry is largely dominated by the emerging markets. Global steel prices will be largely influenced by the demand-supply dynamics and the raw-material cost for producing steel in these emerging economies.

6. Indian Steel Industry: Journey so far Source: CARE Research India has turned to be a net importer of finished steel in the last three years.

7. How has India fared in recent times: • The Indian steel industry is much more favourably placed than others of its kind in withstanding global pressures, as has been witnessed in its resilience to come out of the recent global financial crisis. • The growth prospects are one of the brightest in the world (the end use sectors are expected to grow at anywhere between 7-14% in the medium term), given the substantially low level of steel usage in its economy compared to other countries. • Projected growth rates in steel end-user sectors

8. Indian steel perspective Demand-side: ‘a long on way to run’ • Indian per capita consumption level an order of magnitude lower than the developed countries/China; rural per capita consumption is even lower at 2 kg/capita/annum => significant growth potential left to be achieved. • Developed countries have grown steadily over the past five decades and have run out their full course now; steel has, by and large, grown in step with the economy • On the other hand, China’s growth happened in a spurt over the last decade, driven by rapid growth in infrastructure and fixed asset investment.

9. Indian steel perspective Significant cross-sectoral drivers in recent past • Construction • Economic growth leading to increasing affordability levels; migration • Fiscal incentives by the Government e.g. tax concessions on housing loans • Sharp spurt in new real estate developments across the country • Infrastructure • Significant developments in transport infrastructure – extending and improving road networks, highways, railway freight corridors, developing new ports and augmenting existing capacities • Power sector reforms spurring captive power plants, T&D network • But there is much more to be achieved; enough intent, but not enough implementation, recently introduced – infra bonds • Automotives • Domestic market pulsating with growth triggers across price spectrum • Besides, huge cost arbitrage luring foreign cos to shift manufacturing to India • Engineering/capital goods • Economic growth has spurred new industrial capacities/expansion in existing capacities • Ever-increasing demand for crude and crude derivatives, supported by new hydrocarbon finds has led to demand for laying pipeline

10. What's driving the domestic steel demand? Increased Infrastructure Spending Source: CARE Research

11. Supply-side: a motley group of large and small participants • Indian steel industry is ranked fourth in the world in terms of crude steel production • Three major classes of participants: • Integrated producers, operating through blast furnace-basic oxygen furnace route • Secondary producers, operating through non-blast furnace routes • Small MBFs, induction furnaces, and re-rollers, wire drawing units, sponge iron units, etc. • Two contrasting faces of the industry • Large, internationally reputed, corporatised • entities • Significant scale economies • Efficient technologies and • Globally competitive cost structure • due to access to raw materials and/or • focus on improving production efficiencies/ • labour productivity • Fragmented capacities across the value chain • Includes sponge iron units, MBFs, IFs, EAFs, • re-rollers and wire drawing units • A large proportion of non-operating units • (e.g. 2,288 re-rollers of which 1619 operating; • 1,325 IFs of which 970 operating; 190 EAFs • of which 39 operating; 100 wire drawing units • of which 33 operating)

12. What can be achieved? • Given the mature developed countries have already surpassed all their growth stages, it becomes relevant to compare India’s steel consumption growth trend with China’s • Currently, India’s per capita steel consumption trails at around 48 kg, an order-of-magnitude lower than China’s level of 405 kg. • Chinese government has been investing in steel-intensive core sectors, which has triggered fresh economic growth, resulting in a virtuous cycle. What can be done? • We have been setting up targets on supply side like achieving 200 mtpa till 2020. Need to work on setting up targets for demand side as well by development of the end-user sectors, especially infrastructure and construction. • Clarity on fastening of policy matters on diverse issues to be addressed, including adequate availability of iron ore and coal linkages, timely and unopposed acquisition of land, and environmental clearances.

13. Inclusive growth: • Indian steel industry equally participated by a few large, corporatized and globally reputed steelmakers and number of small participants, who have found out a place for themselves across different sections of the value chain. • Lower down the value chain play important role given their ability to generate employment with low investment. • Their ability to participate in growth is limited due to access to relatively better technology, inadequate infrastructural facilities including power, susceptibility to volatility in market conditions, their low power to control their prices and costs and support from the financial sector.

14. Key rating issues CARE’s steel rating methodology • Control over supply and cost of raw materials • Significant in view of vulnerability of steelmakers to raw material prices (as seen, over the past 10 years, iron ore and coke prices have risen much more than steel prices) • Backward linkages for raw material supply in the form of captive operational mines owned by the company/group entities • Long term supply contracts with miners

15. Key rating issues • Control over other input costs • Freight: freight costs have been prone to significant volatility; hence, having long term shipping contracts, both inbound and outbound, is a credit positive. • proximity to iron ore mines and raw material sources, and to ports for import of raw materials like coking coal/scrap, or export of finished steel • Captive logistic infrastructure (held by company/group) e.g. jetties, bulk terminals • Energy: captive power plants, especially for steelmakers using energy-intensive processes; firm linkages with suppliers of fuel (natural gas/coal)

16. Key rating issues • Technology • Efficiency and age of steelmaking plants e.g. blast furnace being used; gross block and net block per tonne of crude steel produced • Use of cheaper alternative raw materials substituting high-cost imported materials • Many steel technologies involve innovative combinations of traditional processes for operating flexibility and efficiency – these are considered credit positives • Economies of scale and scope • Large size of operations facilitates lower overheads per tonne, and greater bargaining power vis-à-vis suppliers, customers and financial institutions • Diversification into value-added products offers better margins as well as flexibility in altering product mix according to market demands

17. Key rating issues • Extent of cyclicality and specific dynamics • Demand-supply situation, although important for any cyclical commodity-based industry, assumes more importance for steel due to the capital-intensive nature of the business coupled with the long gestation period for the set-up of a new plant For entities in specific legs of the value chain (e.g. wire rod makers, slab-to-HRC converters), it is important to see the historical margins through the cycle and their volatility • Over-capacity/under-capacity situations globally or domestically\ • CARE believes that timing of the expanded capacity coming on-stream is critical to the success of a steel manufacturer. • Geographical and product diversification – diversified market base, extent of value addition • Working capital management – long working capital cycle

18. Key rating issues • Project risks • Important given the cyclicality of industry and capital-intensive nature of operations • Environmental risk: clarity of title for land acquired; opposition, if any, from local communities; environment clearance • Funding risk: project debt-equity ratio; whether and to what extent debt and equity portions have been tied up; extent of dependence on foreign currency borrowings and hedging policy thereon; timing of project relative to issuer’s liquidity and cash flow adequacy situations; proportion of short term borrowings in the debt profile • Management risk: perceived experience level and quality of management; track record of implementation of similar sized projects without delays and cost overruns; group strengths and liabilities; promoters’ commitment to the project as evidenced through funding support

19. About CARECredit Analysis & Research Ltd. (CARE Ratings) • One of the India’s leading Credit Rating Agency • Focus on Credit Rating, Research and Information Services • Second largest Rating Agency in India. Leader in several sectors. • Registered with SEBI under the Securities & Exchange Board of India (Credit Rating Agencies) Regulations, 1999 • ECAI Recognition by RBI for Basel II implementation. Also recognised by Govt. of India and all regulatory authorities like RBI and SEBI

20. About CAREMajor Shareholders Total holding of the above 9 entities = 91%

21. About CARERange of Products / Services

22. Why CARE Ratings February 9, 2011

23. CARE rated Steel companies • SAIL • TATA Steel Ltd. • JSW Steel Ltd. • Jindal Steel & Power Ltd. • Essar Steel • Bhushan Steel Ltd. • Monnet Ispat & Energy. • Sarda Energy & Minerals Ltd. • Usha Martin • Bhushan Power & Steel

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