Docstoc

Slide 1 - Indian Iron and steel conference

Document Sample
Slide 1 - Indian Iron and steel conference Powered By Docstoc
					Indian Steel Industry

  A Rating Perspective
Contents


  Indian steel perspective



  CARE’s steel rating methodology
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:

             o Production shift bias towards China and India

             o The bargaining power of the iron ore and coking coal majors.

             o China is expected to remain a net exporter, at least in the medium term

             o the mature economies have not seen their consumption grow to any level of
               sustainability
Global Steel Industry: Journey till now…
  (Million Tonnes)
 1,600                                                                                1996-2007 CAGR 5.5%
                                                                                     Rising steel usage in the
 1,400                                                                                  emerging markets.

 1,200                                             1946-1973 CAGR 6.9%
                                                     Post World war II
 1,000                                              Re-construction and
                                                  high Economic Growth.
                     1900-1945
  800                CAGR 3.1%

  600

  400                                                                        1974-1995 CAGR 0.8%
                                                                               Energy crisis post
                                                                             industrialized period.
  200

    0
          1903

          1909

          1915
          1918

          1924

          1930

          1936

          1942

          1948
          1951

          1957

          1963

          1969

          1975

          1981
          1984

          1990

          1996

          2002

          2008
          1900

          1906

          1912


          1921

          1927

          1933

          1939

          1945


          1954

          1960

          1966

          1972

          1978


          1987

          1993

          1999

          2005
         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.
                Indian Steel Industry: Journey so far
        (Mn Tonnes)                                                                                  (Mn Tonnes)
 70                                                              3.3                                               4.0
                                                           3.0
                                                                       2.4                                         3.0
 60

                                                     1.4                                                           2.0
 50                                      1.1   1.2
                                   0.7                                                  0.5
         0.3                                                                 0.6                                   1.0
                      0.1    0.3
 40
                                                                                                                   0.0
 30            -0.2
                                                                                                                   -1.0
                                                                                                     -0.9
 20
                                                                                                                   -2.0
                                                                                              -2.0          -3.2
 10                                                                                                                -3.0

  0                                                                                                                -4.0
        FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10


                            Production    Consumption       Net Imports/Exports (RHS)

      Source: CARE Research

India has turned to be a net importer of finished steel in the last three years.
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

        16
        14
        12
        10
         8
         6
         4
         2
         0
               Infrastructure




                                              Pipes/Tubes/Drums




                                                                  Engineering
                                Real estate




                                                                                Automobiles




                                                                                                                                    Consumer durables
                                                                                                             Electrical materials
                                                                                              Wire drawing
Indian steel perspective
Demand-side: ‘a long on way to run’
                                     Steel consumption per capita                                                                                 Steel consumption vs real GDP (2000-2008)

                 700                                                                                                                  700


                 600                                                              Japan                                                                                                                            Japan
                                                                                                                                      600




                                                                                                  Steel consumption (kg per capita)
                 500                                                                                                                  500

                                                                   US
 kg per capita




                 400                                                                                                                  400                                       Rapid                                US
                                                                                                                                                                                infrastructure-
                                                                        China                                                                             China                 led growth
                 300                                                                                                                  300



                 200                                                                                                                  200                                                                     Sustained
                                                                                                                                                                                                              growth in
                                                                                                                                      100                                                                     step with
                 100                                                                                                                              India
                                                                                India                                                                                                                         economy
                                                                                                                                      -
                 -
                                                                                                                                            100              1,000                                  10,000                 100,000
                       2000   2001   2002    2003   2004    2005        2006        2007   2008
                                                                                                                                                            Real GDP (USD per capita: constant 2000 prices)




             •         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.
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
                                             What's driving the domestic steel demand?

                                 Robust Automobiles Growth                                                  (Percent)          Construction sector: Contribution to GDP
                                                                           Ten thousand Units              10
1,600                                                                                                                                                                             8.9
                                                                                                            9                                                              8.7
                                                                                                   1,375
                                                                                                                                                                     8.4
1,400                                                                                                                                                         8
                                                                                                            8                                         7.4
1,200
                          Thousand Units                                                                    7
                                                                                                                                         6     6.2
1,000                                                                                        940                  5.7   5.8      5.8
                                                                                                            6
 800                                                       709                         744
                                                                                                            5
 600                                                                                                        4
                                       454           440
                    368                        350                              368
 400                             286                                                                        3
              245
        184                201                                            195
 200                                                                155                                     2

   0                                                                                                        1
          MHCV                   LCV                 3W                   PV                 2W             0
                                  2008-09     2009-10        2014-15 P                                           FY00   FY01    FY02   FY03    FY04   FY05   FY06   FY07   FY08   FY09


                                                                                 Increased Infrastructure Spending




                                                                                                                                                                    Source: CARE
                                                                                                                                                                      Research
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   •Fragmented capacities across the value chain
    entities                                        •Includes sponge iron units, MBFs, IFs, EAFs,
    •Significant scale economies                    re-rollers and wire drawing units
    •Efficient technologies and                     •A large proportion of non-operating units
    •Globally competitive cost structure            (e.g. 2,288 re-rollers of which 1619 operating;
    due to access to raw materials and/or           1,325 IFs of which 970 operating; 190 EAFs
    focus on improving production efficiencies/     of which 39 operating; 100 wire drawing units
    labour productivity                             of which 33 operating)
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.
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.
CARE’s steel rating methodology
Key rating issues
• Control over supply and cost of raw materials
  700                                                                                                        1,000
  600
                                                                                                              800
  500
  400                                                                                                         600
  300
                                                                                                              400
  200
  100                                                                                                         200
  -                                                                                                            -
        Jan/00


                 Jan/01


                          Jan/02


                                   Jan/03


                                             Jan/04


                                                      Jan/05


                                                                Jan/06


                                                                         Jan/07


                                                                                  Jan/08


                                                                                           Jan/09


                                                                                                    Jan/10




                                                                                                                     Jan-00


                                                                                                                              Jan-01


                                                                                                                                       Jan-02


                                                                                                                                                Jan-03


                                                                                                                                                         Jan-04


                                                                                                                                                                        Jan-05


                                                                                                                                                                                  Jan-06


                                                                                                                                                                                           Jan-07


                                                                                                                                                                                                    Jan-08


                                                                                                                                                                                                             Jan-09


                                                                                                                                                                                                                      Jan-10
                                            HRC           Iron ore lumps                                                                                          HRC            Coke




    – 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
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)
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
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
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
About CARE
Credit 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
About CARE
Major Shareholders
                               IDBI Bank
                     Canara                 First
                      Bank                 Leasing


                State
                                                    Tata
               Bank of
                                                   Group
                India
                              CARE
                 IL&FS                          Sundaram
                 Group                           Finance

                         ING Vysya    Federal
                           Bank        Bank


                     Total holding of the above 9 entities = 91%
About CARE
Range of Products / Services
                                                  Banks and FI
                                                    ratings
                                                                    SME/SSI
                                   IPO Grading
                                                                     ratings


                     Structured
                                                                                Corporate
                       Finance
                                                                                 ratings
                       Ratings



                  Sub-
                                                                                    Infrastructure
                sovereign
                                                                                        ratings
                 ratings
                                                 Services

                                                                                    Corporate
                   Issuer
                                                                                   Governance
                   Rating
                                                                                     ratings



                            Insurance/                                   Construction
                            CPA ratings                                    Grading
                                                           Fund credit
                                           Grading of
                                                             Quality
                                              MTI
                                                             rating
Why CARE Ratings
  Regulatory          • Recognised by GoI, SEBI, RBI, NABARD, NHB, MNRE, BEE
  recognition           and NSIC


                      • Promoted by major banks and FI in India
 Independent          • Three largest shareholders are IDBI Bank, Canara Bank
 rating agency          and State Bank of India
                      • Operates with an independent rating committee


  Professional        • Team of well qualified and multi-faceted professionals
                      • Independent rating committee
     set-up           • Best practices IOSCO Code of Conduct

                      • Founder member of Credit Rating Agencies in Asia
 International          (ACRAA)
                      • Completed assignments for ADB
   expertise          • Granted license by CMDA to commence rating operations
                        in Maldives

                                     22
   February 9, 2011
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
Thank You

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:0
posted:4/27/2013
language:English
pages:24