Contents Sections Executive summary 1 Review 3 Outlook 6 Annexure 11 Figures Input costs firm up 4 Domestic steel prices remain firm 4 Analysis of US steel consumption 8 Analysis of Chinese steel consumption 8 Analysis of Indian steel consumption 9 Tables Outlook on domestic steel industry 1 Availability and consumption of steel 5 Industry aggregate 11 Aggregate for players with iron ore mines 11 Aggregate for players without iron or e mines 11 Steel Authority Of India Ltd – Interim results 12 Tata Steel Ltd – Interim results 12 Ispat Industries Ltd – Interim results 13 Essar Steel Ltd – Interim results 13 Bhushan Steel Ltd – Interim results 14 J S W Steel Ltd – Interim results 14 International players’ financial performance 14 Highlights Operating margins remain stable in first half of 2007-08, to decline overnext 2 – 3 quarters Input costs firm up Steel prices to rise, though not in the same proportion as input costsChina: Limited growth potential Steel products This document has been prepared by Dhimant Kothari and Ashutosh Satsangi (Head of Research). For any queries, please get in touch with our client servicing desk . ([email protected]; Phone: 022-66913561) December 2007
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Industry Information Service presents a detailed and comprehensive analysis of the current trends and the long-term
performance outlook on 47 industries in India. It covers the evolution of an industry, the regulatory environment, cost
structures and the extent of competition. It also provides the key success factors and an analysis of the global trends along withstatistical information on capacities, production, imports-exports, domestic and international prices, and consumption patterns
and player profiles. The parameters are updated on an annual and monthly basis.
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CRISIL RESEARCH STEEL PRODUCTS UPDATE: DECEMBER 2007, 14 PAGES 1
Executive summary
Margins to soften over next 2–3 quartersHigh and rising input costs would lead to softening of the domestic steel industry’s margins over the next 2 – 3
quarters. CRISIL Research expects the operating profit margin (OPM) of players without captive iron ore mines
to fall by 200 – 300 basis points (bps) to 21-22 per cent in 2007-08 as against 24 per cent in 2006-07. The OPM
would remain more or less stable at 21-22 per cent in 2008-09.
Though players owning captive iron ore mines are insulated from the escalating iron ore prices, their margins too
will face pressure from increasing coke prices. CRISIL Research expects the OPM of such players to decline to
nearly 34 per cent in 2007-08 as compared with 36 per cent in 2006-07, and remain at this level in 2008-09.
Table 1: Outlook on domestic steel industry
(Rs / tonne) Players without iron ore mines Players with iron ore mines
2006-07 2007-08 P 2008-09 P 2006-07 2007-08 P 2008-09 P
2 CRISIL RESEARCH STEEL PRODUCTS UPDATE: DECEMBER 2007, 14 PAGES
Limited scope for growth in China’s steel consumption
An analysis of the steel consumption in the US and China leads CRISIL Research to conclude that the buoyancy
in growth of Chinese steel demand would continue for not more than 3–4 years; the same is likely to decelerate
for a few years thereafter.
During 1992-2006, Chinese steel off-take for capital-based applications such as construction, infrastructure and
manufacturing capital goods was nearly 2.3 billion tonnes. This implies consumption of 236 tonnes per square
kilometer of land in China.
Between 1941 and 1975, the phase of major economic growth in the US, the steel off-take for similar capital-
based applications was around 2.1 billion tonnes. This translates into consumption of 230 tonnes per square
kilometer of land in the US.
Thus, we can conclude that the scope for growth in steel demand for capital-based applications, which accounts
for nearly 90 per cent of steel off-take in China, is very limited, even if we consider greater steel intensity in
infrastructural and construction applications and more high rises. Consequently, China’s demand for long
products that are primarily used for construction would slow down considerably over the next 8–10 years.
On the other hand, if we consider consumption-based applications, like steel used in manufacturing automobiles
and consumer durables, the per capita penetration is low in China as compared with the US. Consumption-based
applications amounted to 30 million tonnes in the US and 36 million tonnes in China in 2006. This translates into
per capita usage of steel of 99 kilograms (kg) for US and merely 27 kg for China. Therefore, although these
applications currently account only for 10–12 per cent of steel off-take in China, there still exists tremendous potential for their growth in the country.
CRISIL RESEARCH STEEL PRODUCTS UPDATE: DECEMBER 2007, 14 PAGES 3
Review
Operating margin remains almost stable in the first half of 2007-08The OPM of the domestic steel industry (sample includes Tata Steel, SAIL, JSW Steel, Ispat Industries and Essar
Steel – Set 1) remained stable at 30.5 per cent in the first half of 2007-08, as compared with 30.6 per cent in the
corresponding period in 2006-07.
Players with no captive iron ore mines (Ispat Industries and Essar Steel – Set 2) reported OPM of 20.6 per cent in
this period vis-a-vis 21.8 per cent in the first half of 2006-07. This modest drop in margins is explained by
proportionately higher increase in the cost of inputs (mainly iron ore), vis-à-vis steel prices.
The OPM of players with captive iron ore mines (Tata Steel and SAIL – Set 3) was 33.4 per cent in the first half of 2007-08 vis-a-vis 33.1 per cent in the first half of 2006-07. These players were shielded from the sharp rise in
iron ore prices. Rather, they gained from the portion of steel price increase resulting from higher iron ore costs.
Table 2: Steel industry – Snapshot of financial performance
6 CRISIL RESEARCH STEEL PRODUCTS UPDATE: DECEMBER 2007, 14 PAGES
Outlook
Players to face some margin pressureCRISIL Research believes that players who do not own captive iron ore mines may experience a decline in the
OPM over the next few quarters. The OPM of such players would decline by 200-300 bps to nearly 21-22 per cent
in 2007-08 as against 24 per cent in 2006-07. The OPM would remain more or less stable at 21-22 per cent in
2008-09.
Though players owning captive iron ore mines are insulated from the sharp surge iron ore prices, they will also
face pressure on margins due to increasing coke prices. CRISIL Research expects the OPM of such players to
decline to nearly 34 per cent in 2007-08 as against 36 per cent in 2006-07, and remain at this level in 2008-09.
Input costs to firm up
Over the past 3-4 years, iron ore prices have witnessed a sharp uptrend - prices of iron ore fines (at mine gate)
have increased from Rs 800 per tonne in 2004-05 to Rs 1,350 per tonne in 2006-07. CRISIL Research expects the
same to cost Rs 1,500 per tonne in 2007-08 and Rs 1,750 per tonne in 2008-09. Similarly, the prices of iron ore
lumps (at mine gate) have increased from Rs 1,175 per tonne in 2004-05 to Rs 2,700 per tonne in 2006-07.
CRISIL Research expects the same to cost Rs 3,100 per tonne in 2007-08 and Rs 3,400 per tonne in 2008-09.
Global iron ore (fines) spot prices, which have risen from $65 per tonne in the first half of 2006-07 to $100 per
tonne in the same period in 2007-08, are currently ruling at around $120-130 per tonne. The contract price for 2007-08 is at $82 per tonne vis-à-vis $75 per tonne in 2006-07. As per industry sources, the contract price for
2008-09 is expected to be negotiated at around $120-125 per tonne; spot prices would more or less remain firm at
this level.
Coke prices have also escalated in the last 3 – 4 months. Domestic coke prices have increased to Rs 11,000 per
tonne in the first half of 2007-08 from Rs 8000 per tonne in the corresponding period last year. CRISIL Research
expects the same to touch Rs 11,500-12,000 per tonne in 2008-09. Prices increased because of both demand pull
and cost push – the prices of coking coal, the raw material for coke, increased from $94 per tonne in the first half
of 2006-07 to $115 per tonne in the same period in 2007-08, with current prices ruling at $140-150 per tonne.
In addition to robust demand, rising freight costs have fuelled the price rise of iron ore and coking coal. The Baltic
exchange dry bulk index (BDI), the benchmark index of shipping freight for dry bulk cargo, rose to 6590 in the
first half of 2007-08 from around 3070 in the corresponding period last year. Currently, the BDI is quoted at