Sohrab Darabshaw

Normally, when a project of this size is called off, it sends ripples throughout the entire steel sector, and even negatively affects the stock market.

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Yet, when a few days ago, South Korean steelmaker POSCO let it be known that it had decided to put its much-vexed $12 billion project to build a steel plant in India’s iron ore-rich state Odisha on hold, the reaction in India as well as globally was muted. Almost as if it was anticipated.

Regulatory and Approval Delays

The subdued response can best be attributed to the extraordinary delay – a decade – in trying to get the project off the ground. Holdups in receiving permissions for land use and environmental clearances from the local and Indian governments, long legal battles, protests against the project by residents, red tapism, even the kidnapping of company executives in 2007 for a day by protesting activists, all ensured that the project remained a paper tiger all this while. It’s been a veritable ten years of legal and public relations battles for the former Pohang Iron and Steel Company.

For much of this period, we at MetalMiner, faithfully reported and analyzed the developments on the “POSCO India story,” from the sidelines.

It’s not clear yet, though, whether the Korean giant has finally thrown in the towel in sheer disgust at the inordinate delay, or whether it’s really a strategic decision that was part of the company’s overall cut in overseas business. Given the fact that steel industry across the globe is hemorrhaging cash, it could very well be the latter.

Blame the Steel Market

Officially, unnamed POSCO officials were quoted in the Indian media saying – it’s all part of the restructuring. The exercise is expected to reduce by about a third, POSCO’s overseas businesses. The company has been struggling with sagging profits for some time now, and cutting costs seems like the best way out for now. No doubt, if the Odisha project had gotten off the ground, it would have had provided some financial succor for POSCO in today’s troubled times.

However, a Press Trust of India report quoted by website FirstPost said POSCO put the project on hold due to the aforementioned delays in regulatory approvals.

As far back as early 2014, we predicted that the POSCO India project was on its deathbed, and that no amount of posturing by either the new Indian government sworn in last year or even by POSCO could save it.

A Reuters report said the South Korean steelmaker scrapped its plans after a new law made it costlier to source iron ore for the plant. This was the entire attraction of Odisha in the first place, access to cheap and readily available iron ore.

POSCO Swears The Project’s Not Dead… Yet

The steel major, however, would like everyone to believe that the epitaph of this “Indian steel tragedy” has yet to be written. Steel analysts here feel that POSCO, the world’s sixth-largest steelmaker by revenue, was likely to continue in India even if it ultimately decided to scrap the Odisha project altogether. That’s because the company had no choice but to be in a country where steel consumption was growing at a steady pace, a global rarity.

There are also conflicting reports that POSCO was thinking of taking the steel project somewhere else in India – perhaps to the western state of Maharashtra where it already has a downstream steel project. But this was all officially denied by POSCO.

The company has, so far, acquired only around 600 acres out of more than 4,000 acres needed for the 12-million-metric-tons-per-annum steel plant.

And what would have been an otherwise humorous episode in the rather serious steel business was the fact that barely a couple of days after POSCO’s announcement that it would abandon the project, local tribal residents were reported to have forcibly reoccupied the land they had given up for the project. Almost 500 of the 600 acres of land have been taken over as of this writing. That, more than anything else, was the real pointer to this project’s final status – “a lost cause.”

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The author, Sohrab Darabshaw, contributes an Indian perspective on industrial metals markets to MetalMiner.

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This is part two of an analysis of how China’s recent stock market crash affects neighboring India.

The Indian arm of global credit rating agency Fitch said with soft demand in China, base metal prices had gone down in the range of 2-21% in the first six months of 2015.

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On a year-to-date basis, Chinese domestic hot-rolled coil steel prices declined by 21%. London Metal Exchange nickel prices are down by about 12%, LME copper prices by 9% and China alumina prices by about 10%. In the last one month, iron ore prices dropped by 20%, Shanghai steel prices by 16.4%, and zinc prices by 7%.

What’s This Mean for Steel?

In reference to India’s steel sector, rating agency Ind-Ra pointed out that Indian manufacturers were already struggling with low capacity utilization, and lukewarm domestic demand was unlikely to benefit the margins of manufacturing units in the short term.

So was there any silver lining at all for India where the Chinese downturn is concerned? Depends who you listen to or talk to. Here’s what a report in the Business Standard claimed — the economic downturn would be good for smart cities. The rationale — copper is trading at a 6-year-low and China is the world’s top copper consumer, accounting for 40% of global consumption.

How About Aluminum?

Similarly, aluminum is trading at new lows and was already trading at prices below cost of production of many Chinese companies. For India, as a consumer, this is good news as the cost of constructing new infrastructure, especially smart cities, would reduce.

And that extends to a lower price for a technology innovation dear to almost everyone in the world, according to the report. Mobile phones will be cheaper, it predicted. If the Chinese really devalued their currency, world markets will be flooded with Chinese goods at low prices affecting exports of other countries, including India.

As for the rest, such as automobile manufacturers, it could possibly get only worse in the coming days.

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The author, Sohrab Darabshaw, contributes an Indian perspective on industrial metals markets to MetalMiner.

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Old Chinese proverb: when a giant in a race with another falters, the other, without a doubt, wins.

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Actually, I made that up. Ignore it. Still, when China’s economy started showing signs of a meltdown, some in India “predicted,” in a knee jerk reaction, that it was a “welcome development” for neighbor India.

No need to reiterate here how the two nations, with the largest populations and the largest economic growth rates, were in competition with each other in almost every sector.

A few days later, after the fog cleared, warning bells were rung by analysts and ratings agencies that if China was to lose the race, it would be tough for India, too. Even a tiny spill, such as the one China’s stock market felt last week, was bad enough. There would really be no winners in the race.

China’s economic troubles could have a significant impact on India, particularly in sectors like IT and steel, according to India’s trade and industry body, The Associated Chambers of Commerce and Industry of India (Assocham).

The adverse economic developments may have a directionally negative impact on the Indian metals industry as well as on sectors with an export focus, claimed another agency, India Ratings and Research (Ind-Ra) in a statement.

News reports, quoting metal analysts, claimed that while it was true that a drop in commodity prices linked to China’s slow demand was a positive for India, it was not really “good news” for a host of metal and iron ore producers such as Steel Authority of India, Tata Steel, and upstream oil producers.

The fall in ore, steel and copper prices hit Indian manufacturers as hard as any other company in the world, so what’s there to cheer about?

A paper prepared by Assocham said that in today’s global economy, where India’s economy — like any other — is plugged into the rest of the world’s, the China downturn was bound to impact India. China, incidentally, was the number one merchandise trader in the world with over $4.16 trillion worth of trade, followed by the US with $3.9 trillion, as claimed by Assocham.

But the more pertinent point made by Assocham was that the kind of cost competitiveness which the Chinese companies provided to manufacturing semi-process industries — such as electronics, electrical and telecom equipment — would disappear from the global supply chain. This is without even mentioning the inability of India to fill any of those spaces vacated by the Chinese companies.

Another news report quoted Hitesh M. Avachat, Deputy Manager at CARE Ratings, as saying that China accounted for more than 30% of the overall consumption of metals globally. For Indian metal producers, the price collapse meant their landed price in India would go down further, thereby pressuring companies to reduce prices. Because of the likely Chinese dump of its surplus goods, India’s export demand may also fall, he added.

Jayant Acharya, Director, Commercial and Marketing, JSW Steel Ltd., quoted in the same report, said if prices kept falling, margins would get impacted.

The Indian arm of global credit rating agency Fitch said with soft demand in China, base metals prices had gone down in the range of 2-21% in the first six months of 2015. On a year-to-date basis, Chinese domestic hot-rolled coiled steel prices had declined by 21%, London Metal Exchange nickel prices by about 12%, LME copper metal prices by 9% and China alumina prices by about 10%. In the last month, alone, iron ore prices dropped by 20%, Shanghai steel prices by 16.4%, and zinc prices by 7%.

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The author, Sohrab Darabshaw, contributes an Indian perspective on industrial metals markets to MetalMiner.

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The Reserve Bank of India‘s 5/25 plan allows banks to extend loan repayment periods up to 25 years, with an option of refinancing the loan every five years.

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India’s most indebted steel company Tata Steel Ltd., according to a Business Standard news report, also announced plans to sell its long products division in Europe, but it had not been able to close that deal because international steel prices had weakened, reducing the unit’s valuation. The company had initiated talks with lenders to reduce its interest cost by 0.9 percentage points on a $1.5 billion loan taken out last year. Tata Steel signed $1.5 billion term loan as part of a $3.1 billion refinancing plan last year.

In its financial stability report last week, the RBI warned that steel companies would not be able to service their debt as the infrastructure sector in India struggled with stalled/delayed projects.

Another report by Credit Suisse had estimated the total debt of stressed steel companies in India was about $31 billion, which was 75% of the banking system’s gross non-performing assets.

Many bankers and analysts have also pointed out that some steelmakers which had set up plants between 2008 and 2010, when land acquisition and material costs were high, had even bigger problems at hand.

At today’s price levels of $360 per ton of steel, most of their revenue was going to the servicing of their debt. Not many expected a spectacular rise in steel prices in the coming months. That coupled with the Greece and the looming Chinese stock market crisis meant that Indian steel companies were left with very few options. They had to either sell off some of their assets or infuse more cash, which means more borrowing.

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Steel and banking experts are of the view that if this situation is allowed to continue, India’s banking sector may end up with a crisis of its own. As such, borrowing could turn into bad debt. To avoid that, they suggested that the government, banking and steel sector leaders sit together and hammer out a solution to give both sectors a fresh start. The RBI’s 5/25 scheme was essentially just an offering of liquid cash to keep steelmakers afloat, It’s not a permanent solution.

The author, Sohrab Darabshaw, contributes an Indian perspective on industrial metals markets to MetalMiner.

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Contrary to the belief that Indian steelmakers are well off as compared to those in other economies, it’s just not the case.

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For the last three years, Indian steel companies, including market leaders such as Tata Steel Ltd., have been hammered from all sides. Low consumption, dropping prices, a weak economy and cheap imports have all combined to push many of them into debt. The plunge continues, and some financial analysts have now forecast that even an expected rate of economic growth in India of 7-8% may not be enough to bring the spiral to a halt.

According to one report, the total borrowings by “stressed” steel companies was estimated to be $31 billion. Now the fear is that many of them will be unable to ever repay their loans, leaving banks that lend to steel companies exposed and facing financial ruin.

India’s central bank, the Reserve Bank of India (RBI) has said five of India’s top 10 private steel companies were under huge financial stress. Most are now taking steps to reduce their debt and a few have shown an an inclination to sell more assets in 2015-16.

To help out domestic steelmakers, the RBI recently announced a “5/25 scheme,” which, at heart, is essentially a debt restructuring option. It extends the tenure of loans to 25 years with an option to refinance in five years. At least two steelmakers, Bhushan Steel Ltd. and Essar Steel India Ltd., have opted for it. Companies have an option to refinance the loan every five years.

At this midpoint of the year, Essar Steel, backed by the billionaire Ruia brothers, is reported to be seeking to restructure part of its about $6 billion in debt.

Earlier this week, New Delhi-based Bhushan Steel finally received approval from its bankers to refinance its approximate $55 million debt under the RBI’s 5/25 scheme.

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The statistics on steel imports to India speak for themselves.

Steel imports went up 72% in the last fiscal year to 9.3 million metric tons, of which South Korea and Japan together sent 3.5 mmt. They’re still going up. In the first two months of this fiscal year, the situation got worse, with shipments from Japan at 111% and from South Korea 51%.

This September: SMU Steel Summit 2015

Fitch Ratings, for example, in a recent report, said it, too, did not expect the Indian government’s recent tariffs on the two free trade agreement partners to increase customs duties on steel imports would alleviate the pressure on Indian steel producers. The higher customs duties will likely result in only a marginal increase in the landed costs of imported steel products.

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What Indian steel companies are hoping is that, just like in the US, the Indian government starts thinking of imposing anti-dumping and safeguard measures. Contrary to their expectations, the government is said to be actively toying with the idea of signing a free trade agreement with the Philippines. It also extended a previous deal to supply high-grade ore to Japan and Korea.

Steel in Free Trade Agreements

Steel is one of the many commodities that make up an FTA. At the time of signing its FTAs with Japan and Korea, the global steel scenario was very different compared to the one seen today. It was flourishing and market demand for quality steel was high, both in India and abroad. Now, in 2015 though, the situation is downright bleak.

India represents a growing market, which will require copious amounts of steel for infrastructure and other sectors. So nations such as China, Japan and Korea are dumping inferior steel into the Indian market. The foreign steel is being bought and specified because of its attractive price range.

Many here feel that the FTAs that India signed with Japan and Korea are flawed. Under these agreements, duties paid on imported finished steel products from these countries were given a waiver of 5%. Import duties on goods imported from these two countries was 2.5% compared to the usual duty of 7.5%.

Then Vs. Now

While such FTAs may have worked before, experts are of the opinion that India’s deals with South Korea and Japan weighed heavily in the latter’s favor. The Indian steel ministry already highlighted these concerns to the government, which eventually came around to the view that steel should now be removed from the FTA list. Unfortunately that’s not going to happen any time soon.

Some steel leaders here have pointed to the recent passage of the Leveling the Playing Field Act. This legislation, they said, was designed to give American companies new ways to fight unfair trade practices. That’s the way the Indian government needs to go if it is to protect its own steel industry.

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The author, Sohrab Darabshaw, contributes an Indian perspective on industrial metals markets to MetalMiner.

 

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First it was cheap steel imports from China that bothered India’s steel companies, now just-as-cheap imports from Japan and South Korea, two nations with whom India has a Free Trade Agreement (FTA), are causing the same type of consternation.

This September: SMU Steel Summit 2015

Earlier this month, as reported by MetalMiner, the Indian government imposed five-year anti-dumping duties ranging between $180 and $316 per metric ton for some industrial-grades of stainless steel imported from China, Malaysia and South Korea. The duty was obviously an attempt to try to halt surging steel imports.

Structural_Steel_Frame_550

Structural steel from India could soon get more expensive in the US thanks to anti-dumping duties.

The Heavy Industries Minister in the Indian government has said there could be moves afoot to further raise tariffs on imported steel. The Minister said he would be taking the matter up with the Finance Ministry soon.

Meanwhile, Back in the USA…

While India grapples with its own skewed steel supply and demand issues, back in the US, some Indian steel companies find themselves on the receiving end of upcoming tariffs. A few weeks ago, the Commerce Dept. initiated investigations to determine whether to impose anti-dumping (AD) and countervailing duties (CVD) on import of corrosion-resistant steel products from India, China, Italy, Korea and Taiwan.

Not many players in India’s steel segment want to comment on the US development, blaming the economic slowdown almost everywhere around the world for the low prices.

Free Trade Agreements Making it Easier to Dump Steel?

But when to comes to protecting their own market, local steel firms are almost united in the belief that even if the Indian government was to increase import tariffs, it would not stop countries such as Japan and South Korea who have FTAs with India.

One of these players willing to go on record was Sajjan Jindal, Chairman of JSW Steel Ltd., who felt that both Japan and South Korea paid almost no duty when they sold steel in India.

He told news agency Reuters that almost 50% of steel coming into India was from the FTA countries and that almost all steel players felt the government would not really step up to the plate to impose additional import duties after it did so in June.

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PriceWaterhouseCoopers‘ Mine 2015 Report was good news for India, but cast a troubling picture of the overall global mining industry.

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Dry-fuel miner Coal India Ltd. (CIL) moved up from the 8th to the 6th slot on the list of the largest mining companies in the world in terms of market capital.

A second state-owned company, which was also the country’s top iron ore miner, National Mineral Development Corporation (NMDC), also improved its ranking by coming in 21st, up three spots over the previous year.

What is Mine 2015?

Mine 2015 analyzed the financial performance of the world’s top 40 mining companies by market capitalization. The report said market values continue to fall, overall, in spite of improvements reported in the financial results of all top 40 companies.

Depending on which way you read it, in 2014, a collective $156 billion was eroded (about 16%) of the top 40 companies’ combined market value, but then again, that was only half of the 2013 slide. The collective market capitalization came in at $791 billion in 2014, which was the range miners held a decade ago.

The report said the world’s largest miners had reduced spending but stepped up production. The industry was also helped by lower input costs and currency devaluation. PwC did note, however, that weak commodity prices due to low demand hammered down revenues.

The Iron Ore Drag

The report said the downturn was largely driven by iron ore miners, particularly diversified companies with large exposure to shifts in commodity prices.

Last year, iron ore was the hardest hit, with prices dropping by half because of a supply glut and a negative short-term demand outlook, the report said.

On the coal front, coal miners in the BRICS countries (Brazil, Russia, India, China, South Africa) saw their values increase 19% over the period, regaining almost half of the value they lost in 2013.

In Asia, more industry consolidation was expected between key resource players from India and China in order to stem production overcapacity, the report said.

Chinese Production Still Surging

The coal companies of China made significant gains in the ranking of the top 40 mining companies, with three appearing in the this year’s top twenty.

China Shenhua Energy Co. Ltd (Shenhua) topped the list, becoming the third most valuable mining company (based on market capitalization) after BHP Billiton and Rio Tinto Group. Shenhua moved up from fifth in 2013’s rankings.

Another company, China Coal Energy Co. climbed to 14th rank from 23rd in 2013, with a 30% increase in valuation, while Inner Mongolia Yitai Coal Co. jumped to 18th from 25th. Yanzhou Coal Mining Co. came in at 26th – up from 34th in 2013. Yanzhou also recorded a more than 30% increase in value over 2014.

US Miners Can’t Keep Pace

On the other hand, not many US coal-mining companies charted in Mine 2015. Consol Energy found itself at number 28. No other companies charted despite noted concern from US manufacturing execs about local resource supply.

Of the 40 companies, 15 miners saw their share values appreciate, while 25 witnessed a decline.

The average return on capital employed was largely below the minimum hurdle investment rate of 15 to 20% set by the companies themselves. Only 6 of the 40 passed the 15% benchmark: CIL (coal), OAO Norilsk Nickel (nickel), NMDC (iron ore), Randgold (gold), Shandong Gold (gold), and Newcrest (gold), according to the report.

Copper Still Stagnating

On the copper front, Mine 2015 noted that global copper production had gone up by only 2.8% last year, which was way below the 8.1% of 2013. PwC noted that the world’s largest copper producer, Chile, had faced problems increasing its production due to falling grades.

PwC’s general outlook for the global metals and mining market though remains dreary due to the continuance of a slower rate of economic growth, particularly in emerging markets, especially due to the cooling off of China’s growth rate.

In 2014, iron ore, coal and copper prices had fallen by 50%, 26% and 11%, respectively, according to the report.

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Indian steel, aluminum and copper companies are pinning their hopes on India’s defense sector to help increase sales.

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The government’s “Make in India” campaign, a broad sweep enveloping the entire manufacturing sector, and, as a result, the metals and mining sectors, is expected to boost local raw materials used in defense applications.

The government raised the threshold for foreign direct investment in defense to 49% and has done away with licensing requirements for most items. Several Indian companies such as Tata Steel, Reliance Industries, Mahindra, Larsen & Toubro and others have started identifying areas of defense production their products fit in. They have also started scouting around for foreign partnerships and technology transfers.

International Joint-Venture Partners

One such international player that has in the past shown active interest in this sector is Germany’s ThyssenKrupp AG. The company is reportedly pursuing two interests in the defense field – naval weapons, specifically submarines, and aerospace.

In a recent interview with the Business Standard, Michael Thiemann, CEO of the company’s India region revealed that ThyssenKrupp India Pvt. Ltd was looking to expand its business in not only these segments but was also interested in investing in “smart” cities.

Thiemann said his company was already in discussion with public sector and private shipyards on the submarine front. The CEO let on that his company was open to tying up with private Indian companies such as Larsen and Toubro Ltd. for defense projects.

Project 75

“Project 75,” a plan for the construction of six submarines for the Indian Navy has been in the pipeline for several years now, but with the Make In India campaign it has caught a second wind.

Going by media reports here, the Indian government is likely to shortlist shipyards for the project in about two months. Thiemann said Thyssenkrupp has the technology and expertise and is willing to collaborate with Indian companies, by offering design, engineering and implementation know how.

Thyssenkrupp’s Edge

ThyssenKrupp already makes mining equipment and cement in India. But specifically, where the defense sector is concerned, ThyssenKrupp, say analysts, may have an edge because one of its group companies, ThyssenKrupp Marine Systems (TKMS) has been a partnering with the Indian Navy for more than two decades. Some of the Indian Navy’s previous submarines were made in India under a technology-transfer agreement in which TKMS was involved.

ThyssenKrupp has already invested in a service center at Bengaluru in South India for material processing of aluminum and titanium used in the manufacture of aircraft. The current revenue size of India’s aerospace business is nothing to write home about, but it is expected to grow because of the decisions made by the government.

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India’s BJP-led government, more precisely its finance ministry, recently announced that it would impose, for a period of five years, anti-dumping duties ranging between $180 and $316 per metric ton for some industrial-grades of stainless steel imported from China, Malaysia and South Korea. The idea, obviously, is to stop the tide of surging steel imports.

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Subsidized imports, or “dumping,” of steel into a country by producers from other nations can be a vexing issue. Steelmakers from the US, India and Europe have been facing mounting pressure from cheap imports.

US Anti-Dumping Accusations

Earlier this month, for example, MetalMiner reported that six steelmakers with major US operations had filed a trade complaint seeking punitive tariffs for alleged unfair pricing of imported steel from China, India, Italy, South Korea and Taiwan.

The move by the Indian government came after persistent efforts by steel producers to place tariffs on the foreign products for nearly two years. The cheap imports, claimed the Indian steel industry, were damaging its business prospects.

India consumes about one million mt of industrial steel stainless steel, of which, around 40% is imported, largely from China.

Indian Tariffs

The anti-dumping tax obviously was welcomed by domestic steelmakers. N.C. Mathur, president of the Indian Stainless Steel Development Association (ISSDA) was quoted in a news report as saying the move was long overdue. According to Mathur, the duty has been imposed on hot-rolled flat products stainless steel with all its variants originating from China at $309 per mt, $316 per mt from Malaysia and from Korea at $180 per mt. He added the move would give a respite to the domestic industry.

The ISSDA also complained to the government about of abuse of the India–Malaysia comprehensive economic cooperation agreement (CECA). Stainless cold-rolled flat products from Malaysia are being imported to India through a preferential tariff benefit, the association had claimed in its statement. ISSDA demanded that the Ministry of International Trade and Industry, Malaysia, investigate the cold-rolled imports.

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The author, Sohrab Darabshaw, contributes an Indian perspective on industrial metals markets to MetalMiner.

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