Author Archives: Sohrab Darabshaw

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Steel companies and mining companies in India have heaved a sigh of relief after the federal government amended the prevailing mining law to permit the “seamless transfer” of regulatory approvals to new owners of operational iron ore mines, the Economic Times reported.

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Earlier the week, the government amended the Mines & Minerals (Development & Regulation) Act to ensure smooth transfer of ownership.

The lease of 334 non-captive mineral mines will expire March 31 this year. Of these, 46 mines are operational, 26 of which are iron ore mines.

When the lease expires, all will go on the auction list as per the mining law. However, for some time now there have been apprehensions that the auction round would not be concluded as scheduled.

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Gold and silver prices in India have hit new highs recent days, to the glee of traders and the consternation of retail buyers.

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Multiple reasons are being attributed to the price rises, first and foremost being rising geopolitical tensions following the U.S. airstrike that killed top Iranian general Qassem Soleimani. Other factors include the fall of the Indian rupee versus the U.S. dollar in currency markets following the rise in the price of petroleum products.

As trends show, gold is normally considered to be a safe-haven asset in times of political or economic strife, as investors and even everyday buyers back off from buying equity or trading in currencies.

Last Monday, gold prices moved past the approximately $569.31 (Rs 41,000) per 10 grams mark, which was in line with sentiments in the international markets.

On India’s Multi Commodity Exchange (MCX), February gold futures, too, surged by 2.4% to a record high of about $570 (Rs 41,073) per 10 grams the same day, clearly underlining the market was betting on the price rise to continue in the coming days.

Last Friday, gold had already breached the $555 (Rs 40,000) mark per 10 grams. In the two days since the rally, the price rose by $25 (Rs 1,800) per 10 grams.

Silver futures on the MCX also went up 2.25% on Monday to trade at about $675 (Rs 48,595) per kilogram.

On Tuesday, however, gold and silver prices fell sharply in Indian markets because of the rupee’s rebounding.

On the MCX, gold futures rates fell 0.51% to $327.12 (Rs 40,265) per 10 grams, Livemint reported.

Back on Wednesday morning, the shine was back in India’s bullion market, riding on the back of prices escalating in the international markets by over 2% to touch $1,610.90, its highest level since March 2013. Gold prices in India hit an all-time high of about $573 (Rs 41,278).

Silver prices, too, were up 1.25% to $18.62 in the global markets, according to CNBCTV18.

Part of the resurgence in prices was attributed to Iran’s firing of rockets at U.S. bases in Iraq, read as a sign of an escalation in Middle East tensions.

Most analysts in India think if geopolitical tensions continue to boil, gold and silver’s upward momentum will also continue.

In addition to the tensions between the U.S. and Iran, other factors that are pushing bullion prices up, including uncertainties related to Brexit and the Hong Kong protests.

Some analysts are even forecasting Indian gold prices to touch $616 (Rs 44,300).

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Also on gold traders’ radar is U.S. Vice President Mike Pence’s speech next week, in which he is expected to lay out the government’s policy on Iran.

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For Indian steel producers, 2019 was an unremarkable year.

Like some of the previous years, the steel sector slumped throughout the year, save for the last two months.

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Globally and domestically, the steel industry witnessed a steep price fall not seen in the past three years. For example, prices of hot-rolled coil steel fell for 21 straight weeks; only toward the end of 2019 did some steel companies raise the price of steel products.

Rising steel imports, drop in coking coal imports

Production-wise, Indian steel makers continued to face the challenge of imported steel flooding the market. This, and the lack of pickup of steel, led to some companies reducing their steel output. In October, India had reported a 3.4% drop in crude steel output at 9.09 million tons, against 9.41 million tons in the same month the previous fiscal year.

One indicator of reduction in steel output was the drop in coking coal imports in November, which declined by 14.52% to 3.61 million tons against 4.22 million tons  in the same month last fiscal, according to a report by Iman Resources. A report in MoneyControl said the country’s crude steel production in November was down by 2.8% to 8.9 million tons, compared to production in November 2018.

The country’s crude steel production in November was down by 2.8% to 8.9 million tons, compared to the production figure of November 2018.

Looking to the future of Indian steel

So, what does the immediate future hold for steel in India?

A majority of steel producers and analysts are positive Q4 of the fiscal will show a rebound. What gives them hope is the Indian government’s announcement to put fresh investment into the country’s infrastructure.

A few days ago, the government unveiled the multimillion-dollar National Infrastructure Pipeline (NIP), with projects spread across 18 states over the next five years.

From fiscal year 2020 to fiscal year 2025, sectors such as energy (24%), roads (19%), urban development (16%) and railways (13%) will take up around 70% of the projected capex.

To achieve a U.S. $5 trillion economy by fiscal year 2025, India needs to spend about $1.4 trillion on infrastructure.

The endeavor of the NIP aims to make this happen in an efficient manner, India’s Finance Minister Nirmala Sitharaman told reporters in India.

This fresh investment in power, railways, and water, coupled with renewed interest in the automobile sector is bound to bring in fresh demand for steel, analysts say.

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At the start of fiscal year 2020, the steel industry’s estimated consumption growth was pegged at 7%, which was in line with the demand seen in the last two years of about 7-8%. Steel analysts feel the worst is behind them, and the new year will start off on a more positive note.

It may have taken well over 850 days for its culmination, but the recent completion of an acquisition in India is being touted as the “single-biggest recovery” under the Insolvency and Bankruptcy Code (IBC) process in India.

Earlier this week, global steel giant ArcelorMittal announced it had formally completed the acquisition of debt-ridden Essar Steel India Ltd (ESIL).

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Going ahead, the LN Mittal-led company also announced a joint venture with Nippon Steel, called AM/NS India, to own and operate the debt-ridden Essar.

ArcelorMittal holds 60% of AM/NS India, with Nippon Steel holding the balance.

Last month, the Supreme Court of India cleared the decks for the acquisition of Essar, which is mired in multimillion-dollar debt.

On taking over, the co-owners have announced their resolve to “play an active role in the Indian steel market.” They have decided to step up capacity at the plant from the current 9.6 million ton per annum (mtpa) to 12 or 15 mtpa, according to LiveMint.

As widely reported in the Indian press, Lakshmi Mittal, chairman and chief executive of ArcelorMittal, said this acquisition was an “important strategic step for ArcelorMittal.” India, he added, was an attractive market, and ArcelorMittal had been on the lookout for opportunities to build a meaningful production presence in the country for over a decade.

What attracted it to ESIL was its sizable, profitable, well-located operations.

Incidentally, AM/NS India is an integrated flat steel producer and the largest steel company in western India. Its current level of crude steel production is about 7.5 mtpa against a 9.6 mtpa capacity.

Following the completion of the acquisition process, ArcelorMittal has initiated payment of the dues. Payment from ArcelorMittal has started flowing, with all payments likely to be cleared soon, Business Today reported.

For many years, AM/NS has been investing in countries like the U.S., Brazil and Japan. Its India plans include an intention to increase finished steel shipments to 8.5 mtpa over the medium term, The Hindustan Times reported. This will be achieved by initially completing ongoing capital expenditure projects and infusing expertise and best practice to deliver efficiency gains — and then through the commissioning of additional assets — while simultaneously improving product quality and grades to realize better margins, the company said in a statement.

The promise after this major acquisition of adding more steel to India’s total production may all be fine — but in the face of a slow growth, what will this additional capacity do to it is a question on every analyst’s mind.

Domestic steel prices have fallen by around 10% since the start of 2019. Domestic demand has also slowed, and is estimated to fall to 4-5% this fiscal from the 7.5-8% growth recorded in the previous two years, given muted construction investments and weak automotive market,” according to Crisil.

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All hopes are now pinned on an infrastructure boost promised by the Indian government as part of a larger package aimed at spurring economic growth, which, in turn, could fuel steel consumption.

Aluminum producers in India, like their steel counterparts, are going through some trying times.

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Rising imports, which could only get worse because of the U.S.-China trade war, and an increase in the cost of production have prompted Indian aluminum producers write to the government, asking it to overcome the anomalies in the duty structure by slashing duties on critical inputs.

Import duties on critical inputs are rendering finished aluminum products uncompetitive in international markets.

Trying to grow in this kind of a market, global aluminum major Hindalco has plans to diversify its portfolio. It is actively looking at the electric car market, the logistics sector and the can business to expand.

In an interview with CNBC, Managing Director Satish Pai said the company is actively looking at the can market because of the ongoing anti-plastic movement. Demand for aluminum cans is going up, he pointed out, which meant Hindalco would be expanding its capacity in the near future.

But what has come as a slight surprise was the aluminum major’s foray into logistics, with the launch of aluminum trailers — a first in India — and lightweight aluminum transport vehicles and trailers.

The idea is to help lower the logistics cost by about 15%, according to a report by the Business Standard.

Hindalco Industries, the flagship company of Aditya Birla Group, has decided to enter the truck and trailer market and replace the existing mild-steel usage with aluminum alloy, Pai said in an interview to the Business Standard.

Currently, logistics cost in India is at about 14%, compared with the U.S. cost of about 10% and Japan’s 11%. In addition to warehousing, transportation was the other major factor contributing to logistics costs.

As a start, Hindalco will provide these aluminum trailers for group company Ultratech Cement. For building the aluminum cargo containers and transport vehicles, the company has started working jointly with fabricators across India.

Hindalco is eyeing India’s trailer production market, which is estimated to be around 20,000 units per annum and is growing at a rate of about 12% per year.

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On the electric vehicles front, Hindalco is also actively looking at building smaller electric vehicles for last-mile delivery purpose, which is a crucial component of the logistics chain.

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India may have become a net exporter of steel this year, but domestic demand may remain a problem area.

The US-based Moody’s Investors Service has said in a recent report, titled “Asia: Steel – 2020 outlook,” that India’s steel growth will slow down in the coming days because of weak automotive and manufacturing demand.

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In October this year, India’s domestic steel production fell for the first time in seven months. Steelmakers produced about 9.09 million tons of steel, down by 3.4% over October last year, according to figures by the World Steel Association.

The last time steel production had fallen in a month was in March 2019, when the decline was 1%, Business Today reported.

October’s decline came after a steep drop in the growth rate in September, when production grew by just 1.6% (a five-month low).

The Indian government, on the other hand, paints a different picture.

The steel sector is witnessing growth in the recent past after a slowdown, with India becoming a net exporter in the current financial year, according to minister Dharmendra Pradhan.

The minister said in the Indian Parliament that steel imports had gone up slightly in the last three years, rising from 7.23 million tons in 2016-17 to 7.83 million tons in 2018-19.

But domestic production had consistently increased, regardless of such imports.

Contrary to reports talking of a slowdown in domestic uptake of steel, the minister said the steel sector was “witnessing improvement in recent past after a slow down.”

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However, a report in The Economic Times, citing a report by India Ratings and Research (Ind-Ra), noted India’s steel’s net leverage and interest coverage are likely to deteriorate in fiscal year 2020 as a result of compressed EBITDA margins, due to a drop in realizations. Much of this was because of a demand slowdown and increase in raw material prices in fiscal year 2020 on a year-over-year basis.

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It looks like India is not going to give up its fight with the U.S. and the WTO so easily.

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But first, the original story.

Last week, adjudicators of the World Trade Organization (WTO) rejected most of India’s claims related to its stance that the U.S. was not respecting an earlier WTO ruling related to anti-subsidy duties on Indian steel.

This has been a very convoluted trade case.

India’s contention was that the U.S. had failed to conform with an April 2016 deadline to fall in line with a previous WTO decision related to the U.S.’s imposition of countervailing duties on hot-rolled carbon steel products from India.

A few days ago, when the WTO panel rejected most of India’s complaints, it did accept that the U.S. needed to bring a legislative provision into line with WTO rules, marking a minor victory for India.

But India has decided to take the fight into a new round.

India filed an appeal Tuesday against the WTO panel report. An official statement by the Indian government said India had filed a plea concerning the WTO panel report in the case brought by the United States in “India — Export Related Measures.”

The WTO panel had backed the U.S. in many of its claims against export promotion measures adopted by India. Among those included the Merchandise Export from India Scheme (MEIS) and the Export Promotion Capital Goods (EPCG) scheme, the Hindu Business Line reported.

The WTO panel has also recommended that India should withdraw the “prohibited subsidies” under the EOU/EHTP/BTP Schemes, EPCG Scheme, and MEIS within 120 days from adoption of the report.

According to the Al Jazeera report, India had originally filed a complaint before the WTO in 2012 because the U.S. Department of Commerce had imposed an import duty of nearly 286% on a circular welded carbon-quality steel pipe product from India. The Commerce Department had done so after receiving a petition from Allied Tube & Conduit, JMC Steel Group, Wheatland Tube and United States Steel Corp.

In 2014, the WTO ruled the U.S. measures had breached global trade rules. The two parties agreed the U.S. would comply with that ruling by 2016.

After the expiry of the 2016 deadline, India had once again complained to the WTO that the U.S. had defaulted as the deadline had passed. India’s argument was that the market set the price of the steel pipe; however, the U.S. said the iron ore used to make it came from a state-run mining firm — the National Mineral Development Corporation — effectively constituting subsidization of Indian exporters.

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Last week, a WTO compliance panel issued a report largely supporting the U.S.’s stance. Now, the issue continues with India’s appeal of the report.

The world’s largest steelmaker is in for some tough times.

First, ArcelorMittal announced it would be shutting down a plant in South Africa, quickly followed up with another notice of the temporary closure of a furnace in Poland.

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The global steel company cited “severe financial losses” and a downturn in the global steel sector for its decision to shutter the Saldanha plant in South Africa.

The steelmaker said its blast furnace in Krakow, Poland, will come back online — scheduled to shut down Nov. 23, 2019 — once steel demand recovers. The Krakow unit makes up approximately one-third of the firm’s steel production capacity in Poland.

ArcelorMittal has a presence in as many as 60 countries.

A report in India Today, quoting from a statement by ArcelorMittal, said the steel conglomerate had decided to shut down the Saldhana plant after a strategic review of its operations had found the operations there had lost the competitive cost advantage to compete in the export market, “mainly due to raw material and regulated prices.” The move will retrench about 1,000 workers, a move about which the South African government has expressed regret.

South Africa’s Department of Trade and Industry was quoted as saying the move to shut down operations happened despite the best efforts of government and public agencies to provide additional support to the operations over the last few months.

According to another news report, ArcelorMittal said the “difficult decision” was taken in the context of constructive, ongoing engagements with key stakeholders, including government and organized labor, to find alternative solutions to the dire situation in the South African steel industry.

The South African operations had been acquired from former state-owned steel manufacturer Iscor about 20 years ago.

ArcelorMittal reported a net loss of U.S. $539 million for the July-September quarter of 2019, hit by lower steel shipments and prices, in addition to high material costs.

Sales, too, have shown a decline to US $16.6 billion in the July-September quarter, down from U.S. $18.5 billion during the equivalent period in 2018.

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So far as the Krakow furnace is concerned, it was previously shut down from August 2010 to March 2011.

For a while, whether or not India would join the Regional Comprehensive Economic Partnership (RCEP) was touch and go.

But eventually, much to the relief of domestic steel companies and those from other sectors, the Narendra Modi-led Indian government decided to sit out the controversial RCEP trade pact, which features the 10 members of the Association of Southeast Asian Nations (ASEAN), plus China, Japan, Australia, New Zealand and South Korea.

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As Prime Minister Narendra Modi told the delegates at a negotiation meeting in Bangkok, “Neither the talisman of Gandhiji nor my own conscience permits me to join the RCEP.”

India’s decision comes seven years after negotiations over the free trade agreement began.

The RCEP covers trade in goods and services, in addition to investments, economic-technical cooperation, competition and intellectual property rights.

If India had joined RCEP, it would have become the largest trade agreement in the world, accounting for one-third of global economic output and half of the world’s population.

The remaining 15 nations have decided to go ahead with the deal, led by China.

According to some media reports, like one by India Today, the RCEP was a Chinese game plan to “save its manufacturing industries from folding under their own weight.”

India decided not to join the RCEP for several reasons. Among them, India wanted an important clause included for an auto-trigger mechanism as a shield against sudden and significant import surge from countries.

President of Indian Chambers of Commerce and Industry Sandip Somany was quoted in The Hindu as saying serious apprehensions on the RCEP had been expressed by several sectors, including steel, plastics, copper, aluminum, machine tools, paper, automobiles, chemicals, petro-chemicals and others.

For the domestic steel industry, the Indian prime minister’s announcement was music to its ears. The Indian steel industry had, from the start, opposed what it had dubbed a one-sided pact.

Speaking to LiveMint, Bhaskar Chatterjee, secretary general and executive head for Indian Steel Association, said representatives of the steel industry had met with the Indian Ministries of Commerce and Steel and the Indian Steel Association, where they asserted that if the signing the RCEP was inevitable, then steel items should be kept out of the agreement.

In addition to steel, other sectors that had expressed reservations about joining the RCEP were aluminum, petro-chemicals, agriculture, dairy, steel, rubber and textiles.

Experts were of the view that if other nations were allowed to ship their goods to India without absolutely any duty, they would obviously price them cheaper than their Indian counterparts, creating a market skewed against Indian producers and manufacturers. Playing at the back of the mind of Indian steel companies was 2016-17, when Chinese companies dumped steel in Indian markets in large volumes.

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One other reason behind Modi’s decision to walk away from the deal is the fact that the Indian economy today is particularly vulnerable and weak, with GDP growth stagnating and unemployment at new highs.

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India is right in the middle of its annual festival season that carries on until the year’s end — as is customary, all eyes are on the purchase patterns for gold and silver during the festival of Diwali.

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When the country emerged from Diwali time, initial data showed that purchase numbers were down compared to the previous year.

Or, if you are an eternal optimist, the numbers this year were “not as bad” as predicted.

Experts like Surendra Mehta of the India Bullion and Jewellers Association (IBJA) had but a few days ago painted a picture of doom and gloom, forecasting gold buying would fall by 50% compared to Diwali 2018.

But guess what? The IBJA found out that its prediction had not come true.

Ajay Kedia, director of Kedia Advisory, said gold buying fell 25% this year, LiveMint reported.

Consumers had purchased about 30 tons of gold on a single day of Diwali called “Dhanteras,” down by an average 10 tons as compared to the last few years.

According to sales figures provided by other agencies in the business, pre-Diwali Dhanteras sales of gold and silver had dropped by about 40%.

According to the Confederation of All India Traders (CAIT), about 6,000 kg of gold was estimated to have been sold till evening on Dhanteras day, compared with 17,000 kg of gold sold on the same day in 2018.

CAIT’s Gold and Jewelry Committee Chairman Pankaj Arora was quoted by India Today as saying there was a decline of business from 35-40%.

Anantha Padmanaban, chairman of the All India Gem and Jewellery Domestic Council (GJC), told the same reporter they expected sales, in volume terms, to fall 20% compared with last year; however, sales in terms of value would be the same as last year because of higher prices.

Different figures, but all confirm one basic thing: gold and silver purchases were definitely down as compared to previous years, as feared.

The reasons for Indians losing some interest in bullion this year are:

  • Rising international prices
  • Increasing value of the U.S. dollar against the Indian rupee
  • Liquidity crunch in the Indian market
  • Rising unemployment
  • Increase in import duty on gold and other expensive metals

The benchmark gold futures in Mumbai touched a record U.S. $562 per 10 grams (Rs 39,885) in early September and were more than 20% higher than last year. Experts believe these prices could test approximately U.S. $580 over the next year.

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India is the second-biggest market for gold, after China.

Many in the Indian media have started writing off gold as an investment option for Indians, but as someone who has tracked this metal over the years, allow me to say this – they will eventually be proven wrong.

The Indian love affair with gold is not over and won’t be for a long time coming.