Global and Indian Trends in Metal Industry

1
Global and Indian Trends in Metal Industry

• 11 November 2009

2
About CRISIL Research

• CRISIL Research is Indias largest independent
  research house and is a 100 per cent subsidiary
  of CRISIL Ltd.
• CRISIL Researchs research offering includes
• EcoView
• Periodic review of macroeconomic fundamentals in
  India
• Industry Information Service
• Continuous research coverage on 45 industries in
  India across the manufacturing and services
  sectors
• A service presently used by 90 of the banks
  operating in India both Indian and foreign
• CrisilViews
• Public Information based credit reports on
  150-200 leading Indian companies
• Syndicated research
• Customised research that applies our unique
  understanding of cross sectoral and macro-micro
  linkages to specific client needs

3
About CRISIL Research

• CRISIL Researchs offering in the metals sector
  includes
• Industry Information Service
• Reports on steel, steel intermediates, aluminum
  and copper.
• CrisilViews
• Tata Steel
• Steel Authority of India Limited
• Jindal South West Limited
• Hindalco
• Nalco
• Sterlite and many others
• Syndicated research
• Global Aluminum company
• Large Indian Automobile company

4
2005-06 Beginning of the meltdown

• Note Players considered are Tata Steel, SAIL,
  Ispat, Essar Steel and JSW Steel
• Source CRIS INFAC

5
Decline in steel prices
Note International prices are CIS Black Sea
(FoB) prices Source Metal Bulletin and CRIS INFAC

• The average international price of hot-rolled
  coils (HRC) was 460 per tonne (FOB) during the
  first 9 months of FY 2005-06, 16 per cent lower
  than the 549 per tonne (FOB) reported during the
  corresponding period of 2004-05.
• Domestic HR prices mirrored the trend in global
  prices, averaging Rs 28,444 per tonne in
  April-December 2005, down from an average of Rs
  28,778 per tonne in April-December 2004.

6
Incremental supplies grew higher than incremental
demand

• While the apparent consumption, rose by 4.09 per
  cent (addition of 39.8 million tonnes) during
  2005 over 2004, supplies increased by 6.07 per
  cent (addition of 59.6 million tonnes)
• Reasons
• Slowdown of demand from the US and the EU. The
  regions met most of their consumption needs from
  their inventories leading to reduced buying
• China becomes net exporter in 2005 from net
  importer in 2004. Over the past 3 years (between
  2003 and 2005), China's consumption of finished
  steel increased at a CAGR of 16.12 per cent,
  while its production grew by a CAGR of 25.34 per
  cent over the same period.

Source IISI
7
Higher raw material prices in 2005-06

• Iron ore
• Average international spot iron ore prices
  increased in 2005 to about 80 per tonne, a rise
  of almost 70 per cent from average of around 47
  per tonne in 2004. Strong demand from China led
  to the increase.
• In April 2005, NMDC increased the domestic
  contracted price to Rs 1,450 per tonne (inclusive
  of freight) to align it with international
  prices. In FY 2005-06, as per NMDC's annual
  results, it has sold iron ore at an average price
  of Rs 1,944 per tonne.
• However, players with captive mines such as Tata
  Steel, SAIL and JSW (to some extent) are
  insulated from the price hikes.
• Coke
• During the first 9 months of FY2005-06, coke
  prices averaged 199 CFR. The decline in prices
  can be attributed to increased exports from
  China.
• Coking coal
• The contracted price of coking coal during CY
  2005 was 125 per tonne (FOB) as against 57
  (FOB) in CY 2004 source Tata Steel Analyst Meet
  presentation. Hence players, having captive coke
  ovens like Tata Steel and SAIL did not really
  benefit from the fall in coke prices.
• Natural gas
• Natural gas prices in the domestic market have
  ruled at a substantial premium during
  April-December 2005 (Rs 8,022.72 per thousand
  cubic metres - tcm) over the corresponding period
  of the previous year (Rs 5,066.62 per tcm)
  leading to a heavy erosion in margins of
  gas-based steel makers such as Ispat and Essar.

8
Volumes helped achieving stable revenues

• Note The YoY growth is calculated based on
  results of corresponding period of previous year
• Source CRIS INFAC

9
Looking into the crystal ball

• Margins of the domestic industry to remain stable
  during 2006-07 as compared to 2005-06
• Prices to increase marginally.
• However rise in Input costs to keep margins
  stable.

10
Realization to increase marginally

• The International average prices of steel will be
  around 500 per tonne in CY 2006 as compared to
  490 per tonnes in 2005
• Global demand to remain healthy
• Capacity additions mostly expected in China
• Hence Global operating rates to remain stable
• The Increase in the domestic prices will be lower
  due to unfavorable demand-supply Scenario

11
Global Demand growth to remain stable

• The demand for finished steel which grew by 4.1
  per cent (addition of 39.8 million tonnes) in CY
  2005 is likely to grow by 4.5 per cent (addition
  of 45 million tonnes) in CY 2006
• Chinese demand is expected to grow at a healthy
  rate of around 10 per cent in CY 2006.
• Demand from US and European Union also to pick up.

12
China the key to Demand
CHINA Going strong
Chinas investments in Fixed Assets Key elements

• Note The data for each year is cumulative
  figure for the period January to March of that
  year
• Source National Bureau of Statistics of China

13
Capacity additions mostly in China

• During CY 2006, 54 Million tonnes of finished
  steel capacity is expected globally
• Chinese capacity to add 38 million tonnes of the
  global incremental capacity.
• The balance 16 million tonnes will be added by
  the rest of the world (RoW) excluding China

Source IISI CRIS INFAC
14
Global operating rates to remain stable
Source IISI CRIS INFAC
Average global operating rates to remain stable
at around 86 per cent.
15
Domestic demand-supply scenario

• Demand to grow at a CAGR of 8 per- cent during
  2006-07.
• Pipes tubes and automobiles will continue to
  drive the demand for flat products
• Healthy growth in construction to drive long
  products demand.
• However demand to capacity ratio will remain low.

16
Passenger cars to keep riding on favourable
demographics
CAGR 15
Source CRIS INFAC
17
Growing trend of personal utility vehicles to
help demand
10.3 CAGR
Source CRIS INFAC
18
Commercial vehicle demand to grow at a healthy
rate
Source CRIS INFAC
19
Pipes tubes Significant investments planned
over the next 5 years
39
Source CRIS INFAC

• Note Pipes for only crude oil, LNG and Petroleum
  products has been considered. Pipes for water
  supply, drainage and sewage have not been
  considered

20
Buoyant activity seen in pipes and tubes segment
Note Pipes for only crude oil, LNG and Petroleum
products has been considered. Pipes for water
supply, drainage and sewage have not been
considered
Source CRIS INFAC
21
Infra investments to drive construction

• Real estate investments
• Favourable demographics
• Rising affordability
• Low interest rates
• Favourable govt. policies (FDI)
• Growth in IT/ITES
• Infrastructural investments
• To grow by 8 per cent
• Favourable govt. policies
• Private participation
• Roads, irrigation and water supply, and power
• Industrial investments
• To remain buoyant
• Oil and gas and metals (steel and aluminium)

22
Commercial construction IT/ITES sector is the
driver

• Real estate construction Investments over the
  next 5 years

Source CRIS INFAC
23
Mall construction set to grow
Mall construction Investments over the next 5
years
Source CRIS INFAC
24
Expected Construction Investments in the next two
years
Source CRIS INFAC
25
Industrial Investments (Rs billion)
FY07-FY11 (Rs 6406 bn)
FY02-FY06 (Rs 2111 bn)
Source CRIS INFAC
26
Assumptions of growth rates
27
Demand to capacity ratio for flat products will
only marginally improve

• Source CRIS INFAC

28
Operating cost to remain firm
Coke cost

• Average Operating Costs of the players to
  increase from 367 to 375 per tonne (an
  increase by around 8 over the same period
  previous year).
• Contracted iron ore prices to increase by around
  19 per cent in CY06.
• Average coke prices have declined significantly
  from the average levels of 395 per tonne in CY04
  to levels of 180-200 per tonne in CY05. Prices
  will remain stable in CY 2006. Prices will also
  depend upon coking coal prices.
• Coal and Natural gas will continue to remain in
  short supply.

Source CRIS INFAC
29
Steel tolling margins

• CRISIL Research defines steel tolling margins
  as the difference between the average
  international steel prices per tonne and the
  operating cost of manufacturing steel

30
Margins to remain stable
Source CRIS INFAC
31
Thank You