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| How JSW Steel is combating the slowdown |
| Ishita Ayan Dutt / Mar 22, 2009, 16:14 IST |
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Metal prices have come off from their highs of 2008 and are now down about 50 per cent. In the case of steel, the fall is in excess of 50 per cent for some of the products. Global prices of hot rolled coils (one of the key indicators for flat products, mainly used in the automotive and white goods sectors) have fallen from $1,112 per tone to $503 a tonne in January 2009.
While metal makers are finding problems on the revenues side, high cost raw materials are also an issue as metal companies had bought raw materials at peak levels and then finished product prices came crashing after September 2008. Coking coal contracts sealed in 2008 at $305 a tonne were higher by more than 200 per cent over the previous year, while iron ore prices at $85 a tonne were higher by 63 per cent. With the slowdown finished product prices have halved. Saddled with costly inventories, and weakening in demand, manufacturers’ margins were hugely dented. However, the fall in prices finally seems to be arrested.
JSW Steel adopted a slew of measures to combat the downturn, which are working. Seshagiri Rao, director (finance), JSW Steel says, “We focused on cost reduction and inventory cut-down.” Fixed costs were targeted. “We reviewed the raw material blend and improved efficiency,” pointed out Rao.
On the raw material side, JSW managed to renegotiate its existing coking coal contract with Rio Tinto. As a result, for three months ending March 2009, its coking coal costs have come down by 43 per cent to $175 a tonne. JSW imports all of its coking coal requirements. Rao said all the cost reduction measures would translate to savings of 28-30 per cent for the company. The high inventory levels led JSW to cut production in November and December 2008 by around 20 per cent.
Also, the company reoriented its marketing strategy. While in FY09, domestic sales accounted for 42 per cent of production and exports were at 58 per cent in the third quarter, the corresponding figures for the previous year were at 33 per cent and 67 per cent respectively.
The marketing move was focused at capturing the disparity in domestic and international demand. Even as local demand showed signs of improvement with car sales (passenger) and white goods sector picking up, the international market continues to be in the doldrums.
Domestic prices were also higher than the international market. Global hot rolled coil prices were at $485 per tonne vs domestic prices of Rs 31,000-32,000 (over $600) per tonne. Buoyed by the demand spurt, JSW resumed normal production from January. As a result, sales in January went up 41 per cent over the previous year after recommencing its two furnaces.
The company also commissioned its capacity expansion at Vijaynagar Works last month, which was originally scheduled for October 2008. Crude steel production in February increased 8.5 per cent, which also included trial production from capacity expansion.
Going forward, coking coal and iron ore prices for 2009-10 are likely to be more than halved. If international reports are to be believed, then coking coal contracts next year could see a price reduction of more than 60 per cent. JSW has 30 per cent iron ore security and imports 100 per cent of its coking coal requirements. A fall in spot raw material prices, the arrest of the slide in finished steel prices and an improved liquidity situation is expected to translate into better financial performance for the company. With higher sales and a substantial reduction in the existing contracted prices, JSW should do well in the fourth quarter. The company is now scouting for acquisitions in raw material space, prices of which are now at one-third the price from last year, but has pushed the timeline by a year for some of its major expansion plans and greenfield projects.
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