May have to absorb some of last quarter's severe cost hike: JSW Steel Jt MD

In a Q&A, Seshagiri Rao, who is also group CFO, says the firm could introduce a surcharge to pass on the spike, but may still absorb $90-100 cost per tonne of coking coal in Q3

JSW Steel recorded its highest ever consolidated quarterly operating EBITDA in Q2FY22 on 10 per cent higher sales volumes. Quarter-on-quarter (QoQ), the EBITDA margin, however, was under pressure due to elevated raw material prices and other input costs. In an interview, JSW Steel joint managing director and group chief financial officer, Seshagiri Rao, tells Ishita Ayan Dutt that the company is contemplating introducing a surcharge to pass on the increase in cost. Edited excerpts:

The US has seen some moderation and China is slowing down. So, what is the outlook on steel demand?

We have to look at steel demand and production region-wise, excluding China. The World Steel Association (WSA) has recently given a short-range outlook. It said China is slowing down and the demand for the current calendar year will fall by one per cent, that is, 10 million tonne (mt) lower than last year. But for the rest of the world, it is projecting a growth in demand by 11.5 per cent. So there is a significant increase in demand in the rest of the world. That is where the story of steel is.

Steel demand in China in the month of September came down by 23 per cent on a year-on-year (YoY) basis. In India, 49 mt of steel was consumed in the first half of the year as against 36.5 mt last year. Assuming, we repeat Q3, Q4 of last year, even then we will have very good demand in the current calendar year reaching almost close to 110 million tonne in India. As far as the demand story in steel is concerned, it’s robust.

Raw material prices are increasing and you are contemplating increasing prices in the future through a surcharge. Why a surcharge?

There is a huge amount of volatility on account of energy shortage globally. There are exceptional increases in thermal coal and coking coal, which are unsustainable. Internally, we are working on a lot of things on the cost side.

The concept of surcharge is already followed globally. One of the large steel companies has introduced an energy surcharge of 50 euros per tonne in Europe. Similarly, prices in the US are linked to scrap. Because of the large volatility in price, we are also contemplating a surcharge.

Coking coal prices have more than tripled in the last five months, steel prices are set to go up while iron ore prices have subdued. Overall, what will be the cost impact for JSW Steel in Q3?

Last quarter, the cost pressure was very severe. Iron ore prices fell by 45 per cent globally. In India, the fall was marginal. So, Indian steel companies did not get the iron ore price benefit which was there globally. At the same time, coking coal prices went up by three times, thermal coal prices went up, the power cost doubled and shipping rates also went up. You would see the pressure on EBITDA per tonne both on a consolidated and standalone basis in the last quarter.

As far as the impact going forward is concerned, we expect that we will have to absorb $90-100 cost per tonne of coking coal in Q3. Iron ore prices have, however, reduced partly in the last quarter and partly in this October. That neutralises to some extent the increase in the cost of coking coal. At the same time when cost pressures are so high, we are already seeing some adjustment in price that can happen either through energy surcharge, or, otherwise.

When are you likely to decide on the surcharge?

It is a new concept and not familiar in India. Therefore, we need to discuss, convince the customers and then introduce it.

You are looking at consolidating Bhushan Power & Steel (BPSL) in Q3. What kind of EBITDA and net profit did it have in Q2 and what is the outstanding debt?

BPSL has done extremely well after we took over the company. In the July-September quarter, it recorded sales of 760,000 tonnes and made a net profit of Rs 1,448 crore. Gross debt was Rs 10,000 crore and there is cash balance of Rs 2,000 crore. So, net debt in BPSL is Rs 8,000 crore.

You have commissioned Dolvi and started brownfield expansion at Vijaynagar. What kind of incremental capacity is expected by FY24 in India?

As on September 30, in JSW Steel, we have 18 mt capacity, 2.7 mt in BPSL, 1 mt in Monnet. By March 2024, we will have 36.5 mt in India. Over and above that, we have 1 mt in the USA. So we will have a total of around 38 mt.

The capacity increase will be in a short period of time, is there adequate demand?

India has 143 mt capacity. The 5 mt JSW expansion (Dolvi) will take it to 148 mt. Exports from India last year was at 17 mt and in the first six months of the current year, the country exported 11 mt. If you take this run rate, then we don’t have adequate capacity to meet the demand along with the opportunity to meet the space that is getting vacated by steel exporting countries like China which is reducing exports. We are reasonably confident that there will not be a problem particularly on the demand side where large investments are happening in India in infrastructure and exports are very strong.

Is domestic demand recovering?

Overall demand was not very strong in the last quarter. But now it has started picking up. We have seen a clear improvement in demand in long products, which generally happens after monsoon. In flat steel, the auto sector is weaker now but once the chip shortage is resolved, it should revive. But engineering, solar, and appliances are doing well. We are reasonably confident that Q3 and Q4 will be much better than what we have seen in the last few quarters.