Informist, Thursday, Jul 29, 2021
By Nikita Periwal
MUMBAI – JSW Steel Ltd's recent 7.5-bln-rupee investment in a group paints company may raise concerns about how cash is being utilised in the midst of this super-cycle for steel, but the company views the move differently.
While it may seem like a non-core investment, Seshagiri Rao, joint managing director and group chief financial officer, says the country's largest steelmaker commands two-thirds of the market for colour-coated steel products.
"...the demand for coated products can grow much faster than normal steel," Rao says in an interview to Informist.
The investment in JSW Paints has its merits, given the increasing demand. The company needs a large-scale paint manufacturer to meet its requirement, and this is one of strategic drivers for the investment, Rao says.
Following are edited excerpts from the interview with Rao:
Q. How are a soft Apr-Jun and a seasonally weak Jul-Sep expected to play out for the sales volume guidance of 17.4 mln tn for 2021-22 (Apr-Mar)?
A. The volume guidance for standalone operations is majorly predicated on the expansion of Dolvi, which will come this quarter. Volumes were slightly lower in Apr-Jun, and may be lower in the current quarter because of seasonality, but we are confident that we will be able to make it up in the second half. So, there should be no problem in meeting the guidance.
Q. Will the company now focus on improving the operations of its subsidiaries, now that Dolvi is coming on board and standalone operations have stabilised? Subsidiaries in the US are now profitable at an operating level, but the operating loss has widened in Italy on a sequential basis.
A. There is a good recovery in the US, and there is scope for ramping up capacity in Ohio and US Plate and Pipe Mills. We have the benefit of very high prices in the US market, and there is some more benefit that could come in from US operations.
As far as Italy is concerned, we have been guiding that it will also become profitable at an operating level. But unfortunately, the order from Italian railways was delayed, and the mill could not be operated last quarter. We expect the order to come in by the end of this month. After this, even Italy should start showing a good turnaround.
Q. How will investors perceive a non-core investment of 7.5 bln rupees in JSW Paints?
A. When we needed oxygen for steel operations, we got into a joint venture with Praxair in US. They invested 74%, and we invested 26%. Somebody could have asked us why we did it. But the point is, oxygen is the fulcrum for steelmaking, and we should have some stake, minority maybe, and somebody to drive the entire production process and technology.
Paints are very important for coil-coating steel. Each tn of steel generally requires 20 ltr of paint. And now that our capacity has gone up to 2.5 mln tn, our requirement for paints will be close to 60,000 ltr.
Most paint makers focus on the decoratives side, where margins are 18-20%. There are very limited expansion plans for industrial paints, where margins are 2-9%, with coil coating at the lower end of the spectrum. About 70% of the steel coated market is with JSW Steel, and we are big buyers of paints.
Q. What is the rationale for the investment?
A. There is increasing demand for colour coated products, and we have observed this transformation about two years back. That is when we made large investments in this segment. We need a paint manufacturer to set up capacity to meet our requirement. This routine requirement is one of the strategic drivers for this investment.
The second is that customers are looking for warranties for 10-15 years. For this, we need back-to-back warranties from industrial paints makers, which were not coming through earlier. JSW Paints was willing to give us these warranties for a longer period of time.
The third reason is that we need a lot of shades. We currently use around 1,600 shades for coating steel, and this keeps on changing as per customer preferences. All this requires constant collaboration, and we have kept this in mind.
When we are buying from JSW Paints, we have to ensure that paint prices are marked at an arm's length. That is why when are sourcing, 90% of the requirement comes from JSW Paints and the balance 10% we buy from the market. So, JSW Paints has to match the price we get in this 10%, or offer better terms, over and above other benefits.
Q. What is the expansion plan for colour-coated products, given that it is also more margin-accretive? Any target for the capacity of coated products?
A. There are two aspects here: one is that it is an exportable product. In India, replacement of galvanised steel with colour is creating huge demand. Even assuming that it will take some more time to absorb this commodity, it is exportable, and we have good margins here.
We are setting up a plant in Srinagar, Jammu & Kashmir, and another line in Ludhiana as part of Vallabh Tinplate. So, the capacity might go up by another 300,000 tn. After fully stabilising this 2.5-3.0 mln tn capacity, we will look at further capacity.
Q. Do you think demand for coated products could grow faster than the overall demand for steel?
A. The installed capacity for coated products in India is 3.8 mln tn, and almost everyone is at full utilisation, selling either in the domestic market or exporting. Yes, the demand for coated products could grow much faster than normal steel.
Q. Value-added steel is already at 61% in Apr-Jun, sharply higher compared to the previous year. What would be a comfortable level, and is this sustainable?
A. We used to be at 40-50% earlier, and have already moved to 50-60%. With overall capacity going up, maintaining 50-60% of the total product mix in the value-added segment might be a very ambitious target. So, we have to produce all types of steel, of which 50-60% range at higher capacity of 38 mln tn is a very good mix.
Q. What is your pricing and demand outlook for iron ore, steel and coking coal?
A. As far as iron ore is concerned, supplies from Odisha are improving compared to last year. Overall demand for iron ore from China is expected to come down in the second half of 2021. Together, these two could lead to some correction in prices of iron ore.
Five countries together constitute 83% of the total coking coal consumption globally. This consumption is unlikely to come down, except from China. So, coking coal is expected to remain at current levels as the demand-supply dynamics are not showing any pressure on prices.
Currently, markets are not very freely tradable for steel. Demand is very, very strong, and this will keep prices from falling further. Globally, total production of steel in Jan-Jun was 126 mln tn. This is, in fact, more than the production during Jan-Aug of 2019. Even after so much production, prices have not yet corrected. So I think underlying demand is very, very strong. Prices and margins may correct, but it will not be very significant. End
Edited by Nidhi Chugh
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