Beruflich Dokumente
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Strategy to ambition
Foreword
Global economic growth in 2014 is muted, and indicators are uneven and even signaling a
slowdown in the recent quarter. In the case of the steel industry also, we are witnessing a
role reversal as several rapid-growth markets have not performed up to expectations in
creating demand.
The global steel industry is getting increasingly intertwined and integrated, and the Indian steel
industry, which was relatively insulated until now, will have to factor in these global changes.
In the long run, steel scrap, shale gas as a cheaper source of fuel, stricter environmental
regulations and availability of capital are some of the factors that the steel industry will
have to address.
The Indian steel industry is expected to grow moderately in the near future as end-user demand
starts to pick up. Domestic steel capacity is expected to correspondingly mirror the growth of
end-user industries. The Government plans to unveil a policy that targets 300mtpa in a decade
from now. While we believe that the target is challenging, it is not entirely unsurmountable.
It calls for a concerted effort from all stakeholders. This paper has highlighted several critical
success factors, enablers and building blocks for all the stakeholders to deal with from
regulatory framework, infrastructure and logistics, capital availability, raw material security and
talent management to sustainability and environmental reforms and nancial derivatives.
EYs Mining & Metals sector professionals have developed deep insights into the steel
industry and provide support on a wide spectrum of issues: strategy, regulatory, tax policy,
risk management, mergers and acquisitions, supply chain advisory, process improvement,
information technology, human capital and capital raising for the sector.
We hope this report provides you with insights to help you succeed. We express our deep
appreciation to Global Steel and other organizations participating in the conference for giving us
an opportunity to present this report at the conference.
Global Steel has today become a steel event of international repute and has successfully
carved out a niche of its own. This ninth edition of the event at the business capital of the
country is destined to become the stepping stone for Indias steel policy in the coming years.
In India, the steel Industry is passing through a challenging phase. The demand for steel is at
its lowest. Domestic consumption is severely affected due to lack of activity in infrastructure,
as well as in the manufacturing space. The biggest challenge facing the domestic steel industry
is to have the per capita steel consumption in India at par with the average global standards.
The new Government at the center has, however, rekindled hope in the industry. The ambitious
infrastructure projects and the thrust in manufacturing through the Make in India campaign
are steps in the right direction. The plan for smart cities, improved road and rail connectivity
by building highways, bridges and dedicated freight and superfast rail corridors have huge
potential to spur domestic steel demand.
The global economy is at crossroads. The traditional engine of growth of the past few years,
namely China, is slowing; Europe remains stuck in an economic stall and the USA is only
growing slowly. These facts present major problems for the global steel and steelmaking raw
materials industries. Weak steel conditions have seen industry restructuring, with much more
to come, years of raw materials shortages have led to a strong supply response resulting
in overcapacity in iron ore and coking coal and prices that are causing major cost reduction
initiatives and mine closures. The situation is not sustainable. What will the future hold? More
of the same? Or will there be a realization that current short-term actions are not long-term
strategies and that a more progressive longer-term view is required in both the steel and iron
ore and coking coal industries?
Bringing together major players across the spectrum presents a great opportunity to consider
a new world of mutual benet. rather than the antagonistic approach adopted by selected
participants. Global Steel 2014 is that forum and should set the scene for an interesting 2015
and beyond.
Anjani K Agrawal
Neil J. Bristow
Managing Director
Contents
1.
Executive summary
2.
3.
14
4.
16
5.
20
6.
21
22
23
Capital
25
27
27
Technological innovation
29
30
30
31
33
Executive summary
Anjani K Agrawal
Global growth in H1 2014 was disappointing relative to expectations. Though economic growth indicators improved in Q2, they
have been uneven and signaled a slowdown in recent months. Data in second half is expected to be stronger.
Sep 13
Oct 13
Nov 13
Dec 13
Jan 14
Feb 14
Mar 14
Apr 14
May 14
Jun 14
Jul 14
Aug 14
Sept 14
Steel in
the global
economy
Aug 13
Manufacturing PMI data is mixed with signs of stalling growth in August and September
China
50
51
50
51
50
49
48.5
48
48.1
49.4
50.7
51.7
50.2
50.2
Brazil
49
50
50
50
51
50
50.8
50.4
49.3
48.8
48.7
49.1
50.2
49.3
India
49
50
50
51
48
49
52.5
51.3
51.3
51.4
51.5
53
52.4
51
Indonesia
49
50
51
50
50
51
50.5
50.1
51.1
52.4
52.7
52.7
49.5
50.7
Russia
49
49
53
49
49
48
48.5
48.3
48.5
48.9
49.1
51.9
51
50.4
US
56
56
56
57
56
56
57.1
55.5
55.4
56.2
57.3
55.8
58
57.5
Eurozone
51
51
51
52
52
53
53.2
53
53.4
52.2
51.8
51.9
50.7
50.3
Japan
52
52
54
55
55
56
55.5
53.9
49.4
49.9
51.1
50.5
52.4
51.7
Forecast apparent steel usage fails to eventuate in 2014, and 2015 forecasts are lower as Chinese steel
demand growth weakens
6
4.9
% growth
4
3.3
3.5
3.1
3
2
3.1 3.0
3.5
3.2
3.4
3.0
3.0
2.0 2.0
1.4
1.0
0.8
0
World
China
India
Japan
US
2014e
2015f
2014e
2015f
2014e
2015f
2014e
2015f
Production
1,628
1,656
799
819
85
90
111
112
Consumption
1,619
1,647
755
775
83
87
71
72
44
44
(2)
(3)
40
40
(14)
Surplus (decit)
2015 outlook for steel and economic growth mapped against the location of major steel markets
China
World
2014e
EU 28
2015f
2014e
2015f
88
89
164
164
102
102
152
154
(13)
12
10
Source: BREE
Russia
0.1% 1.2%
EU 28
United States
1.7% 1.4%
0%
0%
0%
Japan
1.3%
China
6.9% 6.7% 2.5% 2.6%
India
5.6% 6.0% 5.9% 4.8%
Brazil
0.9% 1.2%
0%
3.3%
GDP %
Industrial
production %
0%
GDP %
0%
1.8%
Industrial
production %
2
>oreign cooperation aids China steel exports, Kl]]d:mkaf]kk:ja]f_, 21 October 2014, via >activa.
Chinese private mill prots soar 203%, Kl]]d:mkaf]kk:ja]f_, 23 October 2014, via >activa.
State Council urges to cut 80m tons of steel capacity in 5 years, CCICED, cciced.net/encciced/newscenter/latestnews/201310/
t20131025_262245.html, 25 October 2013.
Global I/O: Global Steel S/D: emergence of protectionist moves advantage for the Europe/the US, adverse for China, UBS, 15 October
2014.
MIIT stresses structural adjustment on steel policy revision, Kl]]d:mkaf]kk:ja]f_, 17 October 2014.
Indian steel
update
Percentage
100
91
95
95
99
92
90
90
94
97
92
90
86
80
92
76
73
73
60
40
20
0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Global
developments
to shape
Indian steel
landscape
Sifting Through the Steel Scrap-Heap, OECD Steel Committee, 6 December 2013.
10 Australia and Brazil to increase control of global iron ore supply, 9mkljYdaYfEafaf_, http://www.miningaustralia.com.au/news/australiaand-brazil-to-increase-control-of-global, 16 October 2014.
Driving
competitiveness
in Indias steel
sector
Capital
Technological innovation
15 Coal India: Delay in clearances Biggest hurdle for production growth, UBS research, 27 April 2014, via Thomson One.
16 SAIL-Tata Steel JV seeks to buy overseas coal assets, metaljunction, 21 August 2014.
80
70
Million tonnes
60
50
40
30
20
10
0
FY10
FY11
FY12
Karnataka
FY13
Goa
Orissa
FY14E
FY15E
Others
After the ban was removed, iron ore output from Karnataka
has gradually started ramping up and is forecast to increase to
19mt in FY15. However, production from Goa is not expected
to resume until the second half of FY15. In addition, delays in
obtaining clearances and mining license renewals are likely to
restrict supply availability for the next few years.
Coal mining also continues to be impacted by infrastructure
delays, regulatory hurdles and policy paralysis. India has been
missing its coal production targets repeatedly every year. The
Indian coal industry struggles to bridge the demandsupply
gap, and dependence on imported coal is increasing every
year. In FY14, India imported 168.44mt of dry fuel to meet
a demand of 739.42mt as compared to a supply of 571mt,
registering a growth of 15.7% y-o-y.17 In line, imports have
registered a CAGR of 25% during FY1014 increasing to
INR951 billion in FY14. Coal imports are expected to be more
than INR1,200 billion by FY16.18 The existing port and rail
infrastructure is not sufcient to facilitate the high level of
importing coking coal anticipated for India to produce even
200mt by 202526.
To achieve raw material availability for 2025, steel
production targets, the Government could implement
the following initiatives:
Capital
Governments can provide an enabling policy environment for
growth, but signicant additional investment of capital will still
be required. Investments such as vertically integrating mines,
building new plants, maintaining old plants and pursuing
potential acquisitions will need to be funded. In addition,
steelmakers need to assess various means to optimize their
capital allocation decisions.
In China, the steel capacity increase was largely funded
through loans from state banks. Foreign corporations
relocated manufacturing bases to China to take advantage
of low labor costs. These investments assisted
large-scale developments, not only with capital but
19 Shastri Moonan, Technology transfer: rejuvenating mature industries, Garland studies on industrial productivity, Jgmld]\_], 2013.
17 India imported 168.44mt coal in FY14 to meet demand: Government, The Economic Times, http://articles, economictimes.indiatimes.
com/2014-07-14/news/51484976_1_coal-mines-power-minister-piyush-goyal-india, 14 July 2014.
20 Paul Krugman (Editor), Japanese nancial system and the cost of capital in Trade With Japan: Has the Door Opened Wider? (University of
Chicago Press, 1991).
the debt and equity markets to raise capital. For example, Tata
Steel recently completed a dual tranche bond sale to fund
expansion or renance debt. However, given the stressed
balance sheets of most players in the steel sector and their
credit ratings, taking on signicantly high levels of debt to
feed target capacity expansion may be a challenge under the
current framework.
An analysis of the top 15 Indian steelmakers by market
capitalization shows that levered free cash ow (FCF) has
not yet returned to positive. Cash ow for Indian steelmakers
remains negative due to aggressive capital expenditure. This
can have an impact on serviceability of debt in the short term.
The recent change in Government has led to a more upbeat
Levered FCF for top 15 Indian steelmakers remains negative in 2013 but shows signs of improvement
30,000
10%
25,000
0%
20,000
10%
15,000
20%
10,000
30%
5,000
40%
0
2009
2010
Net debt (US$ Million)
2011
2012
2013
Government: How can the Government and steelmakers collaborate to promote FDI
into the Indian steel sector?
Sustainability and
environmental reforms
Steel companies have recognized the need to be more
energy efcient and to implement means to control
emissions. The difference in emission standards across
regions is a disadvantage for stringent regimes due to their
increased cost of operation. For instance, due to tough
carbon regulations in the EU, steel manufacturers such
as Tata Steel are facing high operating costs across their
European facilities. Even though tough carbon-reduction
targets will deliver increased investment in technologies
such as renewable energy, there are fears that they
will limit protable production in the steel sector.
Sustainability measures are causing companies to increase
their focus not only on air pollution, but also on water
management and maintaining biodiversity. Using advanced
technologies, steel plants in water-scarce area are able to
recycle and reuse about 98% of their water.23 This requires
a signicant capital investment, which steel companies
are nding it difcult to fund given thin margins. This is
particularly so in China, where steelmakers will have to invest
more than US$8.3US$10 per tonne just to achieve emission
levels on par with Japanese and Korean steelmakers.24 The
Chinese Government has also decreed that companies that fail
to meet environmental standards will be charged increased
loan costs as well as increased electricity prices. It is therefore
likely that small Chinese steel mills will have to close down.
In India, to ensure environmental sustainability, the domestic
steel industry is governed by various regulations to protect
the environment and prevent water and air pollution. In
addition, the Central Pollution Control Board (CPCB), along
with its state counterparts, is responsible for dening
framework, guidelines and implementation of legislation for
prevention and control of environmental pollution.
In line with international standards, the Government of
India has realized the need to focus on enhancing energy
efciency rather than only CO2 reduction. Accordingly, under
the National Action Plan on Climate Change (NAPCC), the
National Mission for Enhanced Energy Efciency (NMEEE) has
planned many initiatives around energy conservation with an
aim to reduce the emissions intensity of its GDP by 20%25%
from 2005 levels by 2020.
23 Sustainable Steel Policy and Indicators 2014, Worldsteel Association, 06 October, 2014.
24 China Environmental Measures Impact on Steel & iron ore, WoodMackenzie, 28 March 2014.
22 Union cabinet approves FDI in defence, railways, Hindustan Times, 6 August 2014, via Factiva.
Million tonnes
2,000
1,500
1,000
500
Technological innovation
2003
2004
2005
2006
2007
2008
2009
Total capacity
2010
Production
2011
2012
Consumption
Aluminum
Expanding market share
Product innovation
Aluminum
Competitive defense
Increasing R&D
Automotive purchasing
considerations
100.00
4,000
50.00
2,000
Nov 13
6,000
Sep 13
150.00
Jul 13
8,000
May 13
200.00
Mar 13
10,000
Jan 13
250.00
Nov 12
Sep 12
Jul 12
May 12
@]\_af_mkaf_fYf[aYd
derivatives
Mar 12
Jan 12
Apr 14
Dec 13
Apr 13
Aug 13
Dec 12
Managing risks
Apr 12
Aug 12
Dec 11
Optimizing throughput
Apr 11
Aug 11
Dec 10
Apr 10
Aug 10
Dec 09
Aug 09
Apr 09
29 Action Plan for a competitive and sustainable steel industry in Europe, European Commission, 6 November 2013.
2.
Basis risk
Hedging with derivatives entails taking a position in a
derivative that will offset the price movement in the
underlying commodity in the same period. However,
in case of non-availability of a derivative of the exact
physical variety produced by a steelmaker, the price
movements of the two assets may not always occur in
the same time period, especially if there are differences
in the markets, geographies and so forth. For example, a
steelmaker may have to use NCDEXs general-commercial
grade steel long futures to hedge its physical long steel
products, which may be rebar, billets or wire rods. This
type of hedging is commonly known as proxy hedging.
Boosting
demand
for steel
700
Czech Republic
Japan
600
500
Canada
China
Germany
Italy
Turkey
400
Malaysia
Russia
Thailand
300
United States
Poland
Spain
Netherlands
Mexico
Kazakhstan
200
Ukraine
Brazil
India
100
Kenya
Morocco
Romania
15%
10%
35%
12%
8%
20%
Construction
Infrastructure
Automobiles
Capital goods
Other
Greece
South Africa
38 Iron ore outlook Raising the oor, Macquarie research, 26 September 2013, via ThomsonOne.
Bangladesh
0
France
Portugal
10,000
20,000
30,000
40,000
50,000
60,000
Infrastructure investment
Construction and real estate
Riding on rising demand from all segments, the Indian real estate sector consumed about 22mt of steel in 2013
in the construction of 3.6 billion sq.ft. The contribution of the real estate sector to GDP stood at 6.3% in 2013 and
provided employment opportunities for 7.6 million people.
39
Increasing urbanization: Indias urbanization was 30%, according to the 2011 census, and is slated to cross
38% by 2025.40 Combined with an increase in population, the aggregate demand for housing is going to increase
considerably, with about 8.2 billion sq.ft. of construction estimated in 2025.
Growth in household income: Increase in income has a favorable effect on both residential and commercial real
estate. People are spending increased amounts on discretionary spending categories, resulting in demand for
the retail sector. Improved incomes result in enhanced savings, which are ploughed into real estate purchases.
Growth of services sector: The growth of information technology/information technology enabled services has
caused an unprecedented demand for ofce space.
Demand for affordable housing: This category of housing is gaining prominence with the focus of the
Government on catering to the housing needs of the bottom of the pyramid and reduction in slums in
urban areas.
The Prime Minister of India has announced an initiative to provide homes for all.
Increase in height of buildings: The increasing population pressure in tier I cities is leading to high rises and
skyscrapers, which has resulted in an increase in the overall steel-to-cement ratio in construction in India.
Regulatory requirements: Enforcement of regulations about earthquake resistance and building strength has
led to an increase in steel intensity in construction.
Real estate investment trusts (REITs) will soon be allowed in India for funding real estate projects and will be
given a tax pass-through status. This will help in easing the current liquidity problems in the sector.
Around INR40 billion has been allocated for low-cost housing, and INR50 billion has been set aside for urban
housing. An infrastructure investment trust would also be developed to provide a boost to the sector. To reduce
the burden on big cities, INR71 billion has been allocated for the development of 100 smart cities.
The rebate for housing loan on self-occupied property was also increased from INR150,000 to INR200,000 to
encourage the retail investor.
The demand from the construction industry will largely be for long products in the form of rebars and H-beams.
Galvanized/coated steel sheets will have a reduced demand in urban construction, while corrugated galvanized
sheet for roong in rural areas will be the major contributor to demand for this category in the overall
construction segment.
42 Action Plan for a competitive and sustainable steel industry in Europe, European Commission, 6 November 2013.
43 =Q:m\_]l9fYdqkak, July 2014
Automotive
Roads
Government schemes
such as NHDP,
PMGSY and
SARDP-NE
Increase in overall
Airports
DFC driving
Privatization of major
investment in
signicant upgrade of
rail infrastructure as
well as creating new
sub-routes and new
rail infrastructure
High-speed train
connectivity
movement
airports
Expanding tourism
industry
Urban infrastructure
Increased focus on
urban infrastructure
through JNNURM
Mass Rapid Transport
Rising domestic
passenger trafc
Low-cost airports in
Upgrade railway
stations
requirement in the
areas of water
supply sanitation,
waste water
treatment plants
Power
Large gap between
plants (UMPP)
New transmission line
infrastructure in
power
Super-critical
technology driving
investment in thermal
power plants
Capital goods
The Governments push to turn India into a global
manufacturing hub will boost demand. The aim is to increase
the contribution of manufacturing from 15% to 25% of GDP
by 2025. In comparison, Chinas manufacturing accounts
for about 34% of GDP. The Government plans to promote
manufacturing through policies that will facilitate investments,
enhance skill development and protect intellectual property.
of power
Smart cities
Development of tier II and tier III
cities
Upgrade of power distribution
infrastructure
Engineering goods
Thrust on Make in India
Improvement in competitiveness
of Indian industry
DelhiMumbai Corridor
mining industry
Coal sector and mining sector
reforms
Thrust on underground mining
44 Action Plan for a competitive and sustainable steel industry in Europe, European Commission, 6 November 2013.
45 Is Korean Steel Really Chinese?, The Wall Street Journal, 10 July 2014.
Area contacts
Global Mining & Metals Leader
Mike Elliott
Tel: +61 2 9248 4588
michael.elliott@au.ey.com
Oceania
Scott Grimley
Tel: +61 3 9655 2509
scott.grimley@au.ey.com
China and Mongolia
Peter Markey
Tel: +86 21 2228 2616
peter.markey@cn.ey.com
Japan
Andrew Cowell
Tel: +81 3 3503 3435
cowell-ndrw@shinnihon.or.jp
Africa
Wickus Botha
Tel: +27 11 772 3386
wickus.botha@za.ey.com
Commonwealth of
Independent States
Evgeni Khrustalev
Tel: +7 495 648 9624
evgeni.khrustalev@ru.ey.com
France and Luxemburg
Christian Mion
Tel: +33 1 46 93 65 47
christian.mion@fr.ey.com
Acknowledgment
United States
Andy Miller
Tel: +1 314 290 1205
andy.miller@ey.com
Canada
Bruce Sprague
Tel: +1 604 891 8415
bruce.f.sprague@ca.ey.com
Brazil
Carlos Assis
Tel: +55 21 3263 7212
carlos.assis@br.ey.com
Chile
Lachlan Haynes
Tel: + 56 2 2676 1886
lachlan.haynes@cl.ey.com
Service line contacts
Global Advisory Leader
Paul Mitchell
Tel: +61 2 9248 5110
paul.mitchell@au.ey.com
Global Assurance Leader
Alexei Ivanov
Tel: +495 228 3661
Alexei.ivanov@ru.ey.com
Global IFRS Leader
Tracey Waring
Tel: +61 3 9288 8638
tracey.waring@au.ey.com
India
Anjani Agrawal
Tel: +91 982 061 4141
anjani.agrawal@in.ey.com
ER0215
ED 0615
This material has been prepared for general informational purposes only and
is not intended to be relied upon as accounting, tax, or other professional
advice. Please refer to your advisors for specific advice.
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