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February 19, 2001 Steel Sector Update - February 2001 Production declines….. Production of finished steel in December 2000 declined by 0.3%, as compared to a growth of 12.4% in the same period last year. During the current financial year, this was the first month when production has decreased over the corresponding month of the previous year. Chart 1: Finished steel production (in ‘000 tonnes) Source: JPC The fall in finished steel production in December reflects the 18.6% fall in the production of HR sheets. While hot rolled coils (HRC) production during the period increased by 13% yoy, cold rolled coils (CRC) production increased by 5% yoy. But the rate at which the production has grown is lower than that recorded in the proceeding few months. The cumulative production growth in April-December 2000 is 8.1% as against 12.7% in the same period last year. Production of HRC decreased by 3% MoM and whereas that of bars & rods reduced by 0.4% MoM (between December and November 2000). Bar & rods production came down by 6.5% yoy. We believe that given the slowdown in the Indian economy and poor performance of core sectors like automobiles, the steel consumption may come under pressure in the coming months. If inventories build up, cutback in production levels would be desirable. However, in the past the industry has found it difficult to come to an understanding on production cuts. US has already commenced anti-dumping investigations against import of HRC from India. Indian steel producers are jointly fighting against US allegations in the WTO. Table 1: Production Production (in 000 tons) Dec-00 Dec-99 % Change Apr-Dec 2000 Apr-Dec 99 % Change Bars & Rods 728 779 (6.5) 6721 6415 4.8 HR Coils 708 627 13 6379 5043 26.5 HR Sheets 36 44 (18.6) 368 417 (11.9) CR Sheets/ Coils 335 320 4.9 3001 2617 14.7 GP/GC Sheets 129 125 3.4 1138 1030 10.4 Finished Steel 2369 2375 (0.3) 21256 19661 8.1 Source: JPC Prices firm up… Globally, the steel prices were declining but of late, the prices of steel have picked up. Prices in the international market have started to firm up with hot rolled coil prices increasing to $200 per tonne. The improvement in prices is mainly due to the belt tightening measures adopted by steel companies globally and the resultant cut in inventories. Read the recent report by Dr A.S.Firoz Given the slowdown/recession in the US manufacturing sector, it is doubtful whether the price increase are sustainable. Cheaper imports hits steel companies Cheap imports under the Advance License scheme, especially from Russia and Ukraine are likely to affect the performance of steel companies. While the total hot rolled coil imports into the country for the nine-month period ended December 2000 stood at 0.46 million tonnes, Russia accounts for 30.6% while products from Ukraine amount to 16.7%. During the period import of seconds and defectives grew to 0.23 million tonnes from 0.11 million tonnes in the corresponding period last year. This has put further pressure on the domestic steel industry. The Indian government has restricted the import of defectives or seconds from three designated ports of Mumbai, Chennai and Calcutta. This is an attempt to curb the import of prime grade material under the guise of seconds by paying lower import duty. Indian government has also imposed anti-dumping duty on import of billets and ferro-silicon from China. This move will hurt the seamless tube manufacturers and the alloy steel industry. Exports are also likely to be hit. Stock market performance In the last one month, the India Infoline steel index has given a return of 24%. Essar Steel (20.6%), SAIL ( 37%), Jindal Iron and Steel Co (6%) and Tisco (22.9%) were the major gainers in the last one month. Though the results were not very good, there was a rally in the old economy sectors particularly the steel, banking, power and auto sector. A look at the Q3FY01 performance Tisco’s net profits declined by 12.6% yoy due to higher interest and depreciation on the commissioning of the cold rolling mill at Jamshedpur. Other income also declined substantially as last year in the corresponding quarter the company had booked income from the sale of the cement division. The net loss of SAIL has come down by 74.7% from Rs7,012.7mn to Rs1,776mn. The company’s restructuring plan focuses on being the cheapest mild steel producer and would be divesting off all its non-core activities. Essar Steel has registered net profit of Rs150.8mn as against loss of Rs1,160.5mn, corresponding quarter last fiscal. Jindal Strips has recorded a marginal increase of 2% in the net profits in Q3FY01 at Rs 195.6mn as compared to Rs 191.8mn in the same period last year. Sesa Goa’s net profit increased by 182% in Q3FY01 to Rs 120.6mn as compared to Rs 42.8mn in the corresponding period last year. There has been an improvement in iron ore exports. Table 2: Q3FY01 (Rs mn) Name of the company Sales Operating profit PAT Tisco 16398 4217 1,277 SAIL 40306 5704 (1,776) Essar Steel 6155 1262 151 Jindal Strips 3384 634 196 Sesa Goa 1007 172 121 Source: India Infoline Major news Indian Tata Steel has appointed B Muthuraman, executive director (special projects) as managing director of the company. The appointment is with effect from July 22, 2001, upon the retirement of Dr. JJ Irani, the present managing director of the company. Tata Steel is planning to get into the call centre business in Jamshedpur to provide employment to those choosing for the VRS scheme in the company. The company has forged a marketing alliance with Tata International, which is also getting into the call centre business through a joint venture with Sitel Corporation of the US. The company is also in talks with state-owned Indian Rare Earths Ltd and Kolkata-based Saraf Agencies for an alliance in its proposed titanium project in Orissa. SAIL has decided to launch a new voluntary retirement scheme for its employees from February 20 in an attempt to reduce its manpower from the present 156,000 to 100,000 by the end of 2003. It has implemented a turnaround package called Project ‘Vijay’ at the Rourkela Steel Plant with the help of management consultants McKinsey and Co, with the objective of achieving cash profit in the current fiscal and net profit subsequently. It is going in for a restructuring plan next month by tying up with National Thermal Power Corporation for its captive power plants at Rourkela and Durgapur and hiving off the oxygen plant at the Bhilai Steel Plant. The wage settlement of executive grade officers in Steel Authority of India Ltd is likely to cost the company an additional Rs 3200mn. The financial institutions have finally cleared the financial revamp plan of Jindal Vijaynagar Steel. Ernst &Young is planning to devise a restructuring package for Lloyds Steel According to the restructuring programme prepared by Accenture (formerly Anderson Consulting) and approved by the company’s lead institution, ICICI, JVSL’s capital structure would be modified such that the promoter’s stake is brought down to 38% from the current level of 63%. The equity stake of the FIs is slated to increase from 7% to 44% on account of conversion of debt into equity. JVSL has received an order for BF grade pellets from China, which will be shipped by Feb 2001. The steel ministry may introduce "Buy Indian Act" - wherein usage of only indigenous products will be allowed for domestic projects. The Act is a verbatim copy of the "Buy American Act", and aims at boosting indigenous demand and protecting the domestic market from cheap imports. Steel manufacturers including Essar Steel, Ispat Industries, Jindal and Alloys Steel have urged the government to take measures including hiking customs duty on steel and steel products to the World Trade Organization (WTO) levels of 40 per cent. Financial institutions have ruled out the possibility of extending fresh loans to Ispat Industries to pay off their Euro Convertible Bonds to the extent of $ 122.2mn, which is maturing on March 31, 2001. They are devising a package on recommendations for the company and stressing on streamlining the management and enhancing managerial efficiency of the company. International ThyssenKrupp is in talks with National Steel and AK Steel regarding a joint venture in an attempt to get a foothold in the US and to defend its number one position in the market. It is also talking to Japan’s Kawasaki Steel and NKK about an alliance. The company is planning to set up its own greenfield sites to produce stainless steel in the US. Kawasaki Steel Corp. is planning to implement an emergency production cut of H-beams destined to dealers with February booking for March rolling. Nippon Steel Corporation and Jiagsu FASTEN Co., Ltd., a leading Chinese cable manufacturer, have entered into an agreement to set up a joint venture in Jiagsu Province for manufacturing cables to be used for giant bridges. Nippon Steel and Sumitomo Metal each won an order of 25,000 ton of line pipe for Stat Oil, Norway through Mitsui & Co. and Sumitomo Corp. respectively. Speciality steel and bright bars manufacturer Isibars has posted a loss of Rs 27mn for the third quarter ended December 2000,compared to a loss of Rs 14mn for the same period on the previous year.

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