World Economy
It is rightly said that "Development is about transforming the lives of people,
not just transforming economies". It was with this goal, that the idea of a
globalised world economy transcending all borders was being propagated and advocated.The
winds of globalisation which had gathered speed with Perestroika and Glasnosts, reached
its peak with the fall of Berlin Wall in 1989. No one would have then thought that about 3
decades down the line, USA and UK would call for protectionism and China would turn out to
be the biggest advocate of globalisation. Before Financial Crisis had rocked the world
economy in 2008, multinational companies and business leaders used to talk of a
"flat" world. Today, the global MNCs are not getting the cost advantage in
manufacturing offshore for a variety of reasons and there is a general trend of domestic
production gaining ground. It is also true that, though many champions of globalisation
are talking of "localisation", it is not yet the time to write an epitaph on
globalisation. Globalisation for sure is rescinding but is still fuelling growth in
emerging markets. What we are seeing today is an ecosystem where trade is trying to
balance the socio-political nuances of each nation, resulting into public discourse being
sceptical on the effects of globalisation. This has been further accentuated by Brexit and
talks of protectionism by Trump administration in the USA.
The global economy is on the cusp of a recovery from around a decade long recession
which had started in 2008 with the global financial crisis. Nine years later, 2017 would
mark the recovery in global growth. According to World Bank, "Global growth is
firming, contributing to an improvement in confidence," as it predicts global economy
to grow by 2.7% for 2017 and rising to 2.9% in 2018. Economic recovery seems to be
complete in the Eurozone, and the US economy has also registered a positive real GDP
growth. The fear of hard landing of the Chinese economy has tapered down, while its opaque
debt position and over capacity remain a concern for the future. Improved global trade and
better performance of emerging markets are expected to sustain the recovery. The risks of
"increased protectionism, persistent policy uncertainty, geopolitical risks or
renewed financial market turbulence could derail an incipient recovery."
Indian Economy
India continues to be one of the fastest growing economies in the world. The growth is
powered by domestic demand and a strong consumer sentiment. Indiasconsumer confidence
index stood at 136 in the fourth quarter of 2016, leading the list of nations in world on
the same parameter. India has the potential to beat China and become the fastest growing
nation in world in continuation for the next couple of years. The year 2016 started in a
robust note for India, with the economy looking to perform after a long-drawn recession.
However, demonetisation of high denomination bank notes of Rs 1000 and Rs 500 announced by
the government on 8 November 2016, to eliminate black money and the growing menace of fake
Indian currency notes had put a spanner in the growth trajectory. The initiative of
demonetisation was a noble attempt to tackle the menace of black money and to curb
corruption. However, the economy had to suffer collateral damage in this bigger fight of
Nation building as for the full yearended March 31, economic growth slowed to 7.1% from 8%
a year earlier, and slipped sharply to 6.1% in the January-March quarter, which was the
slowest in 13 quarters. This at a time when the economy was about to perform better, had
affected many small and medium enterprises in the country. However, the effect of
demonetisation started waning from first quarter of 2017-18 with the economy once again
bouncing back.
Various reforms measures initiated by the government is fuelling this growth. In the
power sector, we are witnessing a slow revolution where electricity is being made
available through last mile connectivity to every house. The implementation of GST
unifying the tax structure of the Nation is probably the biggest tax reform that has
happened post-independence. GST would have a positive effect on the countrys GDP and
would increase tax compliance. The government has also taken a bold step by enacting the
Insolvency and Bankruptcy Code 2016 which would go a long way in tackling NPA issues
troubling the Indian banking system through swift resolution of insolvency cases in Indian
industry faced with huge debt accumulated due to various external market conditions mostly
beyond its control.
Global Steel Industry
Global steel industry experienced a strong demand recovery in 2016, led primarily by
China. The Chinese government had arrested the early signs of slowdown through a slew of
stimulators like investment in infrastructure and housing which had resulted in increased
activity in the Chinese steel industry. According to World Steel Association (WSA),
Chinese demand grew by 1.3% in 2016, which resulted in the world steel industry to grow by
1% in 2016. WSA expects that the steel demand would remain almost flat in China for a
greater part of 2017, while the developed as well as developing and emerging economies
would grow. WSA hence forecasts that global steel demand will increase by 1.3% to 1,535.2
Mt in 2017, and by 0.9% in 2018.
Global steel in 2016 had faced a major challenge of dumping by China. China accounts to
about 45% of world steel production. China has been suffering from steel overcapacity for
last few years, which it has been dumping across the globe at very low prices. This had
created havoc in various steel markets including India. Dumping by China has been one of
the challenges before the steel industry. The year 2016 also witnessed a spate of
anti-dumping measures by various countries including India to knock off the Chinese steel
exports from its heights in 2015. India had imposed Safeguard duty, Minimum Import Price
(MIP) and Anti-Dumping duty on various steel products to save the domestic industry from
bleeding. This had resulted in revival in steel production in India in 2016. On the other
hand, steel prices had climbed in 2016 due to increased demand and capacity reduction by
China.
The steel making raw materials industry has been highly volatile in 2016. Iron ore
prices had doubled to around over $ 80 in early December 2016. Chinese infrastructure
investment and rise in steel production resulted in demand of iron ore from China which
led to the price rally. Similar fluctuations were noticed in coking coal which rose to
$305 in November 2016 from the lows of $76 in January 2016, primarily driven by sudden
Chinese demand. Coking coal has however today cooled to around $140 per tonne.
It used to be said that the level of economic activity of a country can be measured by
the consumption of steel. However, today steel is facing a stiff competition from
aluminium in the automobile sector as the automobile industry is exploring options of
switching to a lighter product like aluminium which would reduce weight and reduce fuel
consumption in line with the latest regulations.
The global steel industry is trying to innovate to meet the growing demands of the
market, consumer preferences and changing technology to continue to survive as the
backbone of global manufacturing.
Domestic Merchant Metallurgical Coke Industry
The domestic merchant metallurgical coke industry was suffering from the twin problems
of low demand from steel plants on one hand and excessive dumping by China on the other
hand. The year 2016 continued with the same trend resulting in the domestic merchant met
coke industry operating at around 25% capacity utilisation. The excessive dumping of met
coke by China at a price equal to the cost of coking coal had caused considerable damage
to financial health of the domestic met coke producers, who were forced to sell at prices
less than the cost of production. As a result, many met coke producers had stopped
production, while the bigger units were producing just to stay alive. Faced with low
realisation and high debt, the domestic met coke industry was battling for existence in
the year 2016. The total import of met coke to India in the year 2016-17 was around 4
MTPA, while the production by domestic merchant met coke producers was at around 2.5
MTPA.The year 2016 marked the low in merchant met coke industry when in November the price
of coking coal skyrocketed to USD 305 causing severe bleeding to the industry already
reeling with pain of demonetisation.
However, 2016 also saw the turnaround being scripted by putting the worst behind. The
various safeguard measures like MIP, Safeguard Duty, Anti-Dumping Duty, granted to steel
industry saw the domestic steel production rise, which resulted in an increase in demand
for the met coke industry. Demand started picking upfrom the mid of 2016-17. Imposition of
Anti-Dumping Duty of USD 25.20 on met coke imported from China came as a major relief for
the domestic merchant met coke industry. The Anti-Dumping Duty provides a protection
against dumping from China for 5 years. The domestic merchant met coke industry had hard
fought to have ultimately sealed the relief through imposition of Anti-Dumping Duty. Thus
2016 was a landmark year for the domestic met coke industry. It presented the extreme lows
followed by the reliefs that can help to script a turnaround.
Companys Performance
The income from operations was atRs. 541.21 crores in the year under review as compared
to Rs. 747.44 crores during the previous year.The decrease is primarily due to very low
sales from November to January due to demonetisation. However, inspite of lower turnover,
the net loss during the year under review was reported at Rs. 675.81 crores as compared to
net loss of Rs. 819.34 crores during the previous year, primarily due to higher
realisation of the coke sold. Accordingly, both the Basic & Diluted earnings per share
of the Company (after extraordinary items) were reported at (4.44) respectively, for the
year under review as compared to Rs.(7.13) respectively, during the previous year.
Outlook
As you are aware, the company has been carrying huge debts. Total banking dues as on
March 2017 has been around Rs.3600 crores. The accounts of the company were downgraded as
NPA by all bankers concerned due to non-payment of interest and repayment instalments by
the company for over a year. Also, continuing with various litigations and proceedings in
different Courts was hampering the normal functioning of the Company due to the underlying
uncertainty and was not beneficial from a broader perspective.The Company views upholding
the interest of its shareholders and stakeholders as its foremost obligation. There
areabout 1500 employees directly employed by the Company across its plants and offices as
on December 2016, while indirect employment is 4 to 5 times that number through its
vendors, dealers and suppliers.Hence, to continue with its ongoing operations, so that the
going concern value of the Company is not jeopardised, and that it benefits when the
market is ready to soar once again, the Company had filed an application for initiation of
Corporate Insolvency Resolution Process(CIRP) for quick resolution of cases like the one
faced by the company. The necessary application under Section 10 of the Insolvency and
Bankruptcy Code, 2016 was filed by the company as a corporate debtor and the same was
admitted by the NCLT, Kolkata Bench on 07.04.2017. Pursuant to the same, Committee of
Creditors (CoC) of Gujarat NRE Coke Limited in its 1st meeting held on 5th May, 2017, had
decided to continue the appointment of Mr. Sumit Binani as a Resolution Professional with
respect to the Corporate Insolvency Resolution Process of the company. The company has
appointed PwC as the consultant to prepare the resolution plan. The decision to appoint
PwC was ratified by the CoC.
This action of the company is a sincere effort to chalk out a durable and successful
revival plan in consultation with its bankers. The company is working with PwC to come out
with a resolution plan in discussion with its financers. This is a resolute effort by the
company to come out of the crisis. The company is hopeful that post the exercise, it would
be a much fit and nimble entity, capable of running its operations efficiently and meeting
all its dues and obligations.The Company is positive that its efforts for revival will
bear profitable fruits and would be able to return to its past glory.
Opportunities and Threats
The government at the centre has approved the National Steel Policy 2017. The notable
points in the recently announced National Steel Policy 2017 is a roadmap to ensure that
the steel sector follows a sustainable path of development in respect of augmenting
capacity to 300 million tonnes by 2030-31. To make this target achievable, the government
would give domestic steel a priority in all government infrastructure projects. As
expenditure in infrastructure has been receiving substantial push from government to
revive growth, such measures are bound to increase demand of domestic steel. The increased
demand for steel would result in an increase in demand for met coke.
The coking coal prices have stabilised to a more sustainable range of around USD
140-150 per tonne. The price of met coke has been strong at around USD 330 and is expected
to rise further in next six months. The domestic met coke industry expects positive
margins after a long-time due to this price benefit. The domestic merchant met coke
industry has today successfully overcome the twin challenges of crisis of low demand from
steel industry and dumping from China and hence looks forward to brighter days ahead.
The threats lie in any sudden major policy shift or geopolitical tension arising from
the recent unpredictable global leadership. The continuing conflict in Syria and Iraq, the
recent crisis in Middle East concerning Qatar, the hot and cold relationship between
Russia and the West, flashpoint at South China Sea, as well as any disruption of peace
with Indias immediate neighbours are certain perceived threats. Also, any major policy
change by the USA or any change in demand pattern in China can disrupt the market.
However, the real opportunities weigh much more than the perceived threats, and hence the
industry is confident of a faster recovery to better days.
Risks &Concerns
The broad business risks can be classified as below. Any of these risks has the
potential to influence the actual future operating results to vary from the current
results or from anticipated future results.
a) Commodity Price Risk: The Company is exposed to the risk of price
fluctuations on raw materials and finished goods. However, considering the normal
correlation in the prices of raw material i.e coking coal and finished good i.e. met coke,
this risk gets reduced/adjusted over a period of time.
b) Production Risk: Coking coal, the critical raw material required for
manufacture of met coke is in short supply internationally resulting in uncertainty in its
availability and consequently, its prices. Timely availability of raw material at
reasonable prices is therefore, critical for survival in this industry.
c) Forex Risk: The company like any other company operating in global markets
is subject to Forex Risk. The Company however, has a policy to hedge its foreign exchange
risk within the defined parameters. As imports (raw materials etc.) exceed exports or vice
versa, the Company suitably hedges the differential from time to time to appropriately
manage the currency risk. However, such hedging does not assure avoidance of any losses
due to sudden and/or substantial volatility in currency markets.
d) Risk from Natural Calamities: Any act of nature detrimental to the smooth
functioning of production of metallurgical coke in India, can adversely affect the
performance of the Company.
e) Political Risk: Any risk arising due to any major change in policy decisions
on account of change in Government, Legislative bodies etc. such as levy of any additional
duty etc. on the product produced by the company may affect the results of the company.
Internal Control Systems and Its Adequacy
The Companys internal control systems are commensurate with the nature, size and
complexities of its business to ensure proper safeguarding of assets, maintaining proper
accounting records and providing reliable financial statements.
The Company has an internal audit system which is conducted by an independent firm of
Chartered Accountants as well as a strong in house internal audit cell so as to cover
various operations on regular basis through the year. Summarised Internal Audit
Observations/ Reports are reviewed by the Audit Committee on a regular basis. The finance
and accounts functions of the Company are well staffed with qualified and experienced
members.
Human Resources
The company considers its people as its most important resource. All employees of
Gujarat NRE are considered leaders and encouraged to take responsibility to do their best
that they can while meeting business needs. The companys strength lies in its human pool
of resources and its success is largely dependent on them. The Company therefore, focuses
on developing its talent pool and its employee capability through increased emphasis on
skill upgradation, job rotation, multi skilling and inter plant sharing of experiences.
Critical skills identification and ramp up planning continues at the operating level. The
Company continuously reviews its policies/practices with a view to make them more
contemporary and uniform in application and this is an ongoing process.
Cautionary Statement
The statement in this Management Discussion and Analysis Report describing the
companys objectives, projections, estimates, expectations or predictions may be
forward-looking statement within the meaning of applicable securities laws and
regulations. These statements being based on certain assumptions and expectations of
future events, actual results could differ materially from those expressed or implied. The
Company assumes no responsibility whatsoever, in this regard.
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