Lloyds Metals Management Discussions


Global overview of the steel industry

? Steel is used in every important industry, energy, construction, automotive and transportation, infrastructure, packaging, and machinery. By 2050, steel use is projected to increase by around 20% compared to present levels to meet the needs of our growing population.

? Skyscrapers are made possible by steel. The housing and construction sector is the largest consumer of steel today, using more than 50% of the steel produced.

? The global steel market reached a value of US$874.6b in year-22. The market is predicted to reach a value of US$1,052.25b (Source-IMARC) by 2027, exhibiting a growth rate (CAGR) of 3.02% from 2022 to 2027. The world crude steel production reached 1951 million tons (mt) in FY22, showing a growth of 3.6% over CY 2020.

China has been a leader in this industry for quite a long time now, but India has the potential to emerge as a leading global leader with the right strategy and action plan.

Global trend, growth projection and forecast.

Table 5: steel demand outlook by country (2020-2023f)

Country

2020 2021 2022 2023f
China 995 952.0 952.0 961.6
EU 140.8 163.6 161.5 167.9
India 89.3 106.1 114.1 120.9
US 80 97.1 99.8 102.1
Japan 52.6 57.5 58.2 58.8
S. Korea 49 55.6 56.2 56.8
Russia 42.4 43.9 35.1 35.1

Source: ey-steering-india-into-a-us-5-trillion-dollar-economy-with-steel indian overview of the steel industry

India is currently the worlds second-largest producer of crude steel, producing 118.20 million tons (mt) of crude steel with a growth rate of 17.9% over the corresponding period last year

(CPLY). Indias finished steel consumption is anticipated to increase to 230 MT in 2030-31 from 133.596 MT in FY22.

During 11M FY23, the crude steel production and finished steel production increased by 4% and 6.2%, respectively, on a y-o-y basis. Domestic consumption of finished steel increased by 11.6% y-o-y to 107 million tonnes during this period.

Source: Ministry of Steel

According to CareEdge Research, Indias steel production is estimated to be within the range of 123-127 million tonnes, representing a growth rate of 4-7% in FY24. The domestic consumption growth rate is also expected to be 8-10% in FY24, driven by increased infrastructure spending, a surge in real estate and construction activities, and strong auto sales. Over the longer-term India is expected to achieve 180 mn tonnes of steel-making capacity by 2026. At good efficiency rate of 90% can achieve 160 mn tonnes of production, 33 mn tonnes higher than 2022-23.

As India has entered its pre-election year in 2023, the government is likely to increase investments both at the state and central level. This includes a 33% increase in budgetary capital expenditure to Rs 10 lakh crores for infrastructure, a capital outlay of Rs 2.4 lakh crore for Indian Railways, and the announcement of 100 transport infrastructure projects. These initiatives bode well for domestic demand.

Additionally, the uptick in construction and real estate activities is driving the demand for steel products. The automobile sector, which witnessed a 21% year-on-year growth during 11M FY23, further indicates the growing demand for steel.

DOMESTIC PRICES:

In April 2022, the average domestic finished steel prices reached their peak at Rs 96,079 per tonne. However, after a sharp increase, they began to decline and fell to Rs 69,084 per tonne in December 2022, representing a 17% year- on-year drop. This decline was caused by the imposition of an export duty on a range of finished steel products, leading to lower exports and an increase in domestic inventories. Additionally, the prices of iron ore softened by about 21% to Rs 4,100 per tonne until December 2022, compared to

Rs 5,965 per tonne in May 2022. This was due to an increase in domestic supply following a hike in the duty on iron ore exports to 50% since May 2022. After the reduction in export duty on iron ore in November 2022, domestic prices began to rise. In January 2023 prices for iron ore lumps and fines started regaining the lost ground, which further boosted the prices. As of February 2023, iron ore prices have increased by 2% month-on-month to Rs 4,400, resulting in higher domestic steel prices.

IRON ORE:

Iron ore is regarded as the second most important commodity behind oil. It is an essential input to produce crude steel. Iron ore makes up 5% of the earths crust and is the second most abundant metal after aluminum. 98% of the iron ore mined is used for steel making. Pig iron is produced from the smelting of iron ore and is further processed to remove impurities and reduce carbon content to produce steel.

Iron ore is also used in ferro-alloy, cement, foundry, and glass factories and has three types:

? High-grade ore - has >60% Fe content, like the Brazilian and Australian hematite. Historically, it has provided a direct feed to smelters either as a raw lump or fines, or in a processed form as sinter or pellets

? Medium grade - ores having 55% to 60% Fe content.

? Low-grade ore - iron-rich rocks having lower than 55% Fe content.

Iron ore is the source of primary iron for the worlds iron and steel industries. It is therefore essential to produce steel, which in turn is essential to maintain a strong industrial base. Almost all (98%) iron ore is used in steelmaking. Iron ore is mined in about 50 countries. The seven largest of these producing countries account for about three-quarters of total world production. Australia and Brazil together dominate the worlds iron ore exports, each having about one-third of total exports.

As an essential input to produce crude steel, iron ore feeds the worlds largest trillion-dollar-a-year metal market and is the backbone of global infrastructure. To meet the growing demand for steel products, world iron ore production has increased dramatically over the last decade. As a result, traditional high-grade iron ore reserves are being significantly depleted and many new iron ore deposits of lower-grade and more complicated mineralogy are being mined.

Global iron ore market to reach 2.7 billion metric tons by 2026.

? Amid the COVID-19 crisis, the global market for iron ore estimated at 2.4 billion metric tons in the year 2022. It is projected to reach a revised size of 2.7 billion metric tons by 2026, growing at a CAGR of 3% over the analysis period.

Fines, one of the segments analyzed, is projected to grow at a 4% CAGR to reach 1.3 billion metric tons by the end of the analysis period. After a thorough analysis of the business implications of the pandemic and its induced economic crisis, growth in the HBI/DRI segment is readjusted to a revised 3.4% CAGR for the next seven-year period. This segment currently accounts for a 27.3% share of the global iron ore market.

Indian overview of iron ore industry

? India has large reserves of iron ore, bauxite, chromium, manganese ore, baryte, rare earth and mineral salts. India is home to fifth-highest reserves of iron ore in the world.

? Easy availability of low-cost labor force and presence of abundant iron ore reserves make India competitive in the global set up.

? The iron and steel industry in India is among the most . important industries in the country. India ranks fourth globally in terms of iron ore production.

? Majority (over 85%) of iron ore reserves are of medium- to high-grade and are directly used in blast furnace and direct reduced iron (DRI) plants in the form of sized lumps or sinters or pellets.

It is imperative to note that iron ore growth projections are directly linked with steel demands, as 98% of iron ore is used in making steel.

Rise in infrastructure development is a driver of demand and supply.

Demand for iron and steel will continue, given the strong growth expectations for the residential and commercial building industry. As Envisaged, even 160 mn tonnes of steel production by 2026 could also lead to enormous demand for iron ore in India. Considering the challenges in greenfield expansion of iron ore mining, the supply of iron ore could be challenging to meet the enormous demand.

? With the envisaged increase in the production of iron ore for targeted steel production, there is a need to go for large-scale mining operations. Larger and deeper mines will have to be operated at higher rate of production. This will call for greater bench heights, larger blast-hole diameters and larger machinery. Desired grade control of ROM feed to the processing/ beneficiation plant for treating the ore in its totality will be required. This will also bring into play greater considerations required for minimal environmental impact and degradation due to large-scale operations. India is almost self-sufficient in terms of resources. But with the envisaged crude steel production capacity and requirement of iron ore, including exports, there is a need to exploit the resources judiciously for sustainable growth. If the dependence on high grade ore is continued, the resources would get depleted in another 15 to 20 years. Depleting high grade reserves coupled with increasing demand poses enormous challenges for geological, mining and beneficiation activities.

? It is in this regard that the mining threshold has been revised to 45% Fe and 35% Fe for hematite ore and siliceous hematite ore, respectively. It is now obligatory for the mine operators to exploit and utilize low-grade ores which until now was not happening. In fact, there is a need for starting exploitation of Banded Hematite Quartzite/ Banded Hematite Jasper and magnetite ore.

Beneficiation the way forward

The rapid upward trend in steel output has put pressure on the availability of quality ore for steel production. In order to consume lower grade ore for steel making, beneficiation of ore is required. Iron ore extraction in India yields lumps to fines in the ratio of 2:3 60% of the ore generation is in the form of iron ore fines.For efficient utilization of ore produced, it is imperative to consume the iron ore fines.

Beneficiation efficiently removes silica, alumina, clay, and other contaminants from feed material to increase the Fe value in the final ore.

Silica requires very high temperatures in the kiln, therefore, increasing energy costs when it is present in the feed to the kilns. Both alumina and silica build up in the kilns as a coating, reducing the efficiency of the kilns over time. This requires that the kilns be shut down in order to facilitate the removal of this material build up.

Iron ore beneficiation plants target these contaminants and ensure their effective removal from the feed to the kilns. This has the effect of increasing the Fe value of the iron ore, allowing for a more efficient steel production process.

The Government of India in the Ministry of Mines had constituted an Inter-Departmental Committee to inter-alia recommend the Consultation on the issue of Utilization of Low and Lean Grade Iron Ore Resources in the Country. In this regard Ministry of Mines had published the note for industry consultation vide circular No 1/6/2023- Mines VI dated 12th August 2022. Via this notification, under para no-2 (i) it is recommended that low-grade mineral beneficiation is mandatory.

Our companys Surjagarh mines stands to benefit from this recommendation of the ministry panel as it proposes to set up a beneficiation plant to upgrade the low grade BHQ materials to produce the +62% Fe grade saleable materials which will rope in huge revenue for the state exchequer in terms of Royalty, DMF, NMET & taxes

IMPACT OF AUCTIONING OF IRON ORE MINES

The effective tax rate (ETR) on mining in India ranges from 45% to 50%, while the global average ranges from 34% to 38%. At present, in addition to MMDR Act requirement of royalty, payment towards DMF and National Mineral Exploration Trust (NMET), a mine-operator is also required to pay other fees and levies for use of forest-land under the Forest Conservation Act, 1980 and the Indian Forest Act 1927, including forest tax levied on forest produce procured from forest areas and compensatory afforestation charges.

The amendments in the MMDR Act in March 2021 were aimed to bring out transformative reforms in Indian mining sector. Odisha having huge iron ore resources, completed its first phase of iron ore auctions in 2020.

The 2020 auction gave rise to high winning bids. It witnessed bids in terms of revenue sharing premiums ranging from a low of 90.9% to the highest of 155%. An analysis shows that the total statutory liability, after factoring additional royalty, as a percentage of the sale price, is very wide across various categories of mines mentioned above, ranging from as low as around 20% to as high as 175%.

COMPANY SCENARIO

The Company is one of the largest coal based DRI manufacturer of Maharashtra with a production capacity of 2,70,000 TPA, along with a captive power plant with 30MW capacity, with additional 70,000 tonnes coming up in FY24.

The Company was awarded a lease for iron ore mines in 2007 at Surjagarh Village, Gadchiroli district (having Maharashtras richest iron ore reserve), initially for a period of 20 years the same during the year has been extended to a total period of 50 years under MMDR Act, 2018. Due to instability in the region, the Companys mines faced various challenges in operations. In May, 2021, the Company entered into a strategic partnership with the largest Mine Developer & Operator of the Country ("MDO"), Thriveni Earthmovers Private Limited (now a Co-promoter). Thriveni Earthmovers Private Limited, with all its expertise from September, 2021 recommends mining operations at the mines site in full capacity.

With this mine, the company strengthened its backward integration process for its sponge iron production. The company has also been selling iron ore on merchant basis. The company envisages in maximising the utilization of iron ore reserves .

The company plans to build on its iron ore reserves its growth trajectory towards an integrated value-added steel producer. Few differentiating factors that make our growth trajectory more promising

1. Mine via Allocation route- Makes us cost-competitive against the mine which is auctioned at significantly higher prices. The companys iron ore mine has been awarded via the Allocation route which spares the company from paying additional premiums/royalties. The new mines auctioned are entitled to additional royalties ranging up to 170%. This gives an inherent competitive advantage to the company garnering better returns. This remains the moat for the company over a longer-term basis.

2. Rich and higher Iron ore Reserves:

The companys iron ore reserves are high-quality iron ore with very low Silica and Alumina content, making it an ideal choice for its captive consumption as well as other sponge and steel makers.

Preliminary reports suggest reserves of 180+ mn tonnes.

Further studies are also being undertaken to evaluate BHQ (Banded Hematite Quartz) quantities.

Reserves of BHQ, which can be beneficiated, have an initial estimate of 550 MMT. These are preliminary studies & the final UNFCC-approved JORC report shall be issued under the aegis of Tata Steel Industrial Consulting Ltd soon after their detailed study, which is expected by H1FY24.

The company is optimistic about holistic utilisation of its iron ore reserves and utilising its each reserves over the stipulated period of its mining life.

Thus the company has charted its growth plan in forward integrating into steel making justifying the optimum utilisation of its iron ore reserves

3. DEBT FREE - a net cash Company

The company remains completely committed in keeping its balance sheet healthy which shall keep the growth engine moving without getting de-railed given the cyclical nature of the steel industry. Company cost competitiveness and efficient production techniques would keep garnering sufficient cash flows which shall keep the growth momentum steady going ahead.