To tackle the impact of the depreciating rupee on their margins, top domestic primary steel producers plan to focus on increasing exports and lowering the inventory build-up period of coking coal.
Coking coal is one of the major raw materials used by the domestic steel industry and contributes significantly towards the cost of production of the alloy. To meet its demand for coking coal, the domestic steel industry relies entirely on imports. With the rupee having depreciated about 25 per cent since the beginning of the year, hitting an intra-day record low of 68.75 against the dollar on Wednesday, the import bill for coking coal is expected to surge, raising the expenses of steel companies.
“We plan to lower our coking coal inventory duration to 30 days from 40-45 days,” a Rashtriya Ispat Nigam Ltd (RINL) official told Business Standard. “We will defer our coal purchases.”
RINL relies entirely on imported coking coal to meet demand. Most of the coal demand of JSW Steel and Essar Steel India is met through imports. While Steel Authority of India also imports the commodity, three-four per cent of its demand is met through captive sources.
About half the coking coal requirement of Tata Steel is met through captive mines. Jindal Steel and Power relies on imported coal, but as it also uses electric arc furnaces to manufacture steel, its requirement includes thermal coal, which is domestically available.
As a depreciating rupee benefits exporters, steel companies are planning to avail of the situation by tapping the foreign market, where demand is rising. Steel exports from India, on a rise since the last two-three months, are expected to increase further. “Our strategy to tackle the (falling rupee) situation is to increase our exports,” said Jayant Acharya, director (commercial and marketing), JSW Steel. “We will increase exports from the current 20 per cent (of the total) to tap the opportunity abroad,” he said. Currently, Mumbai-based JSW Steel sells 80 per cent of its steel produced in the domestic market.
“At present, our exports are negligible, but we plan to double it in the coming months to take advantage of the weakening rupee,” said the RINL official. RINL exports only 0.5-one per cent of its total steel production.
Companies such as Essar Steel have remained completely insulated from the rupee’s heat, purely because of their business model. “We are one of the largest exporters of flat products and so, our dollar inflows are more,” said Ashutosh Agarwala, director (finance) and chief financial officer, Essar Steel India. “We are naturally hedged. In fact, we are benefiting from the devaluation of the rupee,” he added.
West Asia, Southeast Asia and Africa were some of the regions that might account for Indian steel exports in the coming months, said analysts.
Meanwhile, Tata Steel and Steel Authority of India are banking on their assured clientele in the domestic market to drive business.
To bring home dollars and lower debt burden, if any, selling foreign assets could be another option steel companies could consider to protect their margins. Tata Steel operates Europe’s second-largest steel company, which it acquired in 2007, while JSW Steel owns a plates and pipes unit in the US, also acquired in 2007. “There are no plans to sell the US plant,” said Acharya of JSW Steel. “The US plant remains very much with us.”
“Even if a company is ready to sell, it is difficult to find a buyer in a dull market like this,” said Giriraj Daga, senior analyst with Nirmal Bang Institutional Equities. “Also, to get the right price for the unit to be sold is difficult,” he added.
On the domestic front, however, demand for steel remains subdued because of the poor investment climate. Here, steel producers plan to increase prices, anticipating demand would rise from October, ahead of the festive season. “JSW Steel is planning to raise prices of steel products for September, but we are yet to decide the quantum,” said Acharya.
“There could be a price rise of Rs 1,000-1,500 a tonne for September, as the input cost has gone up because of the rupee,” said an RINL source. “Though demand is not very strong in the domestic market, stockists are taking a risk in anticipation that demand may pick up in coming months,” said the source.
All things considered, domestic steel producers seem to be keeping no stone unturned to save themselves from the weakening rupee.
Source:- business-standard.com
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