maverick
13-03-2008, 07:04 AM
Indian Steel --Fragmenting Or Consolidating?
Bottlenecks aplenty for mega steel projects: capacity addition below the radar, High Iron Ore And Coking Coal Prices, Marginal Rise in Steel Prices and Chinese Supply Overhang are key risks to the Steel Cycle.
Order books for steel-making equipment companies are running full, and lead times have now stretched to 3 years. Some of the announced plans globally could be at risk – a plus for steel cycle.
All three major mining blocks in Orissa (Khandadhar, Malangtoli and Thakurani) are embroiled in litigation, with some having 250-plus applicants. Even if the approval process were simplified, lack of legal clarity could significantly delay grant of mines.
The industry is fragmenting in India. Land and mine-related issues are not constraints for small DRI-based manufacturers: 109 units with capacity of 13MT capacity have already come online in Orissa itself. They may not cause a downturn, but will limit upside.
While Indian ore reserve estimates are overly conservative. However, infrastructure bottlenecks could constrain ore exports and steel capacity expansion. Indian ore exports could remain capped.
Equipment availability is becoming a concern, as most major steel-making equipment companies have full order books, and lead times for equipment delivery have reached 3 years (vs. 2 years a year back).
Unless the Chinese equipment companies (it seems a large part of the Chinese capacity expansion was indigenous) start expanding globally to utilize their excess capacity, there is going to be a shortage of equipment, and some of the plans announced for 2011-12 could be at risk.
Announced expansion plans are very aggressive in India (e.g. 75MT of capacity is planned just in Orissa, which currently produces 2MT), and Brazil (77MT from current 37MT). That said, we do notice Chinese equipment companies expanding outside China—e.g. Tata’s Coke plant in Hooghly is driven by Beijing Sinosteel (Not Listed), and one of the bidders for Essar’s plant will be MCC (China Metallurgical Group Corporation) .
Mine allocation could take much longer than we thought. A lot of the capacity expansion depends on access to ore mines. Some conference participants indicated it takes 15 years from application to grant of mining licenses. It is not just about the
bureaucratic delays (each application apparently has to pass through 77 desks, with each taking 1-20 days).
Each of the three big mining areas in Orissa (Khandadhar, Malangtoli and Thakurani) are embroiled in litigation, and some have over 250 applicants (some companies applied in the 1990s), each of which needs to be processed before the large applicants get their due.
Land acquisition and Relief & Rehabilitation will be longdrawn issues: Lack of sale deeds, encroachment on government land and a lack of “social infrastructure” make it a
lengthy and messy process.
For example, even three years after acquiring its land, and after having started production, Bhushan Steel (BSSL.BO, Rs966, NR) still has intermittent problems with locals. Construction of the boundary wall itself took a long time.
Industry fragmenting, and capacity addition below the radar: For smaller units (mostly sub 500kTpa), land acquisition is less of an issue, and for the DRI (Direct Reduced Iron) route, coking coal is also not a requirement. Several local business groups have
been leveraging themselves to set up DRI+EAF units.
There already are 109 small manufacturers in Orissa, and about 12.9MT of capacity has come online. Even the recent revisions by the JPC for Indian capacity and production were due to these small manufacturers. Thus, unlike much of the rest of the world where the industry is consolidating, the industry in India is fragmenting. This has serious implications on pricing power of the existing manufacturers.
We continue to believe these small manufacturers will not cause a downturn, but they are likely to limit upside on longs during upturns.
Infrastructure bottlenecks could constrain ore exports and capacity expansion: The Railways are wary of a similar wave of capacity announcements in the early 90s (which never fructified), but are now adding significant capacity. With rail capacity fully
utilized, roads are being used, and as per some participants, their quality has deteriorated significantly (e.g. it takes 8 hrs to travel 100km to the Paradip port).
Iron Ore reserves may be under-reported: The cut-offs used to assess ore reserves were
overly conservative— e.g., at the Daitari mine, just by reducing Fe-grade to 58%, reserves went from 34MT to 85MT. Also, reserves are assessed at 30m depth; 100m is a global norm.
Key Assumptions To Industry profits
1. If steel prices rise beyond our 10% estimate, there could be upside to our earnings.
2. We are assuming coke prices will rise 16% in CY08E – in line with the expectations of our global mining analysts. Much of the street currently factors in a decline next year. If coke prices do not go up, there could be upside to our forward projections.
3. Risks to our call on the steel super-cycle (i.e., rapid capacity expansion in Russia/CIS; and expanding Chinese excess capacity could pressure the Chinese government into easing recently imposed export controls).
4. If the steel price upside does not materialise next year, our assumption of an improvement in the net-debt position may not play out.
Downside risk:
Our base case is a continued up-cycle for steel pricing. Given the significant impact of any changes on Chinese government regulations on Chinese steel capacity and steel exports, any easing of export regulations could create an oversupply globally. This remains the biggest threat to our call
Bottlenecks aplenty for mega steel projects: capacity addition below the radar, High Iron Ore And Coking Coal Prices, Marginal Rise in Steel Prices and Chinese Supply Overhang are key risks to the Steel Cycle.
Order books for steel-making equipment companies are running full, and lead times have now stretched to 3 years. Some of the announced plans globally could be at risk – a plus for steel cycle.
All three major mining blocks in Orissa (Khandadhar, Malangtoli and Thakurani) are embroiled in litigation, with some having 250-plus applicants. Even if the approval process were simplified, lack of legal clarity could significantly delay grant of mines.
The industry is fragmenting in India. Land and mine-related issues are not constraints for small DRI-based manufacturers: 109 units with capacity of 13MT capacity have already come online in Orissa itself. They may not cause a downturn, but will limit upside.
While Indian ore reserve estimates are overly conservative. However, infrastructure bottlenecks could constrain ore exports and steel capacity expansion. Indian ore exports could remain capped.
Equipment availability is becoming a concern, as most major steel-making equipment companies have full order books, and lead times for equipment delivery have reached 3 years (vs. 2 years a year back).
Unless the Chinese equipment companies (it seems a large part of the Chinese capacity expansion was indigenous) start expanding globally to utilize their excess capacity, there is going to be a shortage of equipment, and some of the plans announced for 2011-12 could be at risk.
Announced expansion plans are very aggressive in India (e.g. 75MT of capacity is planned just in Orissa, which currently produces 2MT), and Brazil (77MT from current 37MT). That said, we do notice Chinese equipment companies expanding outside China—e.g. Tata’s Coke plant in Hooghly is driven by Beijing Sinosteel (Not Listed), and one of the bidders for Essar’s plant will be MCC (China Metallurgical Group Corporation) .
Mine allocation could take much longer than we thought. A lot of the capacity expansion depends on access to ore mines. Some conference participants indicated it takes 15 years from application to grant of mining licenses. It is not just about the
bureaucratic delays (each application apparently has to pass through 77 desks, with each taking 1-20 days).
Each of the three big mining areas in Orissa (Khandadhar, Malangtoli and Thakurani) are embroiled in litigation, and some have over 250 applicants (some companies applied in the 1990s), each of which needs to be processed before the large applicants get their due.
Land acquisition and Relief & Rehabilitation will be longdrawn issues: Lack of sale deeds, encroachment on government land and a lack of “social infrastructure” make it a
lengthy and messy process.
For example, even three years after acquiring its land, and after having started production, Bhushan Steel (BSSL.BO, Rs966, NR) still has intermittent problems with locals. Construction of the boundary wall itself took a long time.
Industry fragmenting, and capacity addition below the radar: For smaller units (mostly sub 500kTpa), land acquisition is less of an issue, and for the DRI (Direct Reduced Iron) route, coking coal is also not a requirement. Several local business groups have
been leveraging themselves to set up DRI+EAF units.
There already are 109 small manufacturers in Orissa, and about 12.9MT of capacity has come online. Even the recent revisions by the JPC for Indian capacity and production were due to these small manufacturers. Thus, unlike much of the rest of the world where the industry is consolidating, the industry in India is fragmenting. This has serious implications on pricing power of the existing manufacturers.
We continue to believe these small manufacturers will not cause a downturn, but they are likely to limit upside on longs during upturns.
Infrastructure bottlenecks could constrain ore exports and capacity expansion: The Railways are wary of a similar wave of capacity announcements in the early 90s (which never fructified), but are now adding significant capacity. With rail capacity fully
utilized, roads are being used, and as per some participants, their quality has deteriorated significantly (e.g. it takes 8 hrs to travel 100km to the Paradip port).
Iron Ore reserves may be under-reported: The cut-offs used to assess ore reserves were
overly conservative— e.g., at the Daitari mine, just by reducing Fe-grade to 58%, reserves went from 34MT to 85MT. Also, reserves are assessed at 30m depth; 100m is a global norm.
Key Assumptions To Industry profits
1. If steel prices rise beyond our 10% estimate, there could be upside to our earnings.
2. We are assuming coke prices will rise 16% in CY08E – in line with the expectations of our global mining analysts. Much of the street currently factors in a decline next year. If coke prices do not go up, there could be upside to our forward projections.
3. Risks to our call on the steel super-cycle (i.e., rapid capacity expansion in Russia/CIS; and expanding Chinese excess capacity could pressure the Chinese government into easing recently imposed export controls).
4. If the steel price upside does not materialise next year, our assumption of an improvement in the net-debt position may not play out.
Downside risk:
Our base case is a continued up-cycle for steel pricing. Given the significant impact of any changes on Chinese government regulations on Chinese steel capacity and steel exports, any easing of export regulations could create an oversupply globally. This remains the biggest threat to our call