JPMorgan:: Steel 2011 Q1-Q2- Déjà vu?; Indian flat steel capacity additions

Visit http://indiaer.blogspot.com/ for complete details �� ��


Steel 2011 Q1-Q2- Déjà vu?; Indian flat steel capacity
addition wave starts


• As raw materials set for Q1 increase, steel prices to follow similarly as in
CY10- implications for Indian steels: As per media reports (Bloomberg),
BHP is asking for an 8% increase in coking coal prices for the March quarter,
implying coking coal prices of $225/MT. TSI index iron ore prices are up 8%
in the Sept-Nov q/q. JPM European steel analyst Alessandro Abate in his note
on European Steel (dated end Dec 2nd, 2010) highlights that the cash cost
push coming on the back of lower inventory levels is likely to lead to higher
steel prices in H1CY11E. This mini cycle is likely similar to 2010 when
steel prices increased sharply between Jan-May 2010. Given the cost push
nature of the potential steel price  rally, we believe TATA is best
positioned given 100% captive iron ore and ~50% captive coking coal.
While near term capital issuance remains an overhang (TATA has not
specified any timelines or the instruments), India operations benefit from any
price increase. Indian steel makers have  left pricing broadly stable across flat
and long steel products in Dec, given sluggish demand and elevated inventory.



• Essar Steel commissions new facility – CY11E to be progressively tougher
for Indian steel (particularly flats) given wave of large capacities:  As per
media reports (MB, SBB)  Essar Steel (NR) has recently commissioned
1.7MT of BF capacity, 1.7MT DRI, and 2.5MT of SMS, implying net new
steel making capacity of 2.5MT (7.1MT from 4.6MT) which the company
aims to increase to 10MT. Essar also expects to commission 1.7MT Corex,
2.MT SMS and 3.5MT strip mill by March-11E. The new capacity is mainly
in flat steel. Next in line is JSW Steel’s ~3MT new capacity expected to be
commissioned by March-11E (the HSM capacity is also being increased).
Bhushan Steel’s (NR) 1.9MT HR capacity is currently ramping up. Then
is TATA Steel’s ~2.9MT brownfield expansion mostly of which is flat steel
expected by Q3CY11E. India’s current flat steel consumption was ~31MT in
FY10 and production at ~28MT. While there are significant imports, we
believe this is more because of ‘price arbitrage’ and not because of large
domestic deficits. In this context, while steel new capacity ramp up takes
time, we see progressively tough times for Indian flat steel producers from
H2CY11E. Other than TATA, all the above steel companies do not have
any meaningful raw material integration, implying continued cost push in
an over supplied market.

• Spot thermal coal prices turn hot: As per JPM China analyst Nathan
Ziblich, price controls for contract coal supplies are likely on the horizon in
China. JPM China utilities analyst Chapman Deng believes that in case the
contract coal prices are kept unchanged, coal mines could possibly lower
contract fulfillment rates, and that would result in IPP’s turning to more
expensive spot coal supply. Combined with India’s sluggish coal production
(Coal India is not able to meet targets given Environment and Railway issues)
means spot coal prices are likely to remain at elevated levels. This should
translate into strong e-auction premiums for Coal India.


Metal News Tracker
Steel
China's crude steel consumption to hit 596m tons
China's apparent consumption of crude steel is likely to reach 596 million tons this
year, a year-on-year increase of 5.6%, according to a steel association official. Luo
Bingsheng, deputy head of the CISA, expected the country's crude steel output to
climb 8.2% this year from one year earlier, to reach 624 million tons. Luo further
noted that a rising investment in 2011 would result in an increase in China's steel
demand. If the year-on-year growth of the country's social fixed assets investment
maintained itself at around 20 percent next year, China's crude steel apparent
consumption would see an annual increase of 40 million to 50 million tons next year,
said Luo. (Xinhua)

Steel prices likely to move up in 3-4 months
Driven by a strong domestic demand from the automobile, infrastructure and other
allied sectors, steel prices are likely to increase by $25-30 (Rs 1,000 1,200) per tonne
in the next three to four months, according to industry experts. Steel-makers feel that
better international prices and increase in coking coal and iron ore prices would also
lead to the metal's price increasing. It is currently pegged at Rs 30,000 per tonne.
"We expect steel prices to firm-up in the coming months. In the next three to four
months, prices may go up by another Rs 1,000 per tonne as domestic demand firms
up. Prices of coking coal as well as input costs have risen," a top official at Essar
Steel told PTI. (PTI & Business Standard)



Raw Materials
SC seeks Karnataka's view on plea against iron ore export ban
The Supreme Court sought to ascertain the Karnataka government's stance on a
petition challenging a July, 2010, order banning the transportation of iron ore outside
the state for overseas export. Based on a petition filed by Baldota Group-owned
mining firm MSPL Limited against the ban, a bench comprising Justices R V
Raveendran and A K Patnaik issued a notice to the state government seeking a reply
within three weeks. The Karnataka High Court had on November 19 upheld the state
government's July 28 order imposing a blanket ban on the issuance of mineral
dispatch permits for transportation of iron ore for overseas export. "The petitioner
has been hit very hard by the export ban order. It is a reputed company engaged in
the mining and export of iron ore and is registered as an export-oriented unit," the
firm said in its petition. (Hindustan Times)

Japanese steel mills agree to 8% hike in coking coal from BHPB
Nikkei business daily reported that BHP Billiton plans to increase price of coking
coal for Japanese steelmakers by about 8% from the current quarter for the January to
March period. Nikkei report said that BHP plans to sell coking coal to Japanese
steelmakers at USD 225 per tonne. As per report, some Japanese steelmakers are said
to have agreed to prices in line with the global miner's demands. Prices of Australian
hard premium quality coking coal rose for two consecutive quarters through the July
September period, climbing to USD 225 per tonne before declining to USD 209 in
the current quarter through December 31st 2010. (Reuters)

Other News
China reiterates order on coal companies to stabilize prices
Xinhua reported that China top economic planning agency repeated its order for coal
companies to keep coal prices stable, one week after it made the same call as part of
the government's efforts to check inflation. Mr Cao Changqing head of the
department of price of the National Development and Reform Commission said coal
producers should work to increase production, ensure supplies and keep prices stable.
He said that the rise of coal prices remarkably outpaced that of prices of downstream
products in recent years, adding rising cost pressures to industries including power,
construction materials, fertilizer and metallurgy. He added that China had solid
foundations to stabilize coal prices as supplies increased and demand weakened due
to the government's move on energy savings and emission reductions. He also
encouraged large State-owned coal enterprises to sign long-term agreements with
power firms. Additionally, coal companies were required to keep prices unchanged
for coal excavated fewer than 2011 annual supply contracts, compared to 2010. On
November 22, the NDRC asked coal producers to boost self-discipline and required
local governments not to restrict sales of coal outside their provinces to ensure price
stability. (Xinhua)