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BE Corporation

“We have reduced our guidance by 14%”
Seshagiri Rao, Group Chief Financial Officer, JSW
Issue Date - 10/11/2011
B&E: The second quarter results this year show a lot of drastic dips for JSW. Is the mining ban in Karnataka’s Bellary and Chitradurg region the only setbacks or were there other challenges as well?

Sehsagiri Rao (SR): Well it had been a challenging quarter for us on account of unprecedented iron ore shortage in the state of Karnataka where we have large investments. In spite of these challenges, volumes grew by 11% and sales were up by 19%. Inventories are being operated efficiently and there are no concerns on that front. But the growth could have been much higher. Whenever we have approached the Supreme Court as an industry, they had been kind enough to give us relief. It has recognised that the steel industry is the backbone of the economy, and allowed some reliefs so far. So when the July 29 mining operations were banned in Bellary, on August 5 we were relieved to know that one million tonnes of ore would be made available by NMDC. There were delays to that and our operations had to be curtailed. During this time, we were supplementing some supplies from Chitradurg, and then again on August 27, the apex court banned mining in Chitradurg. We went back to the SC-appointed central empowered committee and the monitoring committee with representations that the industry requires three million tonnes of ore, which is dependent on Karnataka and one million tonne is not adequate. So we got some relief on September 2 when e-auctions of 1.6 million tonnes of iron ore were allowed.

B&E: So what are the major roadblocks that you are still facing despite the two interventions made by the apex court to improve supplies of raw materials for the steel industry?
The issues facing JSW or the steel industry in Karnataka region are that we are facing problems with the implementation of this order. When the auction was held, only 74% of the ore was sold and the rest had no takers due to high asking prices in the bid. So, there is issue as far as pricing is concerned. There are problems with certain procedural issues to avail this iron ore. Logistics and frequency of auctions are also of concern. These were the four major problems that have been identified and brought to the notice of authorities. As directed by the Karnataka High Court, we have made representations to the central empowered committee and to the monitoring committee. So based on that, we are hopeful they would offer us relief, realising that these are the bottle necks.

B&E: What is the notional loss that the company may have suffered due to these bottlenecks in the current quarter?

SR: The loss of production on account of lack of iron ore amounts to about 450,000 tonnes of total finished steel. That is the loss we have incurred in the last quarter. Our cost of production too has gone up due to higher ore prices. We stood at Rs.2,700 weighted average cost for producing one tonne of steel, which has gone up by about Rs.1,500 per tonne. Inspite of these two issues, the Rs.13.33 billion of EBITDA is just about 2.5% lower than last quarter. The 450,000 tonnes in sales would have added Rs.6.75 billion to our EBIDTA. So you can imagine the kind of impact we could have had in this quarter itself. It is not bad at all given the challenges we been facing in the last two months of the quarter.

B&E: JSW has lowered its guidance of production and sale for the rest of the year. Do you see any hopes to revive your earlier levels any time soon?
SR: This time, we had given a guidance of 8.75 million tonnes of steel production and 9 million tonnes of sales. This is primarily because of the low availability, frequency of auction and other reasons that I mentioned. We are hopeful that by the end of next quarter, the monitoring committee, which is taking a lot of interest over the issues the industry is facing will work to remove the bottlenecks. Till that happens, given the current supply situation of ores and our raw material position, we have reduced our guidance for production by 14% to 7.5 million tonnes and reduced total sales volume to 7.8 million tonnes. Our other projects involving capital expenditure are still under progress. Our phase II expansions at our Vijaynagar plant to fetch up to 12 million tonnes in production are still underway and we are continuing active implementation of all our other expansion plans as well. We have applied for permits to expand capacity to 16 million tonnes (from the current 10 million) and have the land for the same. We have also acquired 4,500 acres for a 10-million tonne steel plant at West Bengal, for which we hope to secure funding and commence by the end of this fiscal.

B&E: Infrastructure projects are lined up awaiting clearance. How do you see domestic steel demand evolving over the next few years?
SR: The explosion in demand for steel over the last decade has been driven largely by flat steel demand. Now the other side of the story is picking up. Infrastructure spending not only from the government side but also from the private industry point of view is set to expand with a lot of projects announced, even though there is some sluggishness this year. We expect it to pick up and give a push to demand for infrastructure, housing and other sectors.

Steven Philip Warner           

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