CEO & MD
said in an interview with ET Now. Edited excerpts:
Your view has been that steel prices will remain with upward bias. But with a lot of volatility, is that view still intact?
Yes, even if you look at steel prices today international prices are in the $730-$740 range which is higher than the long term average. So what I said was that it will fluctuate at a higher level than the decadal average for that we have seen and so far it is still there. It is still higher than the long-term average for the last 10 years.
The view shared by some of the naysayers is that currently steel prices are trading way above the average cost of production. Historically, when one looks at the decadal average, this kind of a spread is unlikely to continue?
There are reasons why I differ with that one. If you see the last 10 years the spreads were determined more by the exports out of China and Chinese exports were not really profitable exports. If you look at the financial results of the Chinese companies over the last 10 years you will see what I am saying because they had an EBITDA margin of 5% in normal market conditions a private sector company cannot survive at 5% EBITDA margin and keep growing but they had different reasons why they could survive at that 5% EBITDA margin. That is no longer the case. The Chinese companies are no longer aggressive exporters. Yes, May exports were on the higher side, but that is more temporary.
China wants to reduce its steel exports because it wants to reduce the carbon footprint for the steel industry in China. So, I see a far better balance in global trade over this decade than we have seen in the last decade and if China is not an aggressive exporter. And now, Russia and Ukraine, that would together export about 40 million tonnes, are no longer in the market. Then you have only Japan and Korea who are not low cost exporters so from that point of view. I see greater stability in steel prices and better spreads.
Second thing is that if you look at Europe everyone is investing and converting into greener steel so there is a lot of capex going into that and which is also going to add to the cost. Opex is also going up in Europe because of the fact that there is a carbon price you pay so given all these reasons I expect the spreads to be higher than it has been for the last 10 years.
At the current juncture, looking at where coal prices are and what your underlying selling prices, are you running a profitable business or your spreads are negative?
We are running a profitable business.
The concern in the entire commodity market is China is not producing and we understand that the Covid restrictions are only likely to get extended. What happens in that kind of a scenario?
What is happening in China is because of the lockdowns. Steel consumption in China also topped a bit. Production was actually quite strong and hence you saw seven million tonnes of exports in May which is higher than their normal five million ton kind of monthly exports. So that is why steel prices in Southeast Asia also went down a bit over the last few weeks but in the medium to long term I believe that the Chinese government will take steps to ensure that the economy is back on track.
Yes, it will no longer grow at 8% and 9% but it is USD 13-14 trillion economy, even if it grows at 3% that is pretty strong because it is the second largest economy in the world so you cannot expect it to grow at 8% and 3% on 12 trillion is a lot of GDP growth.
So I do expect that actions will be taken in China to in some sense to stabilise the economy, we will not see the kind of growth we have seen in the past I do not expect exports to happen as it had happened in the past but yes, China has a big impact on the sentiment globally in multiple ways so that is the way I see it. It is a country that we need to watch, they account for 55% of the steel consumption and more than half of the steel production so we will be watching it closely.
Do you fear that inventory built up has already started?
Not so much in Europe. In India, yes, because exports is not an option. In Europe exports is always an option.
For those who fear that a bear market has started in the steel sector, how would you validate that fear is not true?
Obviously, we will also mirror the sentiments overall in the market when interest rates go up share prices drop in some sense of the term or most indices drop. When the dollar gets stronger money flows out of emerging markets like…