BIG CAPEX PLANS AT STEEL, METALFIRMS
Indian metals companies have begun reviving their capacity expansion plans, as they see demand recovering, with prices still elevated despite a recent fall.
Mahesh Vyas, managing director, Centre for Monitoring Indian Economy: “There was a smart pick-up in new steel investment in 2016-17. JSW Steel announced a new project and Tata Steel and Bhushan Steel have large expansions. The total new investment envisaged in projects announced in 2016-17 at ~1.4 trillion ($22.2 billion) is much larger than in recent years.”
Two-thirds of these investments are from the top three steel companies, JSE Steel, Tata Steel and Bhushan Steel, all in Odisha. The other two big ones are from National Aluminium (Nalco) and Adani, respectively, in aluminium and copper. Of the 59 projects for which CMIE has data, around half are in steel and its products, the rest in other metals.
Four projects are from the Vedanta group, of which two are from Hindustan Zinc. Says the latter on its FY18 investment, “Capex on the ongoing mine expansion projects, fumer and smelter debottlenecking will be $350-360 million.”
According to a CLSA report, the capex is expected to reach $4.7 billion in FY18 and $8 bn in FY20. CLSA didn’t respond to an e-mail query but they usually track big listed companies’ performance. The steel industry in general is seeing recovery in export and increasing capex. The World Steel Association says in FY17, demand globally increased 1.3 per cent or 23 million tonnes (mt); of the incremental demand, 25 per cent was met by India.
The Indian government has fixed a target of 300 mt annual steel production by 2030; installed capacity till FY17 was 128 mt.
Vedanta is expected to give details in a few weeks on what they'll be spending for expansion. Anil Agarwal, the group chairman, recently tweeted: “India will need 300 mt production by 2030 and we see potential for five mn new jobs by iron ore and steel producing and downstream industries.” He had also favoured investment in India’s own iron ore sector to support upcoming steel capacities. Group company Hindustan Zinc has announced expansion in its steel tube and zinc smelter; Vedanta has announced expansion of its copper smelter and iron spun pipe manufacturing.
The metal and steel sector’s capex dived after 2013-14, due to falling commodity prices and highly leveraged company balance sheets. However, according to a report by CLSA, “improving sector fundamentals and cash flows are helping several companies regain confidence. Non-ferrous companies have already firmed up growth plans and we believe steel capex should also start soon. We believe companies will be more RoCE (return on capital employed)-conscious in this new round of capex. We expect aggregate annual sector capex to rise from about $4.7 bn in FY18 to some $8b n by FY20.” An e-mail sent to CLSA remained unanswered. The sector’s aggregate capex averaged ~625bn ($9.6bn) annually over FY10-14, as companies invested in large expansion projects, taking a bet on commodity prices staying strong and hoping to gain access to captive resources.
Vibhav Kapoor, group chief investment officer at IL&FS, said: “Optimism for the metals sector to revive capex has come from the fact that global growth is reviving, including in Europe, the US and China.”
Will expansion bring profit for companies? CLSA says, “Several companies are now focusing on a high-RoCE projects. Non-ferrous companies like Hindalco, Vedanta and Nalco, which have seen meaningful improvements in their balance sheets, have already firmed up their growth plans. We believe that steel capex should also start soon. The sharp rise in capex would impact free cash flow generation in the sector to some extent but on the other hand, the start of this capex will improve the growth outlook for the sector and select companies beyond the near term.”