Metals & Mining. Traction in Indian, Chinese steel production. Monthly Update. ICICI Securities Ltd Retail Equity Research.

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1 Monthly Update Index Performance Return % 1M 3M 6M 12M BSE Metals BSE NSE Source: Reuters, ICICIdirect.com Research Domestic steel production Month on Month (MT) YoY % MoM % Finished Steel Production (2.0) Imports Exports Consumption (4.0) Source: JPC India, ICICIdirect.com Research, provisional numbers July 26, 2017 Traction in Indian, Chinese steel production On a monthly basis, the entire base metal pack has witnessed an upward trend wherein prices of zinc, lead, copper and aluminium increased 3%, 1%, 4% and 2%, respectively Domestic HRC prices, post the rollout of GST increased by ~ 1000/tonne during the month to 37250/tonne Exhibit 1: Key events Company /Industry Metals & Mining Event AprilJune (MT) FY17 FY16 YoY % Finished Steel Production Imports (6.4) Exports Consumption Source: JPC India, ICICIdirect.com Research Metal Prices % Change 24 1 Month 3 Month 6 Month 12 Month Zinc 2, Lead 2, Copper 5, Aluminium 1, China (Rebar) Indian (HRC) 37, (All prices in US$/tonne, Indian HRC price denoted in /tonne) Tata Steel Tata Steel Coal India Tata Steel has signed a definitive agreement with the Liberty House Group for the sale of its Hartlepool SAW pipe mills. The sale agreement covers the 42 inch and 84 inch pipe mills, which employs ~140 employees. The two mills are fed with steel plate sourced outside Tata Steel and are independent of the company's strip products supply chain. Tata Steel is retaining the 20inch tube mill at the same Hartlepool site, which employs 270 employees. To further strengthen the 20inch mill, Tata Steel will be making an investment of 1 million towards capacity expansion to make high strength steel tubes. The Tata Steel European steelworks supply the 20inch mill with steel coils and is a part of its strip products supply chain. The transaction is expected to be completed in the next few months. The consideration amount has not been disclosed for the same Tata Steel reported provisional production and sales figures for Q1FY18. The saleable steel production for the quarter was at 2.95 million tonne (MT), up 26% YoY, while the sales volume for the quarter was at 2.75 MT, up 28% YoY Coal India has announced auction of coal linkages (tranche III) for nonregulated sector to ensure dry fuel supply to the steel and cement sector. The Union Cabinet in February 2016 has approved the same and issued guidelines for methodology of linkage auction. Further, the government had asserted that if bids were received for quantity greater than link quantity offered the premium would be accordingly increased in steps JSW Steel The board of directors of JSW Steel has approved setting up of a slurry pipeline to transport iron ore from coastal Karnataka to the Vijayanagar works. The construction of the pipeline is likely to take 24 months at an estimated cost of 2100 crore. The same would enable the company to transport iron ore at a competitive 15% cost of alternate means of transport. Furthermore, the pipeline will help the company source almost 50% of the current iron ore requirement at Vijayanagar works from outside Karnataka either from imports or from Odisha/eastern sector at prices lower than prevailing prices in Karnataka Source: ICICIdirect.com Research Research Analysts Dewang Sanghavi dewang.sanghavi@icicisecurities.com Akshay Kadam akshay.kadam@icicisecurities.com Indian, Chinese steel production on up trend Chinese steel production is on an increasing trend despite capacity cuts and a significant decline in exports, implying early signs of demand revival. On the domestic front, during Q1FY18 (AprilJune), Indian finished steel production increased 6.7% YoY. Domestic steel consumption, in line with increasing production, registered an uptick of 4.6% YoY. Declining Chinese exports have enabled domestic steel players to enhance their market share and also enter the export markets as well. During the quarter, Indian exports were up ~65.9% YoY. The government s impetus on infrastructure development coupled with its policy of procurement of domestically manufactured steel is likely to result in increased offtake of steel from domestic players, auguring well for the sector as a whole (in volume terms).

2 Exhibit 2: World crude steel production In Million Tonne World Crude Steel Production Chinese Crude Steel Production Indian Crude Steel Production Rest of the World Source: World Steel Association (WSA), ICICIdirect.com Research Exhibit 3: Indian steel scenario For June 2017, world crude steel production for 67 countries reporting to World Steel Association (WSA) was at 141 million tonne (MT), up 3.2% YoY. Crude steel capacity utilisation ratio in June 2017 was at 73.0%, up 140 bps compared to 71.6% in June For June 2017, Chinese crude steel production was at 73.2 MT, up 5.7% YoY. For the first six months of CY17, world crude steel production was at MT, up 4.5% YoY. Chinese crude steel production was at MT, up 4.6% YoY while India s crude steel production for the six months period was at 49.5 MT, up 5.3% YoY. World Steel Association (WSA) recently released its Short Range Outlook for CY17 and CY18, wherein it has upward revised its CY17 global steel demand forecast. WSA forecasts that global steel demand will increase 1.3% to 1,535.2 million tonne (MT) in CY17 (upward revised from 0.5% earlier). In CY18, it was forecast that global steel demand would grow 0.9% to MT. WSA expects China s steel demand to remain flat in CY17 and then decline 2% in CY18 while steel demand in developed economies is expected to increase 0.7% in CY17 and 1.2% in CY18. As per WSA, steel demand in emerging and developing economies excluding China, accounts for 30% of world total. It is expected to grow 4.0% in CY17 and then 4.9% in CY18. In Million Tonne Finished Steel Production Finished Steel Consumption Finished Steel Imports Finished Steel Exports Source: JPC India, ICICIdirect.com Research *Provisional Numbers Among all major steel producing countries, India emerged in a sweet spot reporting moderate growth in demand compared to the decline in other major steel producing economies. India s finished steel consumption witnessed 3.0% YoY growth in FY17. Finished steel consumption during the period was at 83.9 MT vs MT in FY16. The measures undertaken by the government have enabled import substitution and cutting down the cheap influx of metal, reducing the gap between imports and exports. Indian finished steel exports were up ~102% YoY to 8.2 MT in FY17 while imports declined ~37% YoY to 7.4 MT Indian finished steel production, consumption continue upward trend Indian finished steel production during June 2017 came in at 8.8 MT, up 7.5% YoY, down 2% MoM. Imports during the month were up 3.2% YoY, 17% MoM to 0.7 MT while exports were up 20.2% YoY, 0.9% MoM to 0.6 MT. Finished steel consumption during the month was at 7.2 MT, up 5.3% YoY, down 4% MoM. For the quarter ended June2017, Indian finished steel production was at 26.3 MT, registering growth of 6.7% YoY. Imports during the quarter were down 6.4% YoY to 1.7 MT while exports were up 65.9% YoY to 1.4 MT. India s consumption of finished steel witnessed growth of 4.6% YoY to 21.0 MT during the quarter influenced by rising production for sale. Page 2

3 Apr/15 May/15 Jun/15 Jul/15 Aug/15 Sep/15 Oct/15 Nov/15 Dec/15 Jan/16 Feb/16 Mar/16 Apr/16 May/16 Jun/16 Jul/16 Aug/16 Sep/16 Oct/16 Nov/16 Dec/16 Jan/17 Feb/17 Mar/17 Apr/17 May/17 Jun/17 In Million Tonne $ / tonne $ / tonne Exhibit 4: Spot hard coking coal prices (fob Australian east coast port) On account of cyclone Debbie in Australia in end March 2017, spot coking coal prices increased sharply by 109% from US$150/tonne on March 29, 2017 to US$314/tonne on April 17, However, over the last couple of month, prices of coking coal have been on a declining trend. Spot prices of hard coking coal (fob Australia east coast port) have declined sharply from US$263/tonne as on April 21, 2017 to US$174/tonne on July 24, 2017, indicating a decline of ~34% Exhibit 5: Chinese crude steel production China s economic planning agency aims to cut 50 million tonne (MT) steel capacity and 150 MT of coal output in CY17. In the preceding year, China had exceeded its capacity cut target. However, majority of production cuts came from idle capacity. Despite the production curbs, Chinese steel production increased in CY16. As per media sources, China has cut 42.4 million tonne (MT) or ~85% of its steel capacity reduction target by end of March 2017 Million Tonne Source: Company, ICICIdirect.com Research Exhibit 6: Movement of Chinese exports & rebar prices Chinese steel exports, after increasing 8% MoM to ~7.0 million tonne (MT) in May 2017, registered a decline of ~2% MoM to 6.8 MT in June Chinese rebar prices during last month increased modestly by 1% MoM RHS: Exports (MT) LHS: Rebar ($/tonne) Page 3

4 Apr15 Apr15 Apr15 Apr15 Non ferrous metals... Zinc Exhibit 7: LME zinc (price and inventory movement) During last month, zinc prices increased ~3% MoM. As per the International Lead and Zinc Study Group (ILZSG), after increasing 3.1% in 2016, global demand for refined zinc metal is forecast to rise by a further 2.6% to million tonnes (MT) in Global zinc mine production, after declining 5.5% in 2016, is forecast to rise 6.7% to 13.7 MT in Regarding the global market balance, despite the expected increase in zinc mine supply the group continues to expect that global demand for refined zinc metal will comfortably exceed supply in The extent of the deficit is forecast at 226,000 tonnes. As per the provisional data, for the first five months of CY17, the global market for refined zinc metal was in deficit by ~178 KT 3, , , , , ,000.0 Prices 700, , , , , , ,000 Aluminium Exhibit 8: LME aluminium (price and inventory movement) During last month, aluminium prices were down ~2% MoM 2,200 2,000 1,800 1,600 1,400 1,200 1,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 Price Copper Exhibit 9: LME Copper (price and inventory movement) During last month, copper prices increased ~3.7% MoM 7,000 6,000 5,000 4,000 3,000 2,000 1, , , , , , , ,000 50,000 Price Lead Exhibit 10: LME Lead (price and inventory movement) During last month, lead prices have increased ~0.9% MoM 2,600 2,400 2,200 2,000 1,800 1,600 1,400 1,200 1, , , , ,000 50,000 Price Page 4

5 Exhibit 10: Valuations Global peers Particulars Valuations: Global companies CY 17 CY 18 CY 17 CY 18 CY 17 CY 18 BHP Billiton Ltd US$ , Fortescue Metals Group Ltd US$ , Rio Tinto Ltd US$ , Vale SA BRL , ArcelorMittal US$ , POSCO KRW , United States Steel Corp US$ , Nucor Corp US$ , JFE Holdings Inc JPY , Gerdau SA BRL , Angang Steel Co Ltd CNY , Alcoa Corp US$ , Norsk Hydro ASA NOK , United Co RUSAL PLC US$ , KAZ Minerals PLC US$ , Southern Copper Corp US$ , Antofagasta PLC US$ , Lundin Mining Corp US$ 8.0 5, Currency CMP M.Cap (US$ Mn) PE (x) EV / EBITDA (x) ROE (%) Page 5

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