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Evolving Role of Scrap in India

MRAI

Rahul Prithiani,Director - CRISIL Research

January 27th, 2017

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60K-65K / T

20K-30K / T

Key messages

� Muted steel demand growth at 2-4% in 2016-17; to rise to 5.5-6.5% in long term

� Share of scrap in steel making in India at 24% below global average of 34%; to rise to

28-30% in 2020-21 with rising availability and displacement of sponge iron

� India’s Aluminium demand growth to slow to 4-6% in 2016-17 post de-monetization;

increased intensity in auto, power and B&C to drive 9% growth over longer term

� Share of secondary aluminium rose sharply to 31% in overall demand on back of

rising auto castings demand; to continue its growth momentum

� In long term, evolving role of scrap will potentially be a function of domestic scrap

availability led by Government policies led by ELV.

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Steel demand to recover in FY18 after being hit in FY17; export growth to support utilization levels

3

Source: CRISIL Research, JPCNote: E- Estimated; P- Projected

Domestic demand rise to 5.5-6.5% CAGR through 2020

11.9%

6.9%

3.5%

0.8%

3.9%4.3%

2-4%

4-6%

6-8%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

-

20.0

40.0

60.0

80.0

100.0

120.02010-1

1

2011-1

2

2012-1

3

2013-1

4

2014-1

5

2015-1

6

2016-1

7P

2017-1

8P

2020-2

1P

(MT)

Steel Demand (mn T) Alloy Steel Y-o-Y Growth (RHS)

66.471.0

73.5 74.1 77.0 80.3 83.087.0

110.7H1 2016-17, growth of 2.5%

Building & Construction

Steel Growth:

6-8% CAGR

Automotive

Infrastructure

Others

36% 27%

10% 27%

share in demand

Urbanization, Housing for All,

PMAY, Rural demand

Smart cities, freight corridors, metros, PMKGSY

(irrigation), Bharatmala, Sagarmala, etc.

share in demand share in demand

share in demand

1-2%

2010-2015 2015-2020

4-5% 7-8%

2010-2015 2015-2020

10-11%

~1%

2010-2015 2015-2020

8-10% 2-3%

2010-2015 2015-2020

5-7%

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Scrap constitutes 24% of India’s crude steel production vis-à-vis global average of 34%

Global average ratio of steel scrap usage to crude steel production at 35%

MT

Source: World Recycling Report, JPC, CRISIL Research

Note: Indian numbers indicative for financial year 2015-16 and rest for calendar year 2015

1621 803.8

166.189.80 78.8555 80.5 88.8 22.0 55.5

34%

10%

53%

24%

70%

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

200

400

600

800

1000

1200

1400

1600

1800

World China EU India USACrude Steel Production Steel Scrap Steel scrap as a % of crude steel (RHS)

� Share of scrap in world’s crude steel production has reduced marginally from 37% to 34% over

past 5 years on account of number of BF-BOF capacities being added especially in China

� However, in India the share of scrap has increased from 18% to 24% over past 5 years on

account of better cost economics over sponge iron

-3% -3% -3% +6%Rise / decline in share of

scrap over past 4-5 years+5%+6%

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Improving scrap availability, favorable cost economics, and technological benefits to drive an increase in scrap usage

5

Driv

ers

De

terre

nts

Driv

ers

De

terre

nts

Increased global

availability of high

quality scrap

High level of

fragmentation and

unorganized nature

of the industry

Volatile scrap

prices

Rising domestic

scrap generation

(esp. post V-VFM

implementation)

Preference towards EAF

technology over obsolete

IF (EAF is 40-45% in US &

EU; no IF/DRI)

Large BF/BOF players

expanding in long steel

Better cost

economics vis-à-vis

sponge iron

Lower extent of

scalability vis-à-

vis BF/BOF units

Proximity of key demand

cluster to sources of scrap

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Share of scrap in steel making to increase led by substitution with sponge iron

6

MT

Average ratio of steel scrap usage to crude steel production to reach 28-30%

Source : CRISIL Research Estimates

• Increasing availability of scrap in domestic and import markets coupled to drive increase in share of

scrap in steel making going forward

• Financial stress, raw material availability and logistics challenges to hit competitiveness of sponge

iron manufacturers

Scrap figure inclusive of 5-6MT of milling scrap/ home scrap. If milling scrap is not included in

the estimates then share of scrap in steel making to increase from 16% in 2015-16 to 24% in

2020-21

7190

124

13 2135-40

18%

24%

28-30%

0%

5%

10%

15%

20%

25%

30%

35%

-

20.00

40.00

60.00

80.00

100.00

120.00

140.00

2010-11 2015-16 2020-21

Crude Steel Production Scrap in steel making Share of scrap

5,000

15,000

25,000

35,000

Ap

r-12

Jul-

12

Oct-

12

Jan

-13

Ap

r-13

Jul-

13

Oct-

13

Jan

-14

Ap

r-14

Jul-

14

Oct-

14

Jan

-15

Ap

r-15

Jul-

15

Oct-

15

Jan

-16

Ap

r-16

Jul-

16

Oct-

16

Coal-based sponge iron prices Landed cost of scrap Domestic Scrap

Conversion yield

Conversion yield

Sponge iron-82-85%

Sponge iron-82-85%

Scrap- 95-97%Scrap- 95-97%

Domestic scrap, Imported scrap & Sponge iron prices (Rs/ tonne)

MT

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1.72.3 2.4

3.30.6

1.01.1

1.6

0.0

1.0

2.0

3.0

4.0

5.0

2010-11 2015-16 2016-17 e 2020-21 p

Secondary

(Recycled)

Aluminium

Primary

Aluminium

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Secondary aluminium demand currently accounts for 31% of overall demand and has grown at ~11% over past 5 years

� Over the next 5 years, we expect overall aluminium demand to rise at 8-9% CAGR largely driven by

increase in asset demand especially in automotive sector and infrastructure (building and power)

sector

� Secondary aluminium demand is projected to increase at a CAGR of 9-10%, primarily driven by an

expected high growth in the automotive sector especially two-wheelers and cars

Share of Secondary 31% 31% 32%26%

Source: CRISIL Research Estimates, IBIS, Industry

11%

6%

9%

8%

CAGR

CAGR

Robust Growth in Secondary (recycled) Aluminium Consumption in India

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Key applications of primary and secondary (recycled) aluminium are largely distinct

Electricity, 56%Building &

Construction,

17%

Automotive, 9%

Packaging, 7%

Consumer

Durables, 6%

Others, 6%Electricity,

1%

Building &

Construction

, 13%

Automotive,

59%

Packaging,

4%

Consumer

Durables, 3%

Others, 20%

Primary Aluminium Consumption MixSecondary (Recycled) Aluminium

Consumption Mix

� While electricity constitutes 56% of the primary aluminium demand, its share in secondary aluminium

consumption is negligible on account of conductivity losses and quality perception issues

� Automotive sector constitutes ~60% of secondary aluminium demand followed by building & construction

sector which constitutes around 13% of the total demand

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Demand from two wheelers, cars and UVs to support robust growth in secondary aluminium demand

Two Wheelers Demand Growth Cars & UVs Demand Growth

� Improving rural connectivity coupled with improving vehicle

ownership economics to help drive demand in the long term.

� However, Emission norm compliance is expected to drive up

prices in the terminal year of our forecast period, thereby

impacting demand

4%

21%

0%

7%

1-3%

8-10%

0-1%4-6%

0%

5%

10%

15%

20%

25%

Motorcycles Scooters Mopeds Overall

FY 11 to FY 16 FY 16 to FY 21

2%

-1%

6%

2%

12-14%

8-10%

12-14% 11-13%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

Small Cars Sedans UVs + Vans Overall

FY 11 to FY 16 FY 16 to FY 21

� Faster demand growth expected in the long term driven by

better income prospects and subdued cost of ownership of

Cars & UVs

� Exports to rise despite muted global demand, driven by

initiatives to export more models and widen reach

Overall demand to rise at 8-10%

CAGR through 2019-20, but correct

by (12)-(14)% post implementation

of BS VI emission norms

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Voluntary Vehicle Fleet

Modernization

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Voluntary vehicle fleet modernization policy to have a significant impact on domestic steel and aluminium scrap supply

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Delhi, Nov’14 – Ban on all 15 years or older vehicles

Delhi, June’15 – Ban on diesel vehicles over 10 years old

Kerala, May’16 – Ban on diesel vehicles over 10 years old

Bihar, Chhattisgarh June’16 - Diesel vehicles over 15 years old banned

Voluntary Vehicle Fleet Modernization Policy August’16 – Draft submitted

Event Timeline for Government Policy on ELV

� Implementation of the voluntary vehicle fleet modernization

(scrappage) policy can potentially generate 20-25 MT of

steel scrap over the considered implementation period

Source : CRISIL Research

� Implementation of the voluntary vehicle fleet modernization

(scrappage) policy can potentially generate 1.0-1.5 MT of

aluminium scrap over the considered implementation

period

Impact on Steel Industry Impact on Aluminium Industry

Implementation of the

voluntary vehicle fleet

modernization

(scrappage) policy is

expected to potentially

impact 28 million vehicle

stock initially

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CRISIL Research

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About CRISIL Research

• CRISIL is a S&P Global company, the world’s foremost provider of credit ratings.

• CRISIL Research is India's largest independent research house, providing comprehensive

coverage to more than 1,200 Indian and global customers

• We have ongoing coverage on 86 industries

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identification and benchmarking-related areas

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Classification: INTERNALClassification: INTERNAL

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and Company Research)

Majority of the end-use

segments are tracked in detail

on a regular basis

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Economy Industry Company

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segments

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In case of any Clarifications or Business Enquiries please

contact :-

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Director – Industry & Customized Research

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Email : rahul.prithiani@crisil.com

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Email : viraj.vora@crisil.com