File_2012_Document1

100 Jindal Steel & Power Limited Business Leadership Sustainable Operations Excellent Governance Robust FinancialsManagement Discussion and Analysis ReportAnnual Report 2011-12101In financialyear 2011-12, theWORLD crude steelPRODUCTION reached1,491.54 millionTONS which includes72.20 million tonsof crude steelPRODUCED in India.Annexure-VMANAGEMENTDISCUSSIONAND ANALYSISREPORTECONOMIC REVIEWThe global economic environment, which was moving ahead steadily took adverse turn in the middleof financial year 2011-12 due to the turmoil in the euro zone and slow growth outlook on the USeconomy. The global economic activities have slowed down and become more uneven. Europeancountries are facing financial turmoil because they could not reach a consensus on restructuringtheir economies, debt and budgetary outlays in the face of public protests. Public unrest swelled insome oil-producing countries resulting in uncertainties in oil production/ price. Rising internationalprices of crude oil have affected the global economies badly. Japan was struck by the devastatingearthquake and tsunami affecting, in particular, developing economies.The growth prospects have become more uncertain due to global economic slowdown. The renewedstress has undermined financial markets and institutions in developed economies. Global trade andcapital flows have declined, resulting in slow growth in emerging and developing economies too.However, growth prospects in China, India, Brazil, Russia and South Korea appear better and areexpected to be stronger in view of projected economic growth in these countries. The shift is clearlytowards emerging markets which are expected to spearhead the growth in the global economy.Bank of India in order to control inflation has resulted in slowingdown of investment and growth, particularly in the industrialsector. The growth rate of investment in the Indian economydeclined significantly during the year under report. Interest rateshave increased resulting in higher costs of borrowings impactingprofitability and internal accruals. Revenues of the Governmenthave remained less than anticipated and with higher thanbudgeted expenditure, there is a strong possibility of high fiscaldeficit.Despite difficult conditions in the global economy, exportscontinued to do better in financial year 2011-12 and areexpected to grow at 14.3% in real terms over and above 22.7%growth achieved in financial year 2010-11, as per advanceestimates of Economic Survey. Imports are likely to end the yearwith a real growth rate of 17.5% as against 15.6% in financialyear 2010-11.OPPORTUNITIES AND THREATSIn financial year 2011-12, the world crude steel productionreached 1,491.54 million tons which includes 72.20 million tonsof crude steel produced in India. India is the fifth largest steelproducer at the global front and is striving to become the secondlargest producer in the coming years. Europe and the UnitedStates are showing weakness in industrial production and assuch their Gross Domestic Product is expected to grow by lessthan 2.0% in 2012, as against an expected 9.0% and 6.5% growthin 2012 for China and India, respectively. In China, however,there is already significant excess steelmaking capacity. Chinesecrude steel capacity is expected to be 840 million tons in 2012,which would be 22% in excess of the expected consumption of688 million tons during this period. In terms of consumption,world steel use grew by 6.5% in 2011 whereas in India, it grewat a much lower rate of 4.3%. As for 2012, it is expected thatgrowth of 5.4% in world steel consumption will come mostlyfrom emerging economies and 70% of world growth in steel overthe coming years will come from these economies with Chinaand India making significant contribution. Rapid infrastructuregrowth in the emerging economies will make them largeconsumers of steel.consumers of steel in India. Moreover, stainless steel, is findinginnovative applications, due to its corrosion resistive property, inindustrial as well as domestic field.India has acquired a central position on the global steel mapwith its large steel plants, acquisition of global scale capacities,continuous modernisation and upgradation of old plants,improving energy efficiency and backward integration. Steelindustry is playing a significant role in the country’s economicgrowth. The Government expects steel production to rise to 100million tons per annum by financial year 2019-20. Global steelgiants from across the world have shown interest in the industrydue to its phenomenal performance.During 2009-11, average prices of iron ore increased at a CAGRof 46.7% and that of coking coal grew by 30.2%. The impactof this rise in raw material prices (based on usage per unit ofsteel production) on a steel player’s profits is phenomenal. Rawmaterial is in short supply and suppliers have seemingly upperhand in fixing prices. Steelmaking has generally taken a formof raw material processing or beneficiation and not the creatorof value. In response to these changes, the business model ofsteelmaking needs to change suitably so that rise in prices ofsupply-constrained raw materials is passed directly to steelcustomers and demand fluctuations of customers are met withmore flexible production responses.Availability of iron ore and coal at competitive prices will be achallenge for steel producers in India. Recent developments inconnection with allotment of public resources and decisions bythe Supreme Court may lead to policy shift by the Government.Public outcry and mobilisation of public opinion againstallotment and utilisation of scarce public resources is a causeof concern. Acquisition of land for expansion and setting up ofnew projects is becoming time consuming exercise and cause fordelay in execution. Power is also one of the main inputs for steelmaking and its supply and pricing will decide the production andpricing of steel in the country.With the restrictions in Karnataka iron ore mining, steel industryin India is struggling to meet the production requirements. Withsevere shortage of raw material, many units are likely to face shutdowns. The Supreme Court of India is presently supervising allmining activities in the Bellary and Tumkur regions in the southernstate of Karnataka after the Central Empowerment Committeereport indicated that mining had caused severe environmentaldamage in the region. Karnataka produces approximately 18million tons of iron ore annually. Steel manufacturers haveThe Indian economy is expected to grow by about 6.9% in financial year 2011-12, after havingregistered a growth rate of 8.4% in each of the two preceding years. The agriculture and servicessector performed well, but overall industrial growth has slowed down. Manufacturing growthduring the financial year 2011-12 is expected to remain sluggish. Inflation remained high for mostof the period during the year, but came down substantially at the year end. Supply-side factorshave triggered inflation particularly in food items. The tightening of monetary policy by ReserveIndia is expected to perform better with consumption estimatedto grow faster due to increasing demand in oil and gas sector,huge spending on infrastructure sector coupled with growth inother sectors, like, housing, consumer durables, automobile,transportation, industrial applications etc. Construction andInfrastructure sectors will, in particular, continue to be the largest