Guidance Note

Iron and Steel Industry - September 2010

1. Production and Consumption

 Global crude steel production increased by 25% in the period January – July `10
to 820.96 million tonnes as compared to the same period last year. However,
there was a decline in July `10 to 114 million tonnes from 124 million tonnes in
April `10, due to marginal decrease in demand which forced the manufacturers
to cut down production.

 In India, production of steel rose by 4% from 14.50 million tonnes in June `09
quarter to 15.08 million tonnes in June `10 quarter.

 Consumption rose by 12% from 13.3 million tonnes in June `09 quarter to 14.9
million tonnes in June `10 quarter, with increase in demand from automobile
and consumer durables sector.

 India’s net steel imports during Apr-Jun`10 quarter increased to 2.1 million
tonnes, a 162.5% increase on y-o-y basis. Moreover, 14% of the total forecast
consumption of steel would be met by imports by the year 2012.

2. Raw Material/Consumable Prices:

 Iron Ore: The spot price of iron ore in Indian market has stabilised at $150-
$152 a tonne and contract prices are $120 a tonne, which is 97% higher than
last year. However, after ban on iron ore export from Karnataka there has been
a decline in domestic iron ore prices by 25% despite rise in international prices.

 Scrap Prices: About 45% of the global non-Chinese steel production is through
Electric Arc Furnace (EAF) route, where scrap is the major raw material. Lower
scrap prices during May-Jun`10 provided a cost advantage to Electric Arc
Furnace route against the Blast Furnace route. The scrap prices have increased
from $259 per tonne in Jun`10 to $362 per tonne in Aug`10, which will reduce
the disparity in manufacturing cost of the steel manufacturers employing the
two different types of furnaces.

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Guidance Note: Iron & Steel Industry September 2010
Credit Risk Management Department
 Coking Coal: Chinese demand for coking coal is likely to decline in second
half of FY11due to declining steel production and lower steel exports which
will put a downward pressure on coking coal prices. The prices are expected to
be at the level of $230 -$240 per tonne for the FY11. SAIL is planning to invest
Rs. 1,200 cr to develop two coking coal mines in Jharkhand coal fields to
reduce the dependence on imports which will help them check the volatility in
pricing. Both the mines together are expected to produce 4.3 million tonnes per
annum of coking coal.

3. Steel and Steel Products Prices

The price of steel products have reduced by 25% on an average since May`10
following the global trend due to weak demand from European markets and
also because of reduced construction activity owing to monsoon season.
However, the domestic steel makers have increased the prices of flat steel by
Rs. 750-Rs.1,500 per tonne from Sept `10, in anticipation of higher demand
with increase in construction activity post monsoon season. The price post-tax
is expected to increase by an average of Rs. 2,000 a tonne to about Rs. 40,000
per tonne.

4. Current Concerns

 Decline in iron ore exports: India annually exports approximately 100 million
tonnes of iron ore, out of which 40 million tonnes is of iron ore having Ferrous
(Fe) content greater than 60%. China is the major buyer of ore with Fe content
between 60%-64% from India, Japan and Korea being the other buyers. Chinese
Government has advised the local steel mills to restrict the import of iron ore
with Fe content of 60% and above, which has led to a decline in iron ore
exports by 15% in June `10 quarter to 20.8 million tonnes from 24.5 million
tonnes in Mar `10 quarter. However, it will ensure improved availability of iron
ore for domestic manufacturers.

 Illegal mining and pilferage of iron ore: The Government of Karnataka

(contributed to 27% of iron ore exports in the last fiscal) has banned export of
iron ore from 10 of its ports since August `10, to prevent illegal export of iron
ore. It has also stopped issuing transport permits for carrying the exportable ore
to other states. This has led exporters to invoke “Force Majeure” clause
included in commodity contracts to remove liability arising out of unforeseen
circumstances that hinder trade. Also, the Goa Government has made “no-
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Guidance Note: Iron & Steel Industry September 2010
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 objection” certificate from the State Department of Mining mandatory for the
port authorities to release export vessels.

 Cheap Imports from China: China has dumped over 1 million tonne of
structural grade steel in India. Structural steel from China is of lower grade and
used in infrastructure, engineering and fabrication. It is cheaper by 10-15% as
compared to Indian steel. The demand for Chinese steel has reduced sharply in
European markets following the European Debt Crisis, owing to which China is
shipping excess quantities of steel to India.

5. Expansion Projects

 JSW Steel will commence commercial production at its newly commissioned

3.2 million tonnes per annum plant at Vijayanagar in Karnataka by February
2011. It also plans to enhance capacity to 32 million tonnes per annum by 2020
through two Greenfield projects in Jharkhand and West Bengal.

 Bhushan Steel is expected to complete final phase of its expansion project at

Orissa by March 2011, which will increase its capacity of HR coils by 2 million
tonnes with a project cost of Rs. 5,200 cr.

6. Bank’s Portfolio
(Rs in cr)
As on 31.03.2010 As on 30.06.2010
FB Advances of Rs 1 cr and
(No. of units: 1362) (No. of units: 1401)
above
Limits O/S Limits O/S
Fund Based Advances 53,475.99 30,506.13 56,661.06 31,254.06
Non Performing Assets 503.15 503.15 559.74 559.74
Total Fund Based Advances 53,979.14 31,009.28 57,220.80 31,813.80
Investments 1,028.35 1,028.35 261.86 261.86
Total Fund Based Exposure 55,007.49 32,037.63 57,482.66 32,075.66
Non Fund Based Exposure 25,221.79 23,736.80 26,823.29 25,594.31
Total Exposure 80,229.28 55,774.43 84,305.95 57,669.97
Above FB Exposure as % of
10.17 10.49 10.26 9.75
Bank's total FB Exposure
NPA as % of FB Advances 1.62 1.76
Limit Utilisation Level (%) 69 55.60

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Guidance Note: Iron & Steel Industry September 2010
Credit Risk Management Department
 Highlights:
 Fund Based limits have increased by 6% from Rs. 53,979 crore as on 31st
Mar`10 to Rs. 57,221 crore as on 30th June`10.

 The NPA level has increased marginally from 1.62% as on Mar`09 to 1.76%
as on Mar`10. In value terms, NPA’s have increased by Rs.56.59 crore. The
List of NPA borrowers added during June `10 quarter is given in Annexure

 NFB Limit utilisation level has been constantly high, at around 95%.

7. Outlook

 The construction and infrastructure sectors have been main growth drivers for
domestic steel consumption, with a share of 61% during FY10. The
Government has proposed investment of Rs. 1.73 trillion on infrastructure in
Union Budget 2010-11, which would generate demand for steel sector.

 Rising demand from automotive and capital goods sector is another driver for
consumption of steel. Passenger cars sales during the first four months of FY11
increased by 29.6% on a y-o-y basis, while the commercial vehicles sales have
increased by 64.8% on a y-o-y basis.

 The contract price of iron ore is expected to decline by 10% in second half of
FY11 due to lower steel production and higher iron ore production in China.
The coking coal price is also expected to decline marginally by about 5% with a
decline in steel production in China.

 Steel manufacturers are expected to sustain the rise in steel prices as demand in
domestic market will be buoyant enough to absorb the increase in steel prices.
Moreover, the Chinese Government has withdrawn the 8% export tax rebate
from July`10, which will lead to reduction in steel export from China and act as
a positive trigger for increase in steel prices in international as well as domestic
market.

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Guidance Note: Iron & Steel Industry September 2010
Credit Risk Management Department
8. Bank’s Outlook
Taking into account the current scenario and future outlook, the following
approach has been approved for taking exposure on the sector. There is no change
in the Outlook and Threshold levels.

a. Qualitative Approach
Segment Earlier Outlook Approved Outlook
Integrated Steel Producers (ISP) Moderately Positive Moderately Positive
Secondary Producers/
Moderately Negative Moderately Negative
Mini Steel Plants
Steel Intermediaries
Neutral Neutral
(Sponge Iron & Pig Iron)

b. Threshold Level
Threshold level
Segment
Enhancements New Connections
Integrated Steel Producers (ISP) SB10 and above SB8 and above
Secondary Producers/
SB5 and above SB3 and above
Mini Steel Plants
Steel Intermediaries
SB8 and above SB6 and above
(Sponge Iron & Pig Iron)

c) Quantitative Position

As a % of Bank’s Total Fund Based Exposure of High Value Advances (Rs. 1 cr and above)
Approved Exposure Level (Since 23.12.2009) Actual Level (30.06.2010)
15.00% 10.26%

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Guidance Note: Iron & Steel Industry September 2010
Credit Risk Management Department
 Annexure

Details of new NPA Borrowers added during June `10 quarter

(Rs. in cr)

Asset
S.No Unit Name Branch Outstanding
Classification
1 Global Hi-Tech Industries Ltd IFB Andheri Sub-Standard 29.51
2 Ramsarup Industries Ltd CAG Kolkatta Sub-Standard 15.40
3 Siddique Iron & Steel Pvt Ltd Domjur, West Bengal Sub-Standard 9.29
4 Southern Ispat & Energy Ltd Palakkad, Kerala Sub-Standard 5.38
5 Kalyaneshwari Ispat Udyog P Ltd CB, Patna Sub-Standard 3.17
6 Shree Balajee Re Roller Bhubaneshwar Sub-Standard 3.12
7 MS JS Forge Pvt Ltd SME Bhillai Sub-Standard 2.61
8 Shri Sanjeevi Agencies Chennai Sub-Standard 1.46
9 Venkateshwar Strips P Ltd SSI Raipur, Bhopal Sub-Standard 1.21
10 Lakshya Cast Iron Pvt Ltd Ahmadabad Sub-Standard 1.03
Total 72.18

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Guidance Note: Iron & Steel Industry September 2010
Credit Risk Management Department