The expansion of 5 million tonne capacity by JSW Steel has come when the industry is seeing a demand slowdown and prices are under pressure. The company is expecting the demand to bounce back sooner than later on back to government incentives and robust balance sheets of corporates. Seshagiri Rao, Joint Managing Director, JSW Steel, spoke to BusinessLine on future outlook. Excerpt:

Is the super steel cycle nearing the end with prices falling and cost going up?

The underlying demand remains strong. In November, the market was affected by the cyclone and unseasonal rains. The kind of acceleration in demand expected in the second half of the fiscal has not yet happened. Things are slowly coming to normal. In between, international steel prices have fallen. Domestic stockists expect some correction in steel prices and are exhausting inventories before they place fresh orders. In the next few days, things will improve substantially. Nobody can continue not to buy new stocks unless and until there is no demand. All the leading indicators are showing a positive trend. Stockists are just playing a waiting game. It will not last long.

Why Banks' credit to corporates has dropped despite the revival in the economy?

Alternate source of funding such as the capital market is available. A lot of companies have raised money through IPOs. Companies are also raising from domestic and global bond markets. In addition, there is a strong cash generation within companies. These have led to a fall in dependency on bank financing. However, banks remain the major source for working capital financing. Banks will continue to focus on working capital and MSME financing, retail, housing and personal loans. DFI (development finance institutions) are financing infrastructure projects. Earlier, banks used to fund all the segments but this has changed. Large projects needing long term funding cannot depend on banks.

Are banks being ignored due to the high cost of funding?

Large loans of banks have become NPA as their source of funding was short term, and lending was done on a long term basis. Steel companies need 15-20 years of funding, but banks lend only for nine years. There was always a misalignment of funds in terms of tenure. The government move to set up DFI for infrastructure spending was the right step. This kind of funding will come into play in future. Corporates will look at banks only for working capital and short-term projects, but long term, where the project implementation is 4-5 years and stabilisation takes another two years. The cash flow starts later. It is not possible to service a 10-year loan after three years.

Is the fast-spread Omicron a threat to economic revival?

Nobody can gauge the exact impact. Even the experts' opinions are not more than the fact that it spreads faster and the effect will be milder. India is more prepared than earlier. A significant population has been vaccinated. Even assuming that it spreads, the impact will be much lower. Corporates have learned to live with it in the last two years, and they are taking enough precautions. We have vaccinated 99 per cent of our employees including contract workers and their families. I do not foresee the kind of lockdown seen last March and April. Localised lockdowns cannot be ruled out, given the intensity of the spread. We also do not foresee complete disruption in the supply chain.

Are steel companies under pressure from Govt to reduce prices for MSME?

) Unless MSMEs are strong, the supply chain ecosystem will not be buoyant. Engineering export from India in September grew by 51 per cent, and the following month it was up by over 30 per cent. Exports are increasing because they are more competitive. After all, raw material like steel was available at lower prices.

Will China start flooding the export market again?

China has been reducing exports steadily. Once their president announced they wanted to be carbon neutral by 2060 and carbon peaking by 2030, Chinese companies have been announcing their carbon reduction much earlier than the deadline set by the country. They have also announced five-year targets for reducing carbon emission by pollutant industries, including the steel sector. If pollution reduction is the big driver in China, I do not see a significant increase in their exports. They focus more on value-added products made of steel than just exporting the commodity.

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