ICRA believes that the near term margin outlook for Indian steel companies remains weak, notwithstanding some moderation in raw material prices recently. Jayanta Roy, Senior Vice-President and Co-Head, Corporate Sector Ratings, ICRA stated “international steel prices are on a downward journey in the current year, reflecting the weakness in major steel consuming regions, viz.
China, the USA and the Euro-zone. Consequently, a surge in cheaper imports into India in the current financial year have exerted significant pressure on domestic steel prices, which are expected to remain under check in the near term. “
Besides this, both limited iron ore availability and a weak rupee offsetting the easing of international coking coal prices, have kept the prices of raw material at relatively elevated levels, despite a fall in domestic iron ore prices in September and October 2012.
This makes ICRA believe that the margins of steel players are likely to remain under pressure for the near term at least.
Indian steel consumption grew at only 5.5% during FY 12 on the back of a slowdown in demand from its key consuming industries including construction, capital goods and automobiles.
While apparent steel consumption growth has improved somewhat in the current financial year in contrast to other major macroeconomic indicators remaining weak, most of it has been fuelled by surging imports, which grew by over 40% YoY in first quarter, keeping domestic production growth at low levels.
Growth in steel imports was driven largely by the fact that the landed cost of imported steel was still cheaper than domestic steel despite increased import duty on hot rolled coils. “This also indicates rising steel inventory levels in the current year”, adds Roy.
Although ICRA believes that the long term demand outlook for the domestic steel industry is positive, favourable policy initiatives to kick-start investments and a moderation in interest rates would remain critical for the growth in the steel demand going forward.