During the quarter steel prices were under pressure from cheaper imports from China, rising domestic production and a slowdown in steel demand. Some steel players had to roll back the price hikes of Rs600-1,000/ton announced during the quarter. Over the last one quarter, Chinese export HRC prices have decline by US$50-65/ton.
For the domestic companies, we expect average realizations to decline by Rs500-1,000/ton on a qoq basis. India’s steel consumption rose a mere 1.5% yoy to 16.4mn tons in Q1 FY12 against a production increase of 8.2% yoy to 17mn tons. Steel volumes are expected to decline on a qoq basis on account of seasonal factors too. Sesa Goa’s iron ore volume is expected to decline 6.4% yoy and 32% qoq to 5.1mn tons.
For the non-ferrous space, topline is expected to decline sequentially on account of lower copper and zinc prices and an appreciation in the rupee. Average LME metal prices except aluminium were lower on a qoq basis. Copper declined the most (-6%), followed by copper (-4.6%) and lead (-1.7%), whereas aluminium prices were 3.9% higher on a qoq basis.
The impact of lower copper sales volume on Sterlite’s topline was marginally offset by higher contribution from its power subsidiary, SEL. On a yoy basis, Sterlite numbers cannot be compared on account of the acquisition of Anglo American’s zinc asset and commissioning of power plants under SEL.
Margins for all the steel companies would decline on a qoq basis on account of marginal decline in realizations and an increase in coking coal costs. The impact of the higher coking coal from US$225/ton to US$330/ton would not be completely reflected during the quarter on account of carryover quantity of cheaper coal.
We believe margins would be under pressure in Q2 FY12, wherein the full impact of higher coking coal costs would be felt, prices are expected to remain subdued and volumes would be low on account seasonal factors.