Will Falling Demand Mean Falling Profits for Indian Steel Companies?

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TC Malhotra contributes to MetalMiner from New Delhi.

Indian steel companies, already in the red this year, are likely to suffer a sharp fall in profit in the third quarter of the fiscal year because of high production costs and falling demand.

A Business Line report notes that major steelmakers such as JSW Steel, Tata Steel and SAIL have reported a fall in profits in the second quarter of this fiscal year. While JSW Steel reported a net loss of Rs 6.69 billion ($133.8 million), Tata Steel’s net profit dipped 89 per cent to Rs 2.12 billion ($42.4 million). SAIL’s profit more than halved to Rs 4.95 billion ($99 million).

According to earnings preview reports of brokerages Kotak Institutional Equities, IDFC, Motilal Oswal, Ambit, and Avendus, steel companies, including SAIL, JSW, Tata, and Essar Steel, along with metal companies such as Hindalco Industries, and Sterlite Industries, will likely report an average 16 percent fall in profitability in the third quarter that ended December.

Reports suggest that the outlook for steel remains muted despite a cautious $20 increase in prices globally. Industry experts say recent purchases by customers are more due to re-stocking and are not attributed to fresh demand.

It is believed that steel demand has fallen due to the global slowdown, with customers putting off purchases of the steel and alloys used for making cars and refrigerators.

Man, That’s Raw

In India during recent times, even though sales are rising, profitability has been impacted due to a rise in prices of key raw materials iron ore and coking coal.

It is widely believed that availability of iron ore has been hit due to a Supreme Court-directed suspension of mining in the south Indian state of Karnataka. Coking coal, which is entirely imported, has become expensive after the rupee fell 20 percent from June last year.

Coking coal, which is imported from Australia, Indonesia and Africa, is now at $235 a metric ton, falling from levels of $280-$300 seen at the end of the second quarter. However, industry experts say that a depreciating rupee will offset the fall in international coal prices.

Citing Fitch Rating, the Business Line report states while raw material cost pressures may ease in the coming months, reduced steel demand is likely to constrain steel prices, putting pressure on margins.”

A significant increase in coking coal prices due to supply disruption adversely affected the profit margins of Indian steel producers,” according to Fitch, quoted in BL.

Forecast

ICRA (formerly Investment Information and Credit Rating Agency of India Limited) believes the margin outlook for Indian steel companies has weakened in recent months, notwithstanding the improvement in operating profitability reported by large Indian steel companies since the lows of Q4 of FY 2008-09.

According to ICRA, growth in steel consumption in India has slowed down significantly to around 2.5 percent in the first six months of the current financial year, from around 14.5 percent in the corresponding period last year, with project offtake slowing down and other macroeconomic challenges also cropping up.

In ICRA’s estimates, almost 25 million metric tons of new capacity, which is about 30 percent of the country’s current capacity, is expected to be commissioned in the next 18-24 months.

This in turn could alter the domestic demand-supply position, thereby keeping realizations in check, notwithstanding any benefit that may come to steel players from a depreciating currency.

–TC Malhotra

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