Indian Steel Profit Margins Under Pressure in Short Term

Profit margins of Indian steel companies may remain under pressure for the next few months, even as steel producers have urged the government to provide them export incentives to help battle overseas competition.

Cheap imports notwithstanding, steel companies currently face pressure on several other fronts including the one imposed by the largely falling rupee vis-a-vis the US dollar. A slowdown in sector growth due to lower demand by automobile and manufacturing sectors has also added to the woes of producers.

According to some analysts who follow the sector, the July-September quarter contract prices of coking coal, an important ingredient in the steelmaking process, has gone up from US $205 to around US $225 per ton. Iron ore prices, too, are on the higher side.

The current sluggish demand from consumers also means steel producers will not want to pass on any price increase to the purchasers. In the 2nd quarter of 2012, raw material prices such as iron ore and coking coal had softened but a depreciating rupee had offset these gains.

A recently released report by rating agency Fitch also spoke of the profit margins of Indian steel producers remaining under pressure in the second half of 2012. Despite margin pressures, Fitch maintains a stable outlook on its rated steel producers to reflect its view that most of these entities could keep up with short-term demand slowdown.

On the brighter side, despite the slowdown in the Indian economy, many in the steel sector feel if the GDP continues to grow at 7 percent, the sector will end up registering a growth rate of about 8 percent by the end of 2012.

Leading steel manufacturers who came together for a meeting organized by Steel Secretary D.R.S. Chaudhary in New Delhi a few days ago expressed worries over the imposition of countervailing duties (CVD) by the US and European countries in addition to the surge in steel imports.

They said CVD had been imposed to insulate the US and European steel industries from overseas competition. On the other hand, imports of the metal have surged in India by about 200 percent. The Indian manufacturers also predicted that Indian steel imports could go up to 50 million tons (MT) from the current 8 million tons to make up for the anticipated 200 million ton demand by 2020.

In a report on this meeting that appeared in The Indian Express, Essar Steel Marketing Director Vikram Amin was quoted as saying the CVDs could limit India’s ability to export to these nations.

Some of those attending this meeting also felt that, like the Chinese government — which had extended incentives on steel exports of about 30 percent — the Indian government, too, should follow suit.

In a different move, as part of the overall Japanese government’s participation in the Delhi-Mumbai Industrial Corridor, India has decided to export two million tons of iron ore to Japan annually for the next three years. The Indian cabinet approved the deal.

An inter-ministerial delegation will be going to Japan within the next two weeks to formally sign the agreement, according to Indian Commerce and Industry Minister Anand Sharma.

Sohrab Darabshaw contributes an Indian perspective on industrial metals markets.

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