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ICRA expects domestic steel demand to improve gradually

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ICRA expects that any significant pick up in domestic steel demand can at best be gradual, as demand recovery from key end user industries remains fragile, despite a growth in the automobile sector in the current year. Domestic steel consumption growth remained nominal at 1.3% during the period April-November 2014. On the supply side, although steel production trend tracked declining consumption pattern, it still remained higher than the demand growth, at 2.5% during the first 8 months of FY15. Moreover, the substantial discount at which imported steel is available in the country led to a surge in imports of steel, which reported a growth rate of almost 49% during the period April-November 2014, as against a fall in steel export by around 5% during the same period. This has led to India becoming a net importer of the metal as against its status as a net exporter in FY14. Higher production growth relative to consumption levels and rising imports also point towards an inventory build-up in the steel market, says ICRA in a recent report. Continuing with the earlier trend, ICRA expects international coking coal prices to remain low in the near term, given the oversupply situation internationally. Consequently, domestic steel players producing steel through the blast furnace route will stand to gain, a trend which has already been observed in the financial results posted by a number of companies in the first half of 2014-15 (H1FY15). Mr. Jayanta Roy, Senior Vice-President and Co-Head, Corporate Sector Ratings, ICRA stated “The average coking coal price in FY15 has been lower by around 21% than that in FY14, reducing the landed cost of imported coal in FY15, despite a depreciation of the Indian currency recently.” ICRA estimates that coking coal costs of Indian blast furnace operators to reduce by around 15% YoY for every MT of crude steel production during FY15. International iron ore prices have seen a sharp decline of over 40% in FY15, driven by a weakening of demand from China, and prospects of higher supply following capacity expansions by large global mining companies. Domestic iron ore production, however, continues to suffer from regulatory restrictions, keeping domestic iron ore prices at elevated levels, notwithstanding some moderations in recent months. This has led to higher iron ore imports in the current year. “Given the steep decline in international prices and economies of scale associated with bulk imports, some of the large Indian players with plants near ports are expected to increase imports till domestic production finally recovers”, states Mr. Roy. Sustenance of low coking coal prices of Q1FY15 in the following quarter supported the operating margins of the domestic steel industry (sample- 7 large Indian companies in the steel sector, together accounting for over 40% of the domestic capacity) in H1FY15. Although the operating margins declined on QoQ basis in Q2FY15, as a result of an increase in iron ore costs, the same still remained higher than the previous year levels. Overall, operating profitability remained healthy at 21.04% in the first half of FY15. Return on capital employed (RoCE) in H1FY15, however, remained at similar levels of around 12% as in the last year. On the other hand, interest coverage ratio of the industry declined further to 3.28 time from 3.6 time in FY14 due to higher interest expenses. Although pricing pressures from cheaper imports and supply shortages in iron ore are likely to stay in the near term, ICRA expects the profitability of domestic steel players to remain stable on the back of softer raw material prices, and a gradual recovery of demand in some of the end-user industries. However, debt protection metrics are not expected to improve significantly due to the high debt levels of companies, and the fact that interest rates would still remain at elevated levels in absolute terms, notwithstanding an expected moderation in the current calendar year. 

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Zhejiang Yaang Pipe Industry Co., Limited

Article Categories:
Metals · Steel

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