ICRA expects the domestic steel players producing steel through the blast furnace route to benefit from the continuing weakness in international coking coal prices, a trend which has already been observed in the financial results posted by a number of companies in the first quarter of 2014-15 (Q1FY15).
Jayanta Roy, senior vice-president and co-head, Corporate Sector Ratings, ICRA stated, ''Coking coal prices have declined by around 16% in the first quarter of 2014-15 (Q1FY15) over the previous quarter, and the same contract prices have been rolled over in Q2FY15. This followed a 13% decline in coking coal prices over the whole of FY14''. With the exchange rate remaining largely stable in FY15 till date, the price decline has provided a relief to the blast furnace operators in the country, which import coking coal for producing steel.
Therefore, ICRA expects the domestic iron ore to remain in short supply for the steelmakers without captive sources of ore at least in the near term, which may affect their capacity utilisations. Even though international prices have seen a sharp decline in recent months driven by a weakening of demand from China, and prospects of higher supply following capacity expansions by large global mining companies, the domestic iron ore prices remained at an elevated level due to the shortage. ''An upward revision of royalty rates on minerals, as announced by the government, and higher railway freight rates would further impact the cost structure of steel players,'' states Roy.
ICRA expects the domestic steel demand to recover gradually from H2FY15 on the back of a somewhat better performance of the Indian economy. Although domestic steel consumption growth declined in the fourth consecutive year to 0.6% in FY14 from 3.3% in FY13 and has remained at nominal level during the current year as well, ICRA believes that the apparent bottoming out of the growth rates of some of the demand drivers including automobiles, and the new government's focus on infrastructure and construction sectors as highlighted in the budget point to a likely pickup in steel demand going forward. However, significant project off-takes remain uncertain in the immediate term.
ICRA believes that near term margin outlook for the steel industry would depend on the sustainability of such hikes. However, for a sustained recovery of RoCE levels, domestic demand conditions have to improve meaningfully.
