Given the continuing sluggishness in the key real estate and construction sectors, ICRA expects the overall steel consumption growth for FY2017 to be lower than the previous year levels. Sluggish demand in recent months led to a reduction of Rs 2,000/MT in domestic hot rolled coil (HRC) prices in February 2017. Though domestic HRC prices have seen an upward revision by Rs 1,000/MT in March 2017, and reportedly the industry is considering a further price increase in April, the sustainability of this increase remains uncertain, given that domestic prices are now costlier than landed cost of imports, says ICRA in the report. Nevertheless, the Government’s thrust on infrastructure and affordable housing sectors in the Union Budget 2017-18 points to a favourable demand outlook for the steel sector in the medium term.
India's steel imports contracted by 38.5% in 11M FY2017 on the back of various trade protection measures including anti-dumping duty, safeguard duty and minimum import price.
Jayanta Roy, Senior Vice-President, and Group Head, Corporate Ratings, ICRA said, ''This decline in steel imports has coincided with a strong growth in steel exports by domestic mills, supported by an improvement in the pricing scenario in international markets. As against a wide gap of 7.6 mt in FY2016 between India’s steel imports and exports, exports have surpassed imports in 11M FY2017 by a thin margin and as a result, India has now become a net exporter of steel in the current year''.
In FY2017, ICRA expects domestic iron ore production to reach 190 mt, registering a growth of 23% over FY2016. A bulk of the incremental domestic production has come from Odisha, where production is expected to cross 100 mt in FY2017. However, buoyant international iron ore prices have helped arrest the slide in domestic ore prices, especially in the states of Chhattisgarh and Odisha, where prices were under pressure earlier due to oversupply.
Between September 2016 and March 2017, NMDC Ltd. has increased the price of iron ore lumps produced from its Chhattisgarh mines by 43%. Additionally, supported by better export realisations, India's iron ore and pellet exports have reached 18.6 mt in 9M FY2017, as against 2.7 mt achieved during the same period of the previous year. ''Rising exports augur well for India’s pellet capacity of around 90.6 million tonne per annum, which has been operating at suboptimal utilisation levels of around 50% thus far,'' Roy added.
With the Chinese Government partially removing supply restrictions on coal mining from mid-November 2016, Chinese coal production have gradually increased in the December quarter. This is expected to lower China's import dependence of coking coal in CY2017. This, coupled with improved supplies from Australia, Russia, and Canada, have led to a downward revision in spot coking coal prices from US$ 309/MT in end-November 2016 to US$ 157/MT in end-February 2017, representing a decline of 49%. ICRA expects this sharp decline in international coking coal prices to benefit the margins of domestic blast furnace players in Q1 FY2018, given the typical lead time of around three months for shipments to arrive onshore. Coking coal contract prices, which have been settled at US$ 285/MT in the current quarter, are expected to moderate to around US$ 160-165/MT in the subsequent quarter, taking a cue from the prevailing spot prices. A reduction in coal prices may lead to a subsequent reduction in international steel prices in ICRA’s opinion, which in turn would keep domestic prices under check.
Operating margins of the steel industry improved to 16.3% in Q3 FY2017 from 13.4% in Q2 FY2017 on the back of increased realisations post the imposition of anti-dumping duties. Coverage indicators too have followed a similar trend sequentially, with industry interest coverage increasing from 1.16 time in Q2 FY2017 to 1.51 time in Q3 FY2017. In the current quarter, however, profit margins of steel producers are likely to remain under pressure, as most of the high cost coking coal inventory would be consumed in this quarter. Apart from blast furnace operators, which form about 45% of the total installed capacity, secondary steel players would also be adversely impacted by the increased input costs of sponge iron and scrap. This, coupled with weak demand conditions, would weigh on the operating margins of the industry in Q4 FY2017.
India's steel consumption growth remained weak at 3.4% in 11M FY2017 due to continued weakness in the key end-user industries. Typically, domestic steel consumption picks up sequentially in the third quarter after the retreat of monsoon and consequent pick up in construction activity. However, with the demonetization of high value currencies in November 2016, the consumption growth in Q3 FY2017 dropped by 2.4% QoQ.
