 "Anti-dumping duty to help domestic steel firms overcome weak demand:ICRA")
Imposition of provisional anti-dumping duty (ADD) on hot-rolled and cold-rolled coils for six months will help domestic flat steel players overcome challenges posed by a weak domestic demand, said ICRA in its report today.
Additionally, the extension of minimum import price (MIP) on a trimmed list of steel products for two months will benefit the industry, especially long steel players which do not attract any ADD as of now, it said.
"India's steel imports, which fell by around 29 percent on year-on-year in the April to June quarter of the current financial year largely due to MIP and Safeguard Duty (SGD), are expected to reduce further in the coming months, thus helping domestic mills regain lost market share,"the report quoted Jayanta Roy, senior vice-president and co-head, corporate sector ratings as saying.
Domestic hot-rolled coil (HRC) prices witnessed a drop in July 2016 on account of weak demand and subdued Chinese export prices. However, after the imposition of ADD in August 2016, HRC prices have increased by Rs. 1,500 per tonne, and are expected to remain buoyant in the near term as domestic HRC prices are still cheaper than landed cost of Chinese import offers by about 13 percent. Nevertheless, in ICRA's opinion, given the marginal demand growth of 0.4 percent in Q1 FY2017 and an overcapacity-related concern in the domestic market, steel prices are unlikely to increase significantly from the current levels unless demand growth strengthens. In such a scenario, an expected revival in rural demand following a normal monsoon after two years, and the likely rise in discretionary consumption after the 7th Pay Commission payouts, remain critical for an improvement in domestic steel consumption in the second half of FY2017.
On the raw material front, India's iron ore production has increased by almost 35 percent YoY in Q1 FY2017, on the back of a 23 percent YoY growth registered in FY2016, being led by rising supplies primarily from Odisha and Goa. With domestic crude steel production growing by a modest 0.9 percent and 4.8 percent YoY in FY2016 and Q1 FY2017 respectively, domestic iron ore prices have remained under pressure, correcting by around 13 percent between April and August of 2016. However, spot prices of coking and thermal coal have witnessed a sharp increase of about 39 percent and 20 percent respectively since end May 2016, which is likely to increase the cost of production of blast furnace operators and sponge iron players respectively. Consequently, ICRA estimates that notwithstanding the lower price of iron ore between May and August of 2016, cost of major raw materials is expected to increase by around Rs 1,580 per tonne for blast furnace players, and by around Rs 390 per tonne for sponge iron manufacturers dependent on imported coal.
Domestic steel prices have increased in the second week of August 2016 post the imposition of ADD. However, given the weak domestic demand, the extent of increase has been only around 5 percent from the July 2016 levels, and currently remains lower than the previous peak levels achieved towards the end of May 2016.
"Steel demand in India remains soft during the second quarter because of lower construction activities during monsoon. This, coupled with the higher coal costs, and a limited price rise off late, will keep the operating profit margins of domestic steel companies under pressure in the current quarter", Roy added. Also, debt coverage indicators of the leading four domestic steel players (accounting for around 45% of the current domestic capacity) have deteriorated significantly in the last few years, with the total debt to operating profit and interest coverage ratios falling to 9.6 time and 1.3 time only in FY2016. The situation in case of mid-sized steel players is even more worrying. Given the significantly high debt levels contracted by these companies in the last few years, ICRA expects debt protection metrics of steel players to remain depressed in the near term.