 "No meaningful improvement in profitability seen for domestic steel players despite new policy: Fitch Ratings")
Soft domestic demand growth for steel and prevailing overcapacity in the market could avert meaningful improvement in profitability for domestic steelmakers before 2017, said ratings agency Fitch Ratings. This, despite the latest move by the government to impose a minimum import price on a wide range of steel products, which is supposed to give flexibility to players to raise prices, said the ratings agency report today.
The agency estimates that the minimum import prices will allow domestic producers to raise product prices for most steel products by around $50-$70 a tonne from current levels.
On February 5, the government imposed minimum prices on imports of 173 steel products, which follows a 20 percent safeguard duty on certain steel-product imports in place since September 2015.
Producers, however, are unlikely to realise price increases of this much because of competition. Producers have raised prices only by around $10-$15 per tonne since the announcement. We believe domestic steel production could rise by around 3-4 percent as imports reduce. However, with new capacities coming in line in 2016, Fitch does not expect capacity utilisation levels to rise significantly. Fitch expects additional price increases, if any, to be similar to the current levels but spread out over the next three months.
Consequently, Fitch expects the profitability of steel producers to remain weak compared to the level in the financial year ended 31 March, 2015. "We believe that further steel price increases and a significant improvement in steel producers' profitability will depend on a strong revival in domestic demand growth," said the report. The agency continues to consider the increased government spending on infrastructure to be the key catalyst for acceleration in Indian steel consumption growth, which was soft at 4.7 percent in 9MFY16. This followed weak demand from key end-user industries, such as real estate and infrastructure.
Steel prices have continued to fall so far in FY16, and current prices are around 30 percent lower than at end-FY15. Prices for key raw materials - iron ore and coke - have also declined, but the falls are insufficient to offset impact on manufacturers' profits from lower steel product prices.
Globally, supply continues to outstrip demand. The recent announcement by China, the world's largest steel producer, that it would cut domestic steel capacity by 100-150 million tonne fails to adequately address concerns. China's capacity is close to 1.2 billion tonnes, with an output of around 800 million tonne in 2015. The stated rationalisation target appears to fall short of addressing overcapacity in the country. In addition, China's announcement did not spell out a timeline for implementing the capacity cuts. We expect the cut in Chinese steel capacity to be gradual with little impact on Chinese output and exports in the short term, said Fitch Ratings.