Despite slowdown, steel firms put up stellar performance

Lower domestic demand a major roadblock; exports provide relief

Steel companies, led by JSW Steel and Tata Steel, have put up a stellar showing despite demonetisation and tepid domestic demand. Price increases for the past three months and falling imports due to protectionist measures have helped them.

In the December quarter, JSW Steel has reported a higher-than-expected net profit of Rs 730.05 crore compared to a net loss of Rs 709.09 crore against the same quarter in 2015-16 while Tata Steel, on Monday, recorded a net profit of Rs 232 crore against a loss of Rs 2,748 crore a year ago. Both the companies had the advantage of higher volumes; JSW Steel realised the benefits of its 3.8-million additional capacity in the third quarter while Tata Steel Kalinganagar crossed 1.5 million tonnes of hot metal production and one million tonne of hot-rolled coil production since commissioning in May 2016. Moreover, the higher volumes came when realisations are on an uptrend.

Steel prices were raised by Rs 3,000 a tonne in December and January in India. However, that was offset to an extent by higher input costs, though coking coal prices came off their highs. The contract price for coking coal in the March quarter is $285 a tonne while spot prices are off their highs of $315 a tonne and are now at $180 a tonne.

But what is driving steel prices if consumption is muted? Tata Steel's results presentation says that consumption growth during the quarter was 'anemic' at three per cent year-on-year. According to the Joint Plant Committee figures, during April-January, consumption grew by 3.6 per cent. In 2015-16, the consumption of Indian steel stood at 81.5 million tonnes, which was higher by 4.8 per cent.

Most steel companies would say that there are no major projects. Essar Steel Executive Director (Strategy and Business Development) Vikram Amin, however, points out that the flat product segment has been growing at six-seven per cent. The problem is at the retail end.

Demonetisation has dragged down retail sales by 10-15 per cent. Add to it 11 per cent higher production and the picture should look dismal for the domestic players, but not quite so. What has helped steel companies immensely is the different trade measures, especially the minimum import price (MIP). During April-January, imports are, in fact, down by 38 per cent.

According to CARE Ratings, with MIP in place in 2016, domestic steel producers increased their production during the year. "In the year 2015, domestic steel production declined continuously in each of the months during the second half of the year. The output fell by 2.4% to 52.09 million tonnes during June-December 2016 compared to that in June-December 2015," the CARE Ratings report said.

Also, with global prices holding, steel producers from India have been able to divert the increased output to the export market. “Last year, the share of exports in total volumes for JSW Steel was 10-12 per cent. In nine months, the share has increased to over 20 per cent, and that too on an enhanced based," ICRA Senior Vice-President Jayanta Roy said.

The data indicate that exports have increased 73 per cent during April to January to 5.9 million tonnes, says Sushim Banerjee, director general, Institute for Steel Development and Growth (INSDAG). “If the trend continues for the next three months, India could end up being a net exporter this year,” Banerjee said.