 "Steel companies incur huge losses on cheap imports from Russia, China")
As if the damage being done by cheap Chinese steel imports was not enough that even the Russian steel is flooding the domestic market now making primary domestic producers incur cash losses worth Rs 3,000-4,000 per tonne, sources said.
Depreciating Russian currency has allowed even the Russian steel to come to India, making it more difficult for debt laden domestic primary steel producers who are battling with high logistics and interest costs, they said.
Currently, domestically produced hot-rolled coils are being priced at Rs 24,000 per tonne.
“Out of this, logistics cost comes to about Rs 3,500 per tonne, while Rs 4,500-5,000 per tonne goes towards payment of interest. While steel companies are left with about Rs 16,000 per tonne in hand, their cost of production is about Rs 19,000-20,000 per tonne. So clearly, there is a minimum cash loss of Rs 3,000-4,000 per tonne for these companies. If interest outgo is higher then loss could be wider on a per tonne basis,” Mumbai-based trader Danesh Mehta, who is also a member of Bombay Iron Merchants' Association told Business Standard.
Price of imported hot-rolled coils on the other hand stands at about Rs 21,000 per tonne at present.
Sajjan Jindal-led JSW Steel, Tata Steel, state-owned Steel Authority of India, Jindal Steel & Power and Essar Steel are among the large steel producing companies in the country. Most companies are unable to comment due to the silent period ahead of third quarter earnings.
“Dumping of steel into the country has pushed steel industry to dead-end. Not only has it driven domestic steel prices to un-remunerative levels, this has also forced the industry to its lower capacity utilisation,” Shivramkrishnan, chief commercial officer of unlisted Essar Steel said. “The sharp drop in steel exports due to protection measures by various countries coupled with rising steel imports at cheap and unfair price levels into India has created a glut in the market which is not in the long term interest of the nation in general, and the steel industry in particular since the industry has made investment of over Rs 4.5 lakh crore in creating capacities of 100 million tonne. The government should immediately take appropriate measures in this regard,” he added.
Last month, domestic steel prices had jumped by Rs 2,000 per tonne after companies stopped selling in anticipation of the government's order to impose minimum import price (MIP).
“Since the government has not acted on the MIP issue, steel prices have corrected by about Rs 2,000 per tonne in the last 10 days,” said another Mumbai-based trader on condition of anonymity.
Most players said, steel companies were clueless regarding a solution to the high import issue as even the government is not taking any further steps to combat the inflow after the imposition of the 20 per cent provisional safeguard duty in September. Companies have also started to lower their capacity utilisation levels, said traders.
“Steel companies have taken their capacity utilisation levels to about 65-70 per cent so as to cover atleast their fixed costs,” said Mehta. “Shutting down a blast furnace is not easy and also comes at a cost, so it makes more sense to keep low utilisations instead,” he added.
Traders were of the view that non-action from the government for a longer period could make the large steel players the non-performing assets (NPA) in the next two years.
“This government seems confused about what they need to do. They initially come ahead to take steps but do not act on it completely,” said Mumbai-based trader A. Shah.
Most traders said that the government should place all imported steel products under provisional safeguard duty which would give the government a time-frame of six months to investigate the damage to the industry and in the meantime this would also protect the local steel players, in turn giving them some breathing space. (see chart for duties levied so far)
Banning of imported steel, however, should be ruled out completely as it will close window for price discovery in the domestic market, they said.
Brokerages have already voiced their weak earnings expectation for the October-December quarter. “We expect a repeat of lacklustre earnings from our metals universe led by realisations decline of 3-5 percent sequentially for ferrous producers on account of continued drop in global prices,” said Centrum Brokerage in its report. “Relentless Chinese import pressure and a 10-18 percent quarter-on-quarter global steel price fall will keep realisations muted yet again and hit Ebitda. This will be mitigated only partly by falling raw material costs and steady volumes,” it said.
Sponge and pig iron segment remain insulated
Cheap imports of the commodity, however, have not hurt all sections of domestic steel industry. Sponge and pig iron segments of the local market have remained insulated from the Chinese imports.
“There is no Chinese pig iron coming into the market. So pig iron industry is certainly spared of this continuous inflow,” said a senior official with Tata Metaliks without divulging more details regarding whether any indirect impact of the imports is likely on the segment.
Depreciating Russian currency has allowed even the Russian steel to come to India, making it more difficult for debt laden domestic primary steel producers who are battling with high logistics and interest costs, they said.
Currently, domestically produced hot-rolled coils are being priced at Rs 24,000 per tonne.
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“Out of this, logistics cost comes to about Rs 3,500 per tonne, while Rs 4,500-5,000 per tonne goes towards payment of interest. While steel companies are left with about Rs 16,000 per tonne in hand, their cost of production is about Rs 19,000-20,000 per tonne. So clearly, there is a minimum cash loss of Rs 3,000-4,000 per tonne for these companies. If interest outgo is higher then loss could be wider on a per tonne basis,” Mumbai-based trader Danesh Mehta, who is also a member of Bombay Iron Merchants' Association told Business Standard.
Price of imported hot-rolled coils on the other hand stands at about Rs 21,000 per tonne at present.
Sajjan Jindal-led JSW Steel, Tata Steel, state-owned Steel Authority of India, Jindal Steel & Power and Essar Steel are among the large steel producing companies in the country. Most companies are unable to comment due to the silent period ahead of third quarter earnings.
“Dumping of steel into the country has pushed steel industry to dead-end. Not only has it driven domestic steel prices to un-remunerative levels, this has also forced the industry to its lower capacity utilisation,” Shivramkrishnan, chief commercial officer of unlisted Essar Steel said. “The sharp drop in steel exports due to protection measures by various countries coupled with rising steel imports at cheap and unfair price levels into India has created a glut in the market which is not in the long term interest of the nation in general, and the steel industry in particular since the industry has made investment of over Rs 4.5 lakh crore in creating capacities of 100 million tonne. The government should immediately take appropriate measures in this regard,” he added.
Last month, domestic steel prices had jumped by Rs 2,000 per tonne after companies stopped selling in anticipation of the government's order to impose minimum import price (MIP).
“Since the government has not acted on the MIP issue, steel prices have corrected by about Rs 2,000 per tonne in the last 10 days,” said another Mumbai-based trader on condition of anonymity.
Most players said, steel companies were clueless regarding a solution to the high import issue as even the government is not taking any further steps to combat the inflow after the imposition of the 20 per cent provisional safeguard duty in September. Companies have also started to lower their capacity utilisation levels, said traders.
“Steel companies have taken their capacity utilisation levels to about 65-70 per cent so as to cover atleast their fixed costs,” said Mehta. “Shutting down a blast furnace is not easy and also comes at a cost, so it makes more sense to keep low utilisations instead,” he added.
Traders were of the view that non-action from the government for a longer period could make the large steel players the non-performing assets (NPA) in the next two years.
“This government seems confused about what they need to do. They initially come ahead to take steps but do not act on it completely,” said Mumbai-based trader A. Shah.
Most traders said that the government should place all imported steel products under provisional safeguard duty which would give the government a time-frame of six months to investigate the damage to the industry and in the meantime this would also protect the local steel players, in turn giving them some breathing space. (see chart for duties levied so far)
Banning of imported steel, however, should be ruled out completely as it will close window for price discovery in the domestic market, they said.
Brokerages have already voiced their weak earnings expectation for the October-December quarter. “We expect a repeat of lacklustre earnings from our metals universe led by realisations decline of 3-5 percent sequentially for ferrous producers on account of continued drop in global prices,” said Centrum Brokerage in its report. “Relentless Chinese import pressure and a 10-18 percent quarter-on-quarter global steel price fall will keep realisations muted yet again and hit Ebitda. This will be mitigated only partly by falling raw material costs and steady volumes,” it said.
Sponge and pig iron segment remain insulated
Cheap imports of the commodity, however, have not hurt all sections of domestic steel industry. Sponge and pig iron segments of the local market have remained insulated from the Chinese imports.
“There is no Chinese pig iron coming into the market. So pig iron industry is certainly spared of this continuous inflow,” said a senior official with Tata Metaliks without divulging more details regarding whether any indirect impact of the imports is likely on the segment.