Domestic steel demand in October-November shrinks 1.8% YoY: ICRA

Domestic prices seen sensitive to global rates in absence of meaningful demand pick-up in seasonally strong Q4

Domestic steel prices fell 1.8 per cent year-on-year (YoY) in the first two months of the third quarter (October-December or Q3) of the current financial year (2019-20 or FY20), according to an ICRA report released on Tuesday.

Growth in steel demand has closely followed the gross domestic product (GDP) growth trend, decelerating through FY20. In Q2FY20, it fell to 3.1 per cent from 6.9 per cent in Q1FY20.

ICRA’s channel checks suggest that off-takes from mills have been lacklustre in the first week of December as well. Expected traction from government projects has not been as strong either.

Despite tepid demand, however, steel mills have announced moderate price hikes in November and December, taking a cue from international steel prices that went up in early November.

According to ICRA, domestic steel prices will be sensitive to international prices, even if there is no pick-up in domestic demand for the metal in the seasonally strong fourth quarter.

“Given continuing macroeconomic headwinds, we believe domestic steel consumption growth is likely to be less than 5 per cent in the current financial year, compared to the 5-6 per cent range that we had guided in August 2019. Operating environment for alloy steel makers has been especially challenging, given the auto sector slowdown and contraction in engineering exports,” the report quoted Jayanta Roy, senior vice-president and group head, corporate sector ratings, ICRA.

He added, “For carbon steel makers, too, the expected pick-up in construction demand after monsoon has not really played out thus far.”

As for exports, between April–November, India remained a marginal net steel exporter. During this period, steel exports grew 33.3 per cent YoY and imports contracted 5.3 per cent.

Given weak domestic demand in Q2FY20, export was a million tonnes per month on an average. The same rate was maintained in October and November.

Domestic hot rolled coil prices have been trading at a discount of about 3 per cent compared to the landed cost of export offers from free trade agreement (FTA) countries in the first week of December.

As a consequence, to maintain healthy capacity utilisation rates, flat steel producers have been increasingly tapping global markets to beat domestic slowdown, especially when domestic steel prices are largely aligned with international steel prices.

Given this trend, steel exports by Indian mills are expected to register a growth of about 30 per cent YoY for FY20.

“Chinese hot-rolled coil offers have increased by around $30 per metric tonne since the beginning of November. This has given domestic flat steel producers headroom to increase hot-rolled coil prices by ~1,500 per tonne. However, we have not seen similar price increases in the long steel segment, so far,” said Roy in the report.

Following continued correction in steel prices and relatively firm raw material costs, the operating margins of the steel industry dropped to 15.4 per cent in Q2FY20 from 18.2 per cent in Q1FY20 and 22.1 per cent in Q2FY19.

A dip in profit margins also led to the industry’s interest coverage ratio declining to 2.2 times in Q2FY20 from three times in Q1FY20 and from 3.4 times in Q2FY19.

According to ICRA’s estimates, the industry’s operating margin is expected to remain at around 16.3 per cent in FY20, 430 basis points lower than in FY19. The industry’s interest coverage is expected to remain at close to 2.6 times in FY20 as against 3.1 times in FY19, indicating a sequential weakness in the industry’s credit profile in FY20 over FY19.