Local steel firms face heat

It is going to be tough times ahead for the country's leading steelmakers Tata Steel and SAIL with analysts expecting a continuing slump in steel prices to eat into their earnings as well as their share prices.

Steel prices are likely to continue to cool down over the next one year owing to decline in consumption and high inventory levels in the industry, analysts believe.

An unabated growth in global supply with rising production in China, lessening supply disruptions in other regions and dropping raw material prices are also likely to put downward pressure on steel prices, they said.

In a research note to its institutional clients, equity research firm, Brics Securities said the domestic players' earnings are likely to remain dependent on steel prices in the medium term, with little prospects left for earnings improvement from factors like product mix or cost reduction.

The two leading domestic steel makers Tata Steel and SAIL are unlikely to witness any major volume growth in the near future, the note said.Tata Steel is already one of the lowest cost steel makers and further gains from efficiency are not expected, it added.

The company has also embarked upon a major capacity expansion plan, which might lead to further dilution in the near-term return for the shareholders, analysts said.

On the other hand, SAIL, despite its cost advantage from captive resources, is not among the country's most competitive steel producers due to its "outdated technology, huge workforce and high proportion of commodity grade products."

The company has announced capacity expansion and modernisation plans to meet these issues, but benefits from these initiatives are still away.

SAIL's high cost base makes its earnings particularly sensitive to steel prices and the company's earnings could be hit hard as prices soften over the next 12 months.