Steel producers not out of the woods yet

Price hikes likely to yield no more than 1-2% gains as most players have started offering discounts already

Steel producers should be in the pink of health, if they are hiking prices and increasing production of steel even in this market. But reality is slightly different, even though data from the Joint Plant Committee (industry body) shows that production of steel has jumped 12% year-on-year for the month of August to 7.2 million tones against a flat growth of 6.4 million tonnes in July. This cheer is visible in the stock prices too. While the Sensex has moved by 2.41% since August this year, the BS Steel Index has jumped 23.30% in the same period. So what explains such optimism? 

 

There are different theories doing the rounds in the market. The most credible theory is that production has increased because players have expanded capacities. Tata Steel’s capacity has increased from 6.8 million tonne to 9.7 million tonne. Several other players have also added capacities in recent times and some of these have gone on stream now, which is why steel production has jumped in August even as real consumption has grown by an abysmal 0.8% annually to 6.2 million tonnes. Analysts say year-to-date production is up 4.9% YoY to 33.3 million tonnes while real consumption has remained flat at 30.3 million tonnes. This is not surprising as key sectors that consume steel, mainly construction, capital goods and automobile, are seeing growth slowdown. IDFC Institutional Securities expects steel producers to cut back production in coming months as demand is unlikely to pick up. 

 

In the face of steadily weakening demand, the price hikes of Rs 1200-1500 per tonne in the flat products will not sustain, as players have already started offering discounts to dealers and distributors. Channel checks indicate that soon after hiking prices on the rupee’s depreciation, steel producers have started giving discounts. Emkay Global does not expect benefits of price hike to be more than one or two% even though the rupee has depreciated by 15%, as demand remains very weak. 

 

Another theory that is doing the rounds is that with the rupee’s fall, Indian steel exports would become attractive. Export data suggests that there may be some truth in this. Net exports of steel have risen 50% month-on-month to 0.45 million tonnes, led by a significantly weaker rupee. IDFC maintain that India will turn net exporter (4.6 millio tonnes) by end-FY14, which would pressure overall realisations. However, India may not be able to export as globally there is a glut of steel due to huge capacities that have been added. 

 

Like India, steel global steel production too is increasing even as demand remains weak. Global steel production in July increased to 132.3 million tonnes against 131.7 million tonnes in June. Capacity utilisation in June was at 79.2% when production was at 131.7 million tonne. Emkay Global says that despite the increase in production in July, capacity utilization dropped to 76.8% from 79.2% in June, which implies increased capacity even as demand remains bleak. Both global and domestic demand factors will continue to put pressure on steel companies.