 "Iron ore, coal shortages hurt profitability of steel makers")
The steel industry is headed for a prolonged slowdown, if global and domestic indicators are anything to go by. Though steel consumption in the first two months of the calendar is above expectations, this uptick is unlikely to sustain, as the macro-economic indicators are not supportive. While a slowdown in automobile and construction has impacted overall demand, rising costs of raw materials has squeezed profitability.
The mining ban across states and Coal India's flat coal production over the last three years has pushed up raw material costs for steel producers. From being an iron ore exporting country, India is expected to become a net iron ore importer. Analysts believe lower utilisation, weak cash-flows and lower profitability will impact return ratios of most steel producers. Players like Jindal Steel and Power, which have a backward integration strategy in place, would weather this storm better.
The demand for steel is expected to be up sequentially in Q4, as it has stayed firm in January and February. Though cement consumption continues to be weak, steel consumption stood at 6.8 mt in February. On the back of some strength in demand, JP Morgan says, companies have been able to push through modest price increases over the past couple of months, particularly in long steel. However, not much should be read into this as analysts believe there was a sharp pullback in demand in December and, therefore, the pent up demand has pushed up steel consumption in January and February. With auto sales continuing to show weakness, the only thing that could prop up steel sales is government spending in a pre-election year.
Globally, too, the situation remains grim for the sector. With China's economy slowing, demand for steel is expected to come under pressure. The macro-economic data emanating from Europe is not promising either. IDFC Securities sees a downward risk to steel prices globally.
The mining ban across states and Coal India's flat coal production over the last three years has pushed up raw material costs for steel producers. From being an iron ore exporting country, India is expected to become a net iron ore importer. Analysts believe lower utilisation, weak cash-flows and lower profitability will impact return ratios of most steel producers. Players like Jindal Steel and Power, which have a backward integration strategy in place, would weather this storm better.
The demand for steel is expected to be up sequentially in Q4, as it has stayed firm in January and February. Though cement consumption continues to be weak, steel consumption stood at 6.8 mt in February. On the back of some strength in demand, JP Morgan says, companies have been able to push through modest price increases over the past couple of months, particularly in long steel. However, not much should be read into this as analysts believe there was a sharp pullback in demand in December and, therefore, the pent up demand has pushed up steel consumption in January and February. With auto sales continuing to show weakness, the only thing that could prop up steel sales is government spending in a pre-election year.
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Even if demand picks up on government spending, it will not be anywhere near the kind of demand growth seen between FY02 and FY12. During these 10 years, steel consumption grew at 10.8 per cent. IDFC Securities expects steel consumption to grow at 6.2 per cent over FY12-15, as macro-economic indicators are not supportive of a higher demand trajectory. In contrast, total capacity addition is slated to rise eight per cent over FY12-15. Consequently, domestic capacity utilisation levels will remain under pressure through FY14, especially in the flat product segment as there is maximum oversupply there.
Globally, too, the situation remains grim for the sector. With China's economy slowing, demand for steel is expected to come under pressure. The macro-economic data emanating from Europe is not promising either. IDFC Securities sees a downward risk to steel prices globally.