 "Steel producers not out of the woods yet")
Steel producers should ideally be in the pink of health, if prices are being hiked and production is growing in double digits. Data from the Joint Plant Committee (industry body) shows production jumped 12 per cent year-on-year (y-o-y) for August to 7.2 million tonnes, against a flat growth of 6.4 million tonnes in July. This cheer is visible in the stock prices, too. While the Sensex has risen by 2.41 per cent since August, the BS Steel Index has jumped 23.30 per cent in the same period. What explains such optimism?
The most credible theory is that production has increased because players have expanded capacities. Tata Steel's capacity has increased from 6.8 million tonnes to 9.7 million tonnes and prices of flat products have been raised by Rs 1,200-1,500 a tonne. Though steel production has risen, real consumption has grown by an abysmal 0.8 per cent annually to 6.2 million tonnes in August. Analysts say year-to-date production is up 4.9 per cent y-o-y to 33.3 million tonnes, while the 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 production in the coming months, as demand is unlikely to pick up.
In the face of steadily weakening demand, players have already started offering discounts to dealers and distributors, channel checks suggest. Emkay Global does not expect the benefits of a price hike to be more than one or two per cent, though the rupee has depreciated by 15 per cent, as demand remains very weak.
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 in India, global production 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 79.2 per cent when production was at 131.7 million tonnes. Emkay Global says despite the increase in production in July, capacity utilisation dropped to 76.8 per cent from 79.2 per cent 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.
The most credible theory is that production has increased because players have expanded capacities. Tata Steel's capacity has increased from 6.8 million tonnes to 9.7 million tonnes and prices of flat products have been raised by Rs 1,200-1,500 a tonne. Though steel production has risen, real consumption has grown by an abysmal 0.8 per cent annually to 6.2 million tonnes in August. Analysts say year-to-date production is up 4.9 per cent y-o-y to 33.3 million tonnes, while the 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 production in the coming months, as demand is unlikely to pick up.
In the face of steadily weakening demand, players have already started offering discounts to dealers and distributors, channel checks suggest. Emkay Global does not expect the benefits of a price hike to be more than one or two per cent, though the rupee has depreciated by 15 per cent, as demand remains very weak.
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A section of the market believes that after the rupee's fall, steel exports would become attractive, which is driving the optimism. Export data suggests there might be some truth in this as net exports of steel have risen 50 per cent month-on-month to 0.45 million tonnes. IDFC maintains India will turn a net exporter (4.6 million tonnes) by end-FY14, which would pressure the 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 in India, global production 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 79.2 per cent when production was at 131.7 million tonnes. Emkay Global says despite the increase in production in July, capacity utilisation dropped to 76.8 per cent from 79.2 per cent 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.