Producers are hit by rising input costs, falling demand and cheaper imports.
Demand for steel has hit the slow lane. Poor order inflows dragged demand growth to 3.1 per cent in the second half of FY11 but this improved to eight per cent in the fourth quarter. The sluggish demand is expected to continue in the near-term.
Additionally, cold-rolled (CR) sheets continue to face pressure from cheaper imports, undercutting domestic prices. Imported steel remains cheaper despite the prices of CR products correcting highs of February 2011.
A section of analysts believes that fresh capacity would add to pressure on prices. With the commissioning of 3.2 million tonnes of capacity by JSW Steel and five million tonnes by Essar Steel, the brownfield expansion has started to come through. There are further expansions (2.9 million tonnes of capacity by Tata Steel, two million tonnes by SAIL at Burnpur and three million tonnes by JSPL) lined for completion in FY12. However, the capacity will be in phases and actual full-capacity production will start in FY13. However, given that India is expected to remain a net importer in FY12 and a minor exporter in FY13, there is no threat of a capacity glut. Nomura expects steel demand to grow nine per cent in FY12 and 10 per cent in FY13. While near-term issues remain, the long-term fundamentals remain strong.