As demand slows and supplies increase, the steel industry may see some price correction
The steel industry is slated to face some hiccups, as spot steel prices seem to be tiring for now. Indian steel makers are caught between sliding demand and rising input costs. Despite these, Indian steel mills are not able to pass on price increases, as domestic demand remains weak and supplies increase. Rising interest rates have already started impacting the construction industry, which will further affect demand. According to JP Morgan, list prices of hot-rolled coil (HRC) are still being increased by mills (Baosteel increased prices by $45/million tonnes (mt) last week), but spot steel prices seem to be tiring out. Long prices have declined in some regions (as scrap prices have fallen) and spot HRC has plateaued. Given that CIS export HRC prices ($730/mt, which are relevant for Indian domestic prices) are at a discount to Chinese export HRC prices ($770/mt), some increases for March volumes are likely, though $100/mt is highly unlikely.
As traded spot iron ore is closer to the $200/mt levels, further increases look difficult (port inventories in China hit 83 mt, the highest level). Analysts expect Indian steel producers clock 10-14 per cent increase in revenues during the fourth quarter, but Ebitda will come under pressure. This quarter, the profit after tax of steel producers grew 14 per cent, says Ajay Parmar, head of institutional research, Emkay Global. Despite slower demand and an increase in supply, this year isn’t expected to be as bad as last year for steel producers and steel stocks, if analysts are to be believed. While this year does not seem as bad as the previous year, Indian steel producers are expected to witness lower domestic demand in calendar 2011. What this essentially means is that high-cost producers will have to either lower utilisation rates or increase exports.