Steel firms to improve profits on softening input costs: Icra

Domestic steel manufacturers may see improved profitability despite lower volumes because of the softening trend in the cost of key raw materials, credit rating agency Icra said today.
"The steel industry being highly raw material intensive, Icra expects the near-term benefits from lower raw material costs to more than neutralise the adverse impact of a low volume growth, even if a part of the benefits of lower costs are passed on to customers to protect sales volumes," it said.
Despite falling supplies, domestic iron ore prices have declined over the last one year even as prices were raised by NNMDC in October and December 2013 by a cumulative Rs 300 per tonne.

Steel makers, on the other hand, had raised prices in successive two months by about Rs 2,500 a tonne to cash in on growing demand and pass the inflated cost of raw material to consumers.
Icra said though the price of international coking coal contract prices declined by over 8 per cent during the first months of the current fiscal, depreciation of rupee against US dollar largely offset the benefit.
However, a further 6 per cent decline in contract prices for Q4 FY'14 is likely to have a positive bearing on their margins.

"Over a longer term, volume growth however would be critical, given that substantial fresh capacities are likely to be commissioned in next two years. Unless demand conditions improve significantly, overall capacity utilisation levels and profitability of steel players would remain impacted," said Jayanta Roy, Senior Vice-President and Co-Head, Corporate Sector Ratings, Icra.

Persistent weakness in demand from end-user industries kept the domestic steel consumption growth at a meagre 0.5 per cent during the April-December period of last year.
Icra expects domestic steel demand to grow at a slower pace in FY'14 than the 3.3 per cent growth rate achieved in FY'13, notwithstanding a typical pick-up in demand in the last quarter.