Primary domestic steel producers to see better profitability in near term: ICRA

ICRA expects primary domestic steel producers to enjoy better profitability in the near term mainly because of improved steel prices in the current year along with support of Minimum Import Price (MIP) imposed by the government since February.

In a report released today, the ratings agency said, post the operationalisation of MIP, domestic hot-rolled coil (HRC) prices have witnessed a sharp increase of about 25% from their lows reached in February 2016. Moreover, there could be additional gains due to increase in sales volumes, as imports are likely to reduce in the current year.

Although MIP is scheduled to expire in August, buoyant international prices at present, along with extension of safeguard duty (SGD) up to March 2018 will continue to lend support to steel producers.

 

"While the prospect of international prices declining again cannot be ruled out, given the still adverse demand-supply equation in the world, the final outcome of anti-dumping investigations initiated by the 'Directorate General of Anti-Dumping & Allied Duties' would be a key determinant of longer term price trends in the domestic market," the release quoted Jayanta Roy, senior vice-president and co-head, corporate sector ratings, as saying.

Although India's steel consumption growth improved to 4.6% during FY16 from 3.1% in FY15, driven by automobile and road construction sectors, a sustained recovery in other steel intensive sectors like capital goods and infrastructure is still not in sight, said ICRA.

Domestic finished steel production, on the other hand, de-grew by 1.9% during FY16, as a substantial chunk of the incremental domestic demand was captured by the burgeoning steel imports. Despite a slowdown post September 2015, India's steel imports still managed to register over 25% annual growth in FY16. Moreover, due to weak international steel prices, domestic manufacturers were reluctant to push exports, which consequently contracted by over 27% during FY16.

On the raw materials front, India's iron ore production in FY16 reached 155 million tonne (mt), registering an annual growth rate of 23%. As per a recent ICRA report on the steel industry, a bulk of the incremental production has come from Odisha, where a number of mines resumed production.

ICRA estimates India's iron ore production in the current year to be in the range of 170-175 mt.

"Given the substantial iron ore inventory levels at mine-heads, and the fact that India's iron ore production is slated to increase further in the current year, domestic iron ore prices are unlikely to recover meaningfully in the near term, thereby benefiting steel mills," Roy was quoted as saying.

Based on prevailing prices, ICRA estimates operating margins of the domestic steel industry (collection of seven large steel players, accounting for over 40% of the current domestic capacity) to improve by around 6 percentage points as compared to the estimated levels prevailing in February 2016. The extent of improvement in coverage indicators of the industry, which witnessed a severe weakening in recent years with interest coverage ratio falling to 0.5 time in Q3FY16 from 2.4 time in Q3FY15, would however be limited. This is because overall debt levels of domestic steel companies are unlikely to reduce significantly in the near term. Consequently, the financial health of domestic steel players is likely to remain a concern in the near term.