A confluence of weak demand, aggressive pricing discounts and regulatory challenges are likely to result in a tough second quarter of current fiscal (Q2FY13) for Indian steel companies.
“For non-ferrous companies, domestic realisations were largely flat and should result in a marginal uptick in operating profitability. Volume trends continue to remain strong for Coal India but we expect blended realisations to correct 3.7% quarter on quarter on the back of lower e-auction volumes,” Barclyas Equity Research said in its latest report on metals and mining.
Steel companies have offered aggressive discounts during the quarter to clear large inventories and counter a rebound in imports. “Although there have been no formal price corrections, we estimate average realisations to have corrected by $35 per tonne for longs and $20 per tonne for flats. This would offset the benefit of lower raw material costs for most steel companies. That said, we expect some benefit of lower coking coal prices to result in a sequential improvement in operating metrics for JSW Steel (standalone) and SAIL,” Barclays said.
For Tata Steel Europe, it expects a negative EBITDA/t of $9/t as compared to $34/t in Q1FY13, led by a decline in European steel prices. Pension liabilities disclosure at Tata Steel is a key issue to watch for. In SAIL, IISCO expansion status and wage settlement timeline are key issues, it said.
“We expect Sesa Goa’s iron ore volumes to decline 90% QoQ to just 0.3 mt on the back of the ongoing mining ban in Karnataka, and logistics issues and mining suspension in Goa (from Sept 2012). We estimate that this, coupled with a 17% QoQ correction in iron ore prices, will result in Sesa Goa reporting a Q2FY13 net loss of Rs 20 crore. NMDC’s realisations would reflect the trend in seaborne prices with a lag of one quarter.
It also expects Coal India to report an 8.2% y/y increase in dispatch volumes to 101.5 mt. “We estimate a 3.7% q/q decline in blended realizations as we build in lower e-auction volumes (10.5% vs. 12% in Q1FY13) and lower e-auction realisations (Rs2,350/t vs. Rs2,562/t in Q1FY13),” Barclays said.
