 "Health of domestic steel industry critically depends on government's decision on MIP: ICRA")
Amid the challenging scenarios the domestic steel industry is currently facing, health of the industry in the second half of FY17 would critically depend upon government's decision on minimum import price (MIP) extension beyond August. This, apart from the final outcome of the recent anti-dumping investigations initiated by the Directorate General of Anti-Dumping and Allied Duties.
Ratings agency ICRA in its report released today said that the Indian steel industry has been severely impacted by a global overcapacity, fall in international prices and surge of imports.
In FY16, steel imports increased more than 25 percent to 11.7 million tonne, over-and-above the 71 percent increase in FY15. To curb cheap imports, the government in September imposed a 20 percent provisional safeguard duty (SGD) on several hot-rolled coil (HRC) products. Nevertheless, international prices continued to fall, neutralising the impact of the duty.
As cheap imports continued to flood the domestic market, especially from countries like China, Japan and Korea, in February this year, the government imposed MIP on 173 grades of steel. However, this measure has failed to have a material impact on steel imports till April, due to a lead time of about one-and-half to two months for the shipment to arrive in India. Full effect of the MIP did set in from May, and as per initial trends, steel imports in April-May FY17 have declined by close to 30 percent on year-on-year basis.
ICRA is of the opinion that the domestic steel price increase of around 25 percent till the middle of June 2016 would have led to better profitability of steel companies in the first quarter (Q1) of FY2017 despite iron ore and coking coal price increases of about 11 percent and nine percent respectively during this period. However, this is unlikely to significantly boost their liquidity and coverage indicators, given the continuing high debt levels of domestic steel companies. To recapitulate, the interest coverage ratio of the industry slipped to 1.06 times during Q4 FY2016, from 1.56 times during Q4FY15 and 2.36 times during Q3FY15.
Given the uncertainty surrounding the government's decision on extending the MIP beyond August 2016, domestic steel prices have been on a decline since mid-June 2016, correcting by 8 percent in the last one month, said the report.
Weak domestic steel demand growth of just 2.8 percent in April-May of FY2017 has also been a dampener because domestic industry capacity utilisation remained sub-optimal, at 78 percent last year and large capacity ramp ups are lined up now, including JSW Steel's 3.7 mtpa brownfield capacity and Tata Steel's 3 mtpa greenfield capacity.
