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Data compiled by Bank of America Merrill Lynch showed that total steel production in India was reported at 66.4 million tonnes as against its apparent demand of 69.1 million tonnes in FY13. Despite lower iron ore availability due to closure of mines, steel output was higher from the level of 65.3 million tonnes against its apparent demand of 66 million tonnes in 2012.
The deficit, however, was bridged by imports. Consequently, steel import in India surged by 14.2% to 6.2 million tonnes in FY13 from the previous year’s level of 5.4 million tonnes. Exports of steel also moved up in tandem by 10.3% to 4.6 million tonnes from 4.2 million tonnes .
Domestic demand growth remained subdued at 3% y-o-y in March (4.6% y-o-y for FY13) as per provisional data released by Joint Plant Committee (JPC). Domestic steel price hikes have been muted in March Q even though a) demand is seasonally strong in March Q, and b) domestic prices are at a discount to import parity. We expect margins of domestic steel cos. to improve q-o-q in March quarter (though weaker than our earlier expectation) due to marginally better ASP, lower coking coal costs & op. leverage (seasonally stronger volume in the fourth quarter).
“We expect domestic steel prices and margins to be under pressure post March quarter as demand seasonally slows post fourth quarter. Also, discount to import parity has narrowed after the recent correction in global prices. We remain cautious on the domestic steel sector and maintain our underperform ratings on SAIL, Tata, JSW and JSPL,” said Bhaskar Basu, Research Analyst with DSP Merrill Lynch (India).
Demand trends have remained surprisingly weak in March quarter as auto-related demand (22% of flats steel demand) has been sluggish, demand from existing projects is tapering off and there is limited demand from new projects. A meaningful recovery in demand appears unlikely near term as lead indicators are stagnant, recovery in investment cycle is likely to be delayed and destocking across end user segments (including autos) should continue. Also, construction and infra activity slows ahead of monsoon which should affect longs demand.
