Steel makers will probably be happy to bid adieu to financial year 2011-12, as it has been one of the toughest for them. For starters, operating profit per tonne has touched a nine-year low for the industry, as iron ore and coking coal prices have stayed high for most of the year. However, fourth quarter has seen an uptick in steel demand, with prices edging higher and input costs coming down. Not surprising that the shares of steel companies are up 18-44 per cent year-to-date(YTD).
But if analysts are to be believed, these high prices of steel products are unlikely to sustain. Though the index of industrial production seems to be showing signs of revival, the recovery is not good enough to sustain high prices. Steel demand has grown at an estimated 5.2 per cent in FY12, compared to 9.9 per cent for FY11. However, recent industry data implies just a 2.6 per cent year-on-year increase in steel demand for February 2012. Domestic hot rolled coil (HRC) prices are broadly in line with imported prices but prices of long products are, however, stronger (up 10 per cent YTD), mainly on supply and cost issues.
While lower supplies and higher demand would have meant a rather profitable year ahead for steel makers, analysts believe this is not likely, as supply is slated to increase. Demand, too, is not expected to pick up anytime soon. Supply is set to rise, as companies expand capacities and improve utilisation.
Despite capacity addition, analysts believe most steel makers have learnt from the past and though production is up, utilisation levels will be lower. In recent times, several steel makers have entered into alliances with Japanese companies for high-grade steel products. This bodes well from a long-term perspective.
For instance, Tata Steel plans to expand in high-grade automobile steel sheet, and for this it has a joint venture with Nippon Steel to produce 0.6 mt annually. The plant is expected to start operations in 2013. While the high-cost European operations are an issue, the company plans to tie up supplies of iron ore and coking coal from its mines in Canada and Mozambique. Analysts like the domestic business as the product mix is good. For players like SAIL, analysts expect volume growth to be muted and wage increases could dent profits in FY13. Bank of America Merrill Lynch says markets are probably pricing in the mining ban resolution for JSW, but this could take longer. Jindal Steel & Power appears better positioned due to higher longs mix. However, earnings growth is expected to be muted and valuations have little upside.
