Signs of recovery in steel industry after two years
NEW DELHI, JUNE 6: The domestic steel sector, which has been plagued by low prices, high-level of imports and muted demand growth is showing signs of an early recovery, according to rating agencies and industry analysts.
The signs of a slow revival in the sector’s fortunes come as the Ministry of Steel prepares to submit a draft report on measures to relieve the financial stresses on the industry to the Prime Minister’s Office.
According to Fitch Ratings, even though challenges remain, the steel sector’s fundamentals have started to improve.
“Indian steel demand rose 4.5 per cent in the financial year 2015-16, a slightly better growth rate than in the previous year. Demand was driven by higher public-sector spending, demonstrated by a 65 per cent year-on-year jump in railway-sector capital expenditure,” Fitch Ratings said in a recent note.
Imports come down
While the ratings agency noted that imports catered to large portion of the demand increase, it also highlighted that the level of imports have started to come down from February 2016 when the minimum import price on over 170 steel products was levied.
“A simultaneous rebound in global steel prices encouraged Indian producers to raise prices, resulting in rebounding margins in the fourth quarter of fiscal 2015-16,” the note added.
Another ratings agency ICRA also expects profitability of steel companies to improve in the near term due to an improvement in steel price.
The agency in a recent report said already price of flat steel products have increased by about 25 per cent from the lows of February this year since the imposition of the minimum import price.
ICRA also does not expect iron ore prices to recover in the near term, while it predicts domestic production to keep increasing, which would be a positive for the steel industry. Already in 2015-16, domestic iron production of iron ore grew 23 per cent to 155 million tonnes.
Demand momentum continues
The momentum in domestic demand has continued in April 2016 with steel consumption in the country growing 5.2 per cent as compared to the same month last year to 5.7 million tonne. Imports had a sharp fall of 15.5 per cent to 6.54 lakh tonnes, according to data from the Steel Ministry.
The developments have been welcomed by the steel industry, which has seen two years of sliding net sales, dropping profits and, in some cases, rising net losses and an erosion of net worth.
After the company’s fourth quarter results, Steel Authority of India Ltd’s Chairman PK Singh said the challenging conditions faced by the industry have seen some respite due to the government’s efforts. The company now plans to complete its modernisation and expansion projects to improve profitability.
SAIL’s balance sheet has been the worst affected amongst the three major listed steelmakers. The company’s net worth eroded by ₹3,385 crore since March 31, 2014, while its total borrowings grew by ₹7,244.33 crore.
Total borrowings at Tata Steel’s Indian operations, JSW Steel and SAIL grew by over ₹15,000 crore between March 31, 2014, and March 31, 2016.
While the signs of recovery are encouraging, Fitch Ratings also indicated that there still remain several headwinds. “The share of stalled projects has risen steadily since June 2015 to 12.3 per cent by the end of first quarter of calendar year 2016. This was due mainly to the private sector where more than 20 per cent of investments are stagnant,” the rating agency said.
“The Nikkei Manufacturing Purchasing Managers’ Index for April stood at 50.5, implying almost half of the respondents did not see the business environment improve relative to the previous month,” it added.
But the biggest worry amongst both rating agencies and analysts is that the government will reconsider minimum import price on steel products in August this year.
“Steel prices have started falling in China from the April 2016 highs. If the minimum import price is lifted, it will hamper the small recovery that the domestic steel industry has seen so far,” an analyst at a Mumbai-based brokerage firm said.