Federal Bank Q1 shows steel loans a ticking bomb for banks

With the Chinese economy slowing, commodity prices are expected to decline, and analysts see steel prices falling sharply.

Indian banks have a total loan exposure of Rs 2.77 lakh crore to the steel sector. Of this, eight projects account for 54 percent of the loan book, and all eight projects are grappling with cost overruns.

Among the major state-owned banks, loans to iron and steel companies account for 7-11 percent of total loans for SBI, Punjab National Bank, Canara Bank, Indian Overseas Bank and Bank of Baroda.

Steel analysts say with the exception of Steel Authority of India, Tata Steel and JSW Steel, other steel companies are struggling to pay even the interests on the loans.

According to a report by broking firm Credit Suisse, Chinese steel prices have plunged USD 80/tonne since April, and much of it over the last month alone. “But domestic prices are still around USD 40/tonne higher than import parity prices; such a sharp divergence has rarely sustained,” said the Credit Suisse note, adding that there is always a lag in the transmission of steel prices.

The broking firm expects a steep fall in the earnings before interest, taxes, depreciation and amortization (EBITDA or operating profit) of major steel companies for every tonne of steel produced this year.

Credit Suisse expects Steel Authority of India’s EBITDA per tonne to fall to USD 23 from USD 58 last year, JSW Steel’s to USD 94 from USD 109, and Tata Steel’s to USD 135 from USD 180.

The Banking Secretary has suggested that the steel ministry should push for higher duties on imported steel.

Broking firm JP Morgan feels hiking duties alone may not be enough to save the steel sector.

“ It (hiking steel import duty) does not make imports from China unviable, just slightly more expensive,” said the JP Morgan note earlier this month.

“In our view, if the government would have to: a) increase import tariffs further; b) introduce quality certification norms which would make trade imports more difficult; and c) address the FTA issues with Japan and Korea from where steel imports have also increased sharply,” the note said.