The domestic steel players producing steel through the blast furnace route stand to benefit from the continuing weakness in the international coking coal prices, but iron ore continues to play spoilsport for the Indian steel industry, rating agency ICRA has said.
"We expect the domestic players producing steel through the blast furnace route to benefit from the continuing weakness in international coking coal prices, a trend which has already been observed in the financial results posted by a number of companies in the first quarter of 2014-15," it said.
Coking coal prices have declined by around 16 percent in the first quarter of 2014-15 (Q1FY15) over the previous quarter, and the same contract prices have been rolled over in Q2FY15. This followed a 13 percent decline in coking coal prices over the whole of FY'14.
"With the exchange rate remaining largely stable in FY'15 till date, the price decline has provided a relief to the blast furnace operators in the country, which import coking coal for producing steel," ICRA Senior Vice-President and Co-Head (Corporate Sector Ratings) Jayanta Roy said.
Domestic iron ore production, however, continues to suffer in spite of the lifting of bans from mines in Karnataka and Goa. The continuing short supply situation in the country has been further aggravated by the recent closure of iron ore mines in Odisha, although temporarily.
While some of the mines, which were initially under the purview of this ban, have been allowed to commence operation subsequently, production is yet to resume at the other merchant mines, which had accounted for around 15-20 million tonnes of iron ore production in FY14 in the state.
ICRA expects the domestic iron ore to remain in short supply for the steel makers without captive sources of ore at least in the near term, which may affect their capacity utilisations.
Even though the international prices have seen a sharp decline in recent months driven by a weakening of demand from China, and prospects of higher supply following capacity expansions by large global mining companies, the domestic iron ore prices remained at an elevated level due to the shortage.
"An upward revision of royalty rates on minerals, as announced by the government, and higher railway freight rates would further impact the cost structure of steel players", Roy said.
On the demand front, ICRA expects the domestic steel demand to recover gradually from H2FY15 on the back of a somewhat better performance of the Indian economy.
Domestic steel consumption growth declined in the fourth consecutive year to 0.6 per cent in FY'14 from 3.3 per cent in FY'13 and has remained at nominal level during the current year as well.
However, ICRA believes that the apparent bottoming out of the growth rates of some of the demand drivers, including automobiles, and the new government's focus on infrastructure and construction sectors as highlighted in the budget point to a likely pickup in steel demand going forward. However, significant project off-takes remain uncertain in the immediate term.
Stable international prices and exchange rates in the current year and weak domestic demand conditions forced Indian steel players to partially roll back price hikes announced in Q4FY14. However, rising costs have made a number of players to announce price hikes again in coming months.
ICRA said that near-term margin outlook for the steel industry would depend on the sustainability of such hikes. However, for a sustained recovery of RoCE levels, domestic demand conditions have to improve meaningfully, it said.
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