Quick take|Indian steel — on shaky ground

Jitendra Kumar Gupta Moneycontrol Research 

Since mid-September this year, the share prices of India’s three largest steel producers — Tata Steel, JSW Steel and SAIL —  have on an average corrected about 23 percent, as investors worry about the prospects for demand growth and pricing pressure. Some of these negative trends could be visible in the coming quarters. According to World Steel Organisation data, India’s steel production fell by 1.3 percent on a year on year basis to 8.49 million tonne as against global steel production growth of 5.8 percent to 148.6 million tonne.

Unfortunately for Indian steel producers, Chinese production, which accounts for half world steel production, continues to grow at a rapid clip delivering 10.8 percent in growth in November and 9.1 percent growth in October. Global steel capacity utilisation, which was at 69.6 percent in December 2017, increased to 77.5 percent in July this year and is expected to have remained high with rising global production.

The effect of increased supply is seen in steel prices. Domestic hot rolled coil (HRC) steel prices have fallen from Rs 47,550 a tonne in October to around Rs 44,000 currently. Similarly, Chinese prices have fallen from $560 a tonne in October to $490 a tonne in December.

International prices have plunged, putting pressure on domestic prices. During October, India’s steel imports saw an increase of 17.3 percent as against a 23.4 percent decline in exports. These trends will continue as long as the premium of domestic steel prices over international prices remains high. "We expect further correction as domestic prices (ex-mill) are still 9-10 percent premium to FTA (countries with free trade agreements) import parity; and 3-4 percent premium to Chinese import parity. Notably, import parity implies 7-8 percent downside risk to our domestic HRC ex-mill estimate in FY20E," said Bhaskar Basu in a note prepared for Jefferies.

What does it mean for the sector?

While there is some respite because of the correction in iron ore prices, the overall pricing pressure and higher coal prices indicate companies could face pressure on earnings. The higher financial leverage of many companies as a result of debt-funded capex for both organic and inorganic growth is likely to make things worse.

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