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Last Updated : Jan 09, 2019 04:31 PM IST | Source: Moneycontrol.com

Opinion | Is the steel story in danger of blowing up?

Tata Steel’s standalone steel sales in volume terms declined by 10 percent over a year ago and by 6.6 percent sequentially.

Ravi Ananthanarayanan @moneycontrolcom
 
 
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That’s the first question investors may think of after the volume numbers put out by steel major Tata Steel. But it may be the wrong question to ask.

A quarter should not alter the long term outlook for domestic steel demand, which still remains robust. Just this week, Standard Chartered Plc predicted India would become larger than the US economy by 2030. Its demand for steel should sustain over a much longer period, if predictions about its economic progress come true.

That investors seem surprised by the slowdown is a strange, because the signs were already there. In the December quarter, automobile sales had slowed down and even forced companies to cut production days. A firm trend in interest rates and a liquidity crunch affected consumer demand, business sentiment and the real estate sector too. Government capital expenditure too is slowing down. Steel demand should be expected to trend down in such circumstances. Falling global steel prices would have made exports less remunerative too.

Tata Steel’s standalone steel sales (domestic and exports) in volume terms declined by 10 percent over a year ago and by 6.6 percent sequentially. That it did not taper production could either be its inability to anticipate the slowdown, which seems unlikely, or confidence that demand will pick up. Output rose by 1.8 percent over a year ago.

JSW Steel does not share sales data but its production numbers indicate a 3 percent increase in rolled products while flat products have risen by 18 percent over a year ago. That is slightly higher than the December quarter. How much sales volumes rose by will become clear when its results are announced.

Tata Steel’s investors may also have been concerned that its Europe production and sales declined due to a planned upgradation and some operational issues. What these issues are should become known once its results are declared. Anyway, the December quarter has been a seasonally weak one. The release said that lower output and an adverse product mix will affect Europe’s financial performance. Europe underperforming is a worry but not a big one--its Ebitda as a percentage of the consolidated total was only 12.3 percent in the September quarter but India’s was critical at two-thirds.

The current quarter then becomes a crucial one to watch out for. Production numbers indicate that companies expect sales to improve. That depends on the end-user sectors enjoying better sales growth. If that does not happen, then the pain for steel companies will increase.

The main worry should be that this is happening at a time when global steel price trends have turned soft. This comes in the backdrop of a slowing Chinese economy and the ongoing trade war between China and the US. The Chinese New Year holidays will also mean a seasonally weak period for steel.

Of course, China and the US calling a truce will be a major relief for the global economy and for commodity prices. In India, a more favourable macroeconomic scenario that encourages capital investment, consumer demand and keeps interest costs down should benefit steel companies. Conversely, if consumer demand for automobiles, durables and real estate remains dull, the risks for steel will mount. Exports may not be a viable option, due to softer prices and a strengthening rupee.
First Published on Jan 9, 2019 03:59 pm
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