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Reduction in raw material prices to help slowdown-hit steel cos: India Ratings

Oct 2,2019

The reduction in raw material prices since July 2019 will provide a major respite to India steel players, India Ratings and Research has said in its latest report on the steel sector.

 

In August 2019, Australian hard coking coal (HCC) prices fell 15 percent year on year and were 23 percent lower as compared to March 2019, while domestic iron ore prices fell 7 percent as compared to the previous month. Further, NMDC, the leading domestic iron ore producer, announced a cut in iron ore prices.

 

Domestic steel prices have followed the declining global prices with hot-rolled coil prices falling 19 percent year on year in August 2019, a drop of 12 percent from March 2019, the report said.

 

Domestic crude steel production declined 3.7 percent month on month in August 2019. Sluggish domestic demand from end-user segments, including automobile, consumer durable, capital goods, construction, and real estate sectors, led to a slowdown in consumption growth. Slow demand has also led to an increase in the inventory of semis finished steel products.

 

A substantial pick up in the consumer demand and government and private sector spending is required to arrest the fall in demand. The agency, in its FY20 Mid-Year Outlook on September 3, 2019, had cut the domestic crude steel production outlook to 4 percent from 7.5 percent in FY19.

 

The average domestic spreads fir steel players over April-August 2019 were well below the average FY19 levels signifying a likely fall in margins of domestic steel players in the first half of FY20 (H1FY20). However, with raw materials playing catch-up, the spreads are likely to improve in the second half of the year (H2FY20).

 

Over April-August 2019, the average domestic spread for HRC was around Rs 3,500-Rs 4,000 lower than the average over FY19 while that of rebars was around Rs 2,500-Rs 3,500 lower than the FY19 average. Domestic steel prices have been low on account of a fall in international steel prices and sluggish domestic demand.

 

Globally, the first half of 2019 has seen sluggish Chinese demand for steel that has partially contributed towards the falling global steel prices. Chinese exports remain steady at 7 million tonnes a month over June-July 2019.

 

The extent and continuity of the Chinese fiscal stimulus will remain the key determinant of international prices and steel imports into India, the report said.

 

"With the on-going US-China trade dispute and weak global growth outlook, international metal prices may remain weak for the rest of FY20," the report added.