ICRA: Performance of domestic steel industry to remain sequentially weaker in Q1

ICRA: Performance of domestic steel industry to remain sequentially weaker in Q1

The performance of domestic steelmakers is likely to be under check in Q1 due to several headwinds. According to an ICRA report, domestic steel consumption growth eased to 7.5% in FY2019 from 7.9% in FY2018 due to liquidity and fuel price related headwinds faced by the auto sector during the second half. The demand growth moderated further to 6.4% in April 2019 and is likely to remain lower than the FY2019 levels in Q1 due to continued weakness in the auto sector and reduced construction related activities during the general election period. This, coupled with elevated coking coal prices, is likely to affect the financial performance of domestic steelmakers in Q1. However, the construction sector would be at the forefront of the demand recovery in the second half of FY2020 on the back of an expected boost to the infrastructure sector. The Union Budget for FY2020 to be presented in July 2019 would provide a guidance towards Government thrust to the sector.
Spot price of seaborne premium hard coking coal, which accounts for 40-45% of the steelmaking cost for a domestic blast furnace operator, has remained above US$ 200/MT, supported by a healthy 10.1% growth in Chinese crude steel production during January-April of CY2019. Given that domestic steel hot rolled coil (HRC) prices have weakened sequentially from Rs. 41,250/MT in Q4 FY2019 to Rs. 40,500/MT in Q1 FY2020, elevated coking coal prices are likely to keep the profitability of domestic blast furnace operators under pressure in the current quarter.
Jayanta Roy, Senior Vice-President & Group Head, Corporate Sector Ratings, ICRA said: “We have already seen a contraction in gross contribution levels of a domestic blast furnace operator by around Rs. 3000/MT in Q4 FY2019. In the current quarter, with coking coal prices remaining firm and steel prices under pressure, we see a further contraction in gross contribution levels by around Rs. 400-500 per MT over Q4 FY2019. However, in the case of iron ore, the other key steelmaking ingredient, Indian mills have benefitted from the domestic supply glut due to significant ramp-up in mining activities in Odisha, where a large number of iron ore mines would witness lease expiry in March 2020. This has helped partly insulate domestic ore prices from the steep rally in seaborne prices following the supply disruptions from Brazilian miner Vale”.
Unlike elevated coking coal prices, price of thermal coal, an important cost driver for secondary steelmakers producing steel through the sponge iron route, have seen significant easing in the last few months. Coal India’s spot e-auction premiums declined to 69% in April 2019 against 92% in April 2018 and 100% during October – March of FY2019. The decline in seaborne thermal coal prices have been even steeper, with thermal coal from South Africa having gross calorific value (GCV) of 6000 kcal/kg correcting by around 30% in the last six months. Consequently, the gross contribution for a secondary steel producer has been more resilient to softening steel prices compared to blast furnace operators largely due to lower thermal coal prices.
Despite flat and negative production growth rates reported by large steel producing regions such as India and the EU respectively, global steel production growth during 4M CY2019 stood at 4.8%, largely supported by a healthy growth registered by China. China’s steel production growth stood at 10.1% in 4M CY2019 on the back of improved domestic demand, which in turn was aided by a pick-up in real estate and infrastructure related activities post the Chinese New Year. However, escalation of trade tensions between China and the US in May 2019 points to possibilities of moderation in Chinese economic activities in the coming months, which would keep its steel production growth and in turn global steel production growth under check in the near term. While the World Steel Association in April 2019 revised upwards its forecast for Chinese steel demand to 1.0% for CY2019 from 0% estimated in October 2018, China’s commitment towards infrastructure spending would be crucial to achieve this demand growth.
On the domestic front, says ICRA, softening demand and a 34% dip in steel exports kept the domestic crude steel production growth low at 3.3% in FY2019. While the steel imports grew by 4.7% in FY2019 and kept India a net importer of steel during that year, imports are expected to go down in the coming months as the domestic hot-rolled coil (HRC) prices are currently trading at a 6% discount to imported offers. Despite expectations of reduced imports, domestic steel production growth is likely to remain modest in Q2 FY2020 due to the seasonal weakness in demand, and would recover in H2 FY2020 mirroring steel consumption trends.
Roy added, “While there is a scope for an immediate price hike due to the current disparity between the domestic and imported steel prices, ICRA expects that any meaningful price improvement would happen only in H2 FY2020, when the infrastructure spending is likely to gain momentum and the auto sector is expected to do well on the back of pre-buying ahead of the BS-VI rollout. International steel prices would also remain a strong determinant of domestic prices”.
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