New fiscal 2017-18 is set to bring the glory of the domestic steel industry back as its woes, sans poor domestic demand, are getting healed with each passing day with imports nosediving and coking coal prices cooling off at a faster pace.
However, according to a report published by rating agency ICRA, the last quarter of the current fiscal would be painful, unlike the previous quarter, as “most of the high-cost coking coal would be consumed in this quarter.”
“In the current quarter, however, profit margins of steel producers are likely to remain under pressure. Apart from blast furnace operators, which form about 45% of the total installed capacity, secondary steel players would also be adversely impacted by the increased input costs of sponge iron and scrap. This, coupled with weak demand conditions, would weigh on the operating margins of the industry in Q4 FY’2017,” it said.
However, ICRA said coupled with improved supplies from Australia, Russia, and Canada, have led to a downward revision in spot coking coal prices from USD 309 per MT in end-November 2016 to USD 157 per MT in end-February 2017, representing a decline of 49%. It expects this sharp decline in international coking coal prices to benefit the margins of domestic blast furnace players in Q1 FY’2018, given the typical lead time of around three months for shipments to arrive onshore.
Coking coal contract prices, which have settled at USD 285 per MT in the current quarter, are expected to moderate to around USD 160-165 a MT in the subsequent quarter, taking a cue from the prevailing spot prices.
Though revision in coking coal prices will have a downward pressure on international steel prices, it will, in turn, keep domestic prices under check. Meanwhile, thanks to anti-dumping duty and other imposed trade barriers, domestic steel is costlier between USD 8-17 per MT compared with the landed costs. After bringing down prices by INR 2,000 per MT in February, they have raised prices in March and is likely to make them costlier even in April.
Meanwhile, imports contracted by 38.5% in the first 11 months of he current fiscal and have coincided with a strong growth in exports supported by an improvement in the pricing scenario in international markets. As a result, India has now become a net exporter of steel in the current year.
However, weak domestic demand is a worry. India’s steel consumption growth remained weak at 3.4% in the April-February period of the current fiscal due to continued weakness in the key end-user industries, but “2017-18 points to a favorable demand outlook for the steel sector in the medium-term,” ICRA said.
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