Major steel companies such as JSW
Steel, Tata Steel and SAIL have all reported sharp fall in profits in the
second quarter of this fiscal. Their margins may continue to remain under
pressure in first two quarters of next fiscal due to increase in input cost and
falling demand.
Rise in Input costs
A significant increase in coking
coal prices due to supply disruption adversely affected the profit margins of
Indian steel producers, it added.
Coal India, one of the largest
suppliers of coal, has started pricing its produce based on the gross calorific
value of coal against the current practice of 'useful heat value'. The average
price of non-coking coal is expected to increase by 22 per cent to Rs 2,590 (Rs
2,118) a tonne.
Demand Slowdown
Steel demand has a high
correlation with growth in GDP, which is showing signs of slowdown. Fitch has
lowered its real GDP growth projections for India this fiscal and FY'13 to 7
and 7.5 per cent respectively, from 7.5 and 8 per cent, given the likelihood of
India's economy being weighed down by higher domestic interest rates and a
weaker global economy.
Over-Capacity
About 30 million tonnes of steel
capacity is expected to be added in 2012-13. Should domestic steel demand not
grow as expected, steel producers would have to focus on exports to maintain
their operating rates at profitable levels – a challenging proposition given
the current slowdown in the developed world.
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