Tuesday, April 19,
Steel markets are not seen taking any direction either on the upside or the downside. And the news flows from around the world is only making the task difficult.* We saw Indian steel demand growing at 9.9% for FY11 which outpaced the supply that grew by 8.8%. But even after these kind of positive news flows, market didn’t respond in the same manner because the future looks uncertain as the IIP (Index of Industrial Productivity) numbers continue to slide downwards. Also, inflation which continues to make a upward march is causing RBI to tighten liquidity in the system.
Globally, we can see steel demand in USA improving but Europe is still slow in recovering from the 2008 crisis. The question remains what will happen to the Steel market in India in the new financial year?
Let’s look in to the Indian economy. India continues to be the second fastest growing economy in the world and expected to maintain its rate of growth in the current fiscal with various agencies pegging GDP growth between 8.3%-8.8% p.a. This means that demand for base metals such as steel will remain good but how much of it will be reflected in the price, is an important question.
India’s steel production was at 66 mtpa and installed capacity at 80 mtpa for FY11; this would mean that it will take some time before demand starts pushing up the prices. With inflation on the rise because of increase in the price of food articles and recently because of the boil in the oil prices, RBI is forced to take monetary action to control the supply of money in the system. And, as the money is getting dearer it has started to reflect in the performance of the steel industry. Demand from construction and infrastructure sector has taken a hit and as a result demand for steel long products has fallen down considerably.
Along with the money crunch, the pressure is also from the three mining giants who now are dictating terms when it comes to the price of raw material, with Iron ore and steel grade coal moving up between 30-50% in the previous quarter. On top of this the miners are arm twisting the buyers to shift to monthly contracts from the current practice of quarterly contracts. This move will only add to the uncertainty, as steel companies still follow quarterly to half yearly contracts without any escalation clause. And due to weak demand, steel producers are not able to pass on the input cost hike to the end consumers. The mill owners cannot increase the product prices even though their cost has been going up; this has put pressure on the margins.
The only thing that can be said with certainty is that the current fiscal will be a tough year for the steel sector. What needs to be seen is whether the Indian growth momentum continues to surprise everyone or the macro economic factors like inflation and geo-political factors will take a toll on the demand. Whatever is the case; this will be an exciting year for the industry for sure.
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