Demand remains a bright spot for steel companies in second quarter

15-Oct-2018

Steel company shares have not been spared in the equity bloodbath, but they have ended the September quarter on a strong note. Domestic steel demand continues to grow at a good pace. A moderate growth in output and a decline in imports also meant the market was not oversupplied. Finished steel demand rose by 6.8% in the September quarter over a year ago, according to data from the Union steel ministry’s Joint Plant Committee. This is lower than the June quarter’s 8.9% growth but was mainly due to slower growth in July. Both August and September have seen demand at higher levels. Since July 2017 saw the goods and services tax roll-out, taking the first half data could smooth out distortions. April-September demand grew by 7.8% compared to 4.3% a year ago.

While demand growth has been healthy, steel output has been held in check. Production rose by only 2.9%, chiefly due to a fall in Steel Authority of India Ltd’s output. While large private sector companies saw output increase, this varied. On Monday, Tata Steel Ltd reported its production numbers. Steel sales volumes rose by 3.2% over a year ago, the slow growth attributed to it operating at full capacity. But its acquisition of Bhushan Steel Ltd in May will boost output, rising by 6.7% over a year ago compared to 2.2% stand-alone.

Rising demand and slowing output growth has affected steel trade. Exports fell by 36.3%, while imports declined by 19.6% in the September quarter. Companies would prefer to sell in the domestic market, as they earn higher profit margins.

Recently, Macquarie Research upgraded its estimates for Tata Steel and JSW Steel Ltd citing a weak rupee versus the dollar and stable prices. In a report dated 25 September, it also said domestic steel prices are trading at a discount of 6-7% to the landed import price, leaving room for price hikes in the near future. Despite that optimism, steel shares have declined in the aftermath of the sell-off in equities.

While India’s steel industry seems to be in good shape, the chief risk it faces is external. There is some uncertainty on the extent to which China’s steel output could decline in the winter months. China appears to have decided to adopt a flexible approach towards capacity cuts that are meant to curb pollution. A tight supply situation in China is one of the reasons steel prices are holding up and if that changes, it could affect prices. But for external risks, large integrated steel companies seem to be in a good place.

Source: LIVEMINT