Analysts believe the growth in volumes will not translate into improving margins for the companies as steel prices are not seeing any signs of revival. A couple of steel makers tried to increase prices in January, but rolled most of it back as demand languished, an industry official told Business Standard, requesting anonymity.
Abhijit Mitra and Neerav Bagaria of ICICI Securities said in a recent report the volume growth in the sector would be meaningful from companies like Steel Authority of India Ltd and Jindal Steel and Power Ltd, however, a decline in margins in the third quarter would impede margins.
“Tata Steel (stand-alone) is expected to post a decline of Rs 500 per tonne on a quarter-on-quarter basis in realisations in the third quarter. The company in particular has failed to pass through any major price increase in the quarter,” they said.
Even though demand for steel looks weak, steel makers have continued to increase production. Steel production at JSW Steel’s Vijayanagar plant in Karnataka went up eight per cent in the third quarter of the current financial year against the corresponding period last year. Tata Steel produced 2.09 million tonnes (mt) steel in the quarter, up from 1.93 mt a year ago.
These production increases did not translate into sales. Enam Equity Research, in its January report, suggested steel makers would continue to report weaker demand for their products. It said: “We expect NMDC and Tata Steel to post muted numbers for the December quarter due to lower volume offtake. We expect volumes to improve in the March quarter due to seasonal demand (pick-up in construction activity).”
Mitra and Bagaria of ICICI wrote: “The true impact of restocking should be felt in the March quarter where simultaneous impact of price rise as well as weak raw material prices can lead to a positive surprise.”