Steel Authority of India (SAIL) has disappointed the market by posting a net profit drop of 17.9 per cent to Rs 696.4 crore on account of higher forex losses. However, more than the profits, the company has posted a flat sales growth against market expectation of nine per cent growth. Sales for June 2012 were at Rs 11,912 crore as compared to Rs 11,907 crore in June 2011. This was a sharp drop as compared to March 2012, were the company posted sales of Rs 14,785 crore.
It seems that the company has been severely impacted by imports on account of lower global steel prices, rising inventories and excess capacity.
Global steel market is going through tough times, with the brunt of the impact being felt in China. For the first time in 31 years, production in China is expected to fall in 2012. Chinese steel manufacturers have seen a 96 per cent drop in profits in first half of 2012 as compared to the same period in 2011. Recent reports say that the Chinese government is considering tax exemption to the steel sector, to partly overcome the sharp drop in profits. The reason China is important in the global context is because it accounts for half of world production.
If consumption in China slows down, steel produced in its mills will be routed to other countries. Posco Steel at the time of announcement of its June quarter numbers said that its profitability has been impacted because of steel being dumped in South Korea from China and Japan. Korean steel manufacturers are building up a case asking their government to impose anti-dumping duty.
A recent report by UBS on Asian Steel industry says that steel exports to South East Asia are barely above variable cost. Inventories are on the rise across all manufacturing countries. UBS expects steel market to be range bound till 2014.
China’s Baosteel has lowered steel prices for the second consecutive month even as data coming out from China Iron and Steel Association said that production has declined by 1.7 per cent month on month. China steel prices have been weak for 13 weeks now and at current prices, most of the mills are either making losses or are operating at break-even levels.
With companies in China, barely making profits further aggression from them cannot be ruled out. With demand faltering in most part of the world, these steel can find their way in India where prices of the commodity is still $100 per tonne higher (17-18 per cent) higher than in China.