After poor show in Q1, major producers like SAIL, JSW & Tata Steel are hit by weak demand and high raw material cost
Major domestic steel producers — Steel Authority of India Ltd, JSW Steel and Tata Steel — disappointed the market with their first-quarter numbers. The worst still may be far from over.
If the first quarter was marked by a slowdown in the developed and emerging economies, the second has seen downward price revisions, high raw material cost, over and above weak demand.
“There have been downward price corrections in July and August across products, while raw material prices remained high. Raw material prices have seen a fall in the spot market, but the ones in the pipeline were bought at higher prices,” said Jayant Acharya, JSW Steel director (commercial & marketing).
Coking coal contract price for July-September was $221 a tonne, while spot prices are hovering at $175-$180 a tonne.
The other key input material, iron ore, has seen a sharp fall in prices globally, but NMDC, leading PSU iron ore mining company, has increased prices by 8-13 per cent, though it has indicated that prices could ease in the third quarter.
“Iron ore prices have come down in the international market, but it has not reflected in NMDC prices. Also, iron ore in the domestic market is strong because of the auction-based pricing system,” Acharya said.
Iron ore prices have been hovering around $140 a tonne globally, but have seen a sharp fall over the past few months to $105 a tonne. In the long-term, however, it’s likely to be around $120 a tonne.
There is little doubt in the industry that the second quarter will be dismal. “The second quarter will be little more challenging than the first. There is no major infrastructure project on the ground,” said H M Nerurkar, managing director, Tata Steel.
India’s domestic steel demand outlook remains soft. However, supply issues (mostly with secondary manufacturers) have balanced the situation, Tata Steel recently conveyed to the investors.
All eyes are now on the October-December quarter. “We expect Q3 demand to be better than Q2. Currently, the inventory levels at buyers’ end is low. In order to meet the festival demand for consumer goods, manufacturers will be back in the market to buy steel. Further, we are hopeful that the policy initiatives will also kick start the demand. Traditionally, demand for steel starts picking up from Q3 onwards and peaks around March-April,” said Alok Gupta, president-global markets & strategy, Essar Steel India.
“We expect positive news on infrastructure in the next two months,” Nerurkar said. The sentiment is echoing through the industry. “We need some definite policy measures from the government to boost consumption expenditure. Demand is under strain and margins are depleting,” Acharya pointed out.
But, government initiatives apart, there is some hope from another quarter. Some US plate mills have indicated a $50 a tonne price increase for September shipment. Japanese dealers are also expecting an increase in prices from September.