Safeguard duty unlikely to have a significant impact on domestic steel prices: ICRA

Differential between domestic, internatDifferential between domestic, international hot rolled coil prices has reduced significantlyional HRC prices has reduced significantly

The 20 percent safeguard duty levied on hot-rolled coils (HRC) of steel imports is not likely to have a significant impact on domestic steel prices, rating agency ICRA said today in its release. However, the extent of cheaper imports is likely to come down in the near term, since the share of the items covered under the safeguard duty in India's overall steel imports was close to 50 percent in June quarter, it said.

Following the imposition of the duty, the differential between domestic and international hot rolled coil (HRC) prices has reduced significantly, and the domestic prices now are largely aligned with imported steel prices, said ICRA. However, international HRC prices have declined further by around 5 percent after the duty was imposed which, along with weak domestic demand conditions and prospects of further capacity additions in India in the near term, is likely to keep domestic prices under check, ICRA said.

India's steel consumption growth improved to 5.4 percent during the period April-July from 3.1 percent in the corresponding period last year.

"While the growth remained steady at upwards of 6 percent during the first three months, it declined to 0.5 percent only in July 2015, indicating that the sustainability of demand improvement is still uncertain," the report quoted Jayanta Roy, senior vice-president and co-head, corporate sector ratings at ICRA as saying. Domestic steel production growth, on the other hand, declined to 1.3 percent during the period April-July 2015 from 3.3 percent last year.

On the raw material front, NMDC has continued to cut its iron ore prices in Q2FY16, revising prices of fines by 15 percent and lumps by 3 percent in July 2015, and again in September 2015, when lump prices were reduced by 3 percent. Moreover, in October 2015, prices of both lump and fines were again dropped by a steep 12 percent. "With the re-opening of closed iron ore mines in Odisha and Jharkhand, and with the proposed auction of iron ore mining leases in the current quarter, iron ore production in India is expected to increase going forward, which will keep domestic prices under pressure", said Roy. On the other hand, international coking coal prices too continued with their downward journey, with the benchmark premium hard coking coal contract price declining by 5 percent in the current quarter.

As per the latest ICRA report, operating profitability of the domestic steel industry declined in Q1FY16 to 11.4 percent from 12.2 percent in the preceeding quarter due to a continued fall in steel prices. For the first six months of FY16, ICRA estimates that while domestic HRC prices corrected by around 15 percent, major raw material costs of blast furnace players declined by around 9 percent. Consequently, gross contributions declined by around 20 percent during this period. However, the safeguard duty has reduced the possibility of further significant price declines. This, coupled with the softening of iron ore and coking coal prices is expected to support the profitability of blast furnace operators to an extent in the second half of the year.

As per ICRA's estimates, gross contribution level has improved by around 5 percent in October 2015 over the previous month's level, after the latest fall in domestic iron ore prices. The recent interest rate reduction would also provide a relief to players going forward, given their leveraged balance sheets. Nevertheless, the impact of the same on their credit profile is unlikely to be significant.