Steel mills to show better profitability on low raw material prices: Icra

Over a longer term, volume growth however would be critical, given that substantial fresh capacities likely to be commissioned in next two years

Profitability of steel industry is likely to improve in coming quarters due to soft raw material prices. Also, recent upward revision in steel prices also helped mills to generate better realisation despite lower demand from user industries. Credit rating agency Icra finds in a study that despite demand side concerns profitability outlook for steel players shows improvement for the near term.

“Outlook on the profitability of Indian steel players has improved, given the soft price trends of key raw materials. Price hikes announced by the industry in the current calendar year should also help, provided a weak steel market can absorb such a price hike. The steel industry being highly raw material intensive, the near term benefits from lower raw material costs to more than neutralise the adverse impact of a low volume growth, even if a part of the benefits of lower costs are passed on to customers to protect sales volumes,” said the study.



Over a longer term, volume growth however would be critical, given that substantial fresh capacities are likely to be commissioned in the next two years. Unless demand conditions improve significantly, overall capacity utilisation levels and profitability of steel players would remain impacted, said Jayanta Roy, Senior Vice-President and Co-Head, Corporate Sector Ratings, Icra.

Based on a study of the financial performance of seven large steel players which account for over 40 per cent of the domestic installed capacity, the stand-alone operating profitability of the industry declined from 20.37 per cent in Q1FY14 to 19.87 per cent in Q2FY14. Additionally, depreciation and finance charges on account of the debt funded capital expenditure by most players continued to impact their net margins.



Persistent weakness in demand from key end-user industries kept the domestic steel consumption growth at a meagre 0.5 per cent during the period April-December 2013. The domestic steel demand is expected to grow at a slower pace in FY14 than the 3.3 per cent growth rate achieved in FY13, notwithstanding a typical pick-up in demand in the last quarter.

On the other hand, double digit production growth rates clocked by several large steel producers in April-December 2013 resulted in a domestic steel production growth of 5.2 per cent during the same period.

The mismatch in domestic supply and demand necessitated higher steel exports, which also benefitted from favourable exchange rate conditions. This led to an export growth of 9.5 per cent, while steel imports crashed by 29.2 per cent during the period.

Meanwhile, domestic iron ore production declined continuously over the last three years, and the trend has been continuing in the current year as well on account of various restrictions in key iron ore producing states.