No end to misery of steel sector likely next year

Two big-ticket pull outs, subdued demand and pricing, and costlier inputs have further taken the sheen off the Indian steel sector, and if reports of PWC and Moody's are to be believed, profits in the new year are likely to be historically low.

Issues like land acquisition, raw material availability and its exports, and overall nosediving demand are still factors to reckon with, experts feel.

However, this has not deterred the government from setting a production target of 300 million tonnes (MT) by 2025 from around 90 MT now.

India, the world's fourth largest steel maker, cannot possibly remain insulated from the vagaries of global markets and when production growth slips below world average for want of demand in an emerging country, it becomes a matter of concern.

In the first ten months of the current year, India's steel production grew by 2.8% compared to the world's growth average of 3.2%.

Barring a few companies which have captive iron ore sources, most producers suffer deficit and resultant production loss, despite the fact that India has huge reserves of the key steel-making ingredient.

So is the case with coking coal and SAIL depends mainly on imports to meet the needs.

It is difficult to justify steel makers' waning capacity utilisation despite the fact that India's per capita usage is only about one-fourth of the world average.

Despite a slowing economy, experts feel there should have been a good demand for steel as infrastructure in the country needs a huge leg-up. Probably promotion of rural usage was missing from the agenda of domestic firms.

As a result, steel prices remained subdued throughout the year. End use segments like construction and consumer durables were also in disarray leading to just 0.3% consumption growth during the April November period.

Capacity addition by almost all firms is in progress amid instances of rising imports from China and Japan. Additional capacity expansion plans are also already out of the boardroom.

But, it remains to be seen how the massive fund requirement for these plans are going to be met, particularly, the debt component, to jack up capacity to 300 MT by 2025. It takes roughly USD one million to raise one MT capacity.

Steel makers' performance in the first nine months of the calendar year is far from encouraging. Due to dip in net sales realisation caused by poor sales amid subdued prices, SAIL had clocked a 72% decline in bottom line to Rs 447 crore in January-March quarter.

It was no different during the  April-June quarter when Sail's net profit dipped by 35.25% for same reasons.

The July-September quarter though showed improvement, but its realisation fell by 6.5% on subdued prices.

The Indian operation of Tata Steel also clocked Rs 2,174 crore profit before tax in January-march quarter against Rs 2,371 crore a year earlier. It was at par in the next quarter and slightly up in the July-September quarter.

The new year does not look promising either. Global consultancy firm PwC said Indian steel makers may well prepare for a bumpy year next year due to costlier inputs - both iron ore and coking coal.

 Moody's Investors Service, in a recent report, said profits of Asian steel makers would remain historically low next year, amid higher output and slowing demand.