Analysis: Posco's guidance a sign of worry for Indian steel

Poor numbers point to a slowdown in China, the biggest consumer, and this spells trouble for the sector in India

World’s fourth-largest steel manufacturer Posco has announced a disappointing set of numbers for the September quarter. More than the results, it is the guidance and its downgrade that is worrying for Indian steel companies.

Posco has posted a decline in profit for the third consecutive quarter. After posting a 25% drop in its net profit, the company reduced its forecast for the third time this year. It is 12% below what it had envisaged in April 2012. The lower outlook is on account of cooling of demand in China and a slowdown in the automobile and shipbuilding sector.

Standard & Poor's has lowered Posco’s credit rating, citing tough conditions for the steel industry over the next 12 to 18 months. China, which was the reason for the euphoria in 2007, is now the reason for the gloom. Slowdown in the country has sent steel prices to a three-year low.

Excess capacity in China and slowing demand in the country has resulted in the metal being exported to various other countries. China exported a record 5.1 million tonnes of steel in September 2012, up 22% over the same month previous year. In the first nine months of 2012, the country exported 41 million tonnes which is a growth of 10.2% over the corresponding period tghe last year, and 8% of its output.

What both these factors suggests is Indian steel makers will continue to feel pricing pressure. India is one of the few places in the world that is witnessing strong demand. Indian steel prices are higher than those in the international market. However, this difference is what is resulting in higher imports in the country. India’s steel imports have shot up by 40% for the period April to August 2012. China, Korea and Japan where the main exporters of steel to India.

Close proximity of India to some of the largest steel producers in the world is resulting in material being diverted into the country. The Indian steel industry will continue to remain under pressure till the economic situation in these countries improves. S&P says it does not see any improvement for the sector over the next 18 months. This is also reflected in Posco’s reduced guidance.