Improved profits for steelmakers unlikely before 2017: Fitch

Improvement in profitability for Indian steelmakers is unlikely before 2017 despite imposition of minimum import price (MIP) to protect domestic producers from the onslaught of cheap imports, Fitch Ratings said today.
The government's decision to impose minimum import price on a wide range of steel products would provide protection from cheap imports and give domestic producers some flexibility to raise prices and increase their margins, Fitch said.
"However, producers will continue to face pressure from soft domestic demand growth and prevailing over-capacity. As a result, a meaningful improvement in profitability for Indian steelmakers is unlikely before 2017," the rating agency said in its report.

The government imposed minimum prices on imports of 173 steel products on February 5, following the 20 per cent safeguard duty on certain steel products imports in place since September 2015.
Fitch estimates that the minimum import prices will allow domestic producers to raise product prices for most products by around USD 50-70 a tonne.
"However, producers are unlikely to realise price increases of this much because of competition to improve their capacity utilisation and weak demand," it said.

Producers have raised prices only by around USD 10-15 a tonne since the announcement.
"We believe domestic steel production could rise by around 3 per cent to 4 per cent as imports reduce.

"However, with new capacities coming online in 2016, Fitch does not expect capacity utilisation levels to rise significantly. Fitch expects additional price increases, if any, to be similar to the current levels but spread out over the next three months," it said.
Consequently, it expects the profitability of steel producers to remain weak as compared to 2014-15.
"We believe that further steel price increases and a significant improvement in steel producers' profitability will depend on a strong revival in domestic demand growth," it said.
Fitch said it continues to consider the increased government spending on infrastructure to be the key catalyst for acceleration in domestic steel consumption growth, which was soft at 4.7 per cent in the first nine months of this fiscal.

This followed weak demand from key end-user industries, such as real estate and infrastructure.
Steel prices have continued to fall so far this fiscal, and current prices are around 30 per cent (USD 200/tonne) lower than at end-FY15.
Fitch Ratings said globally supply continues to outstrip
demand.
"The recent announcement by China, the world's largest steel producer, that it would cut domestic steel capacity by 100 million-150 million tonnes fails to adequately address concerns," it said.
China's capacity is close to 1.2 billion tonnes, with an output of around 800 million tonnes in 2015, it said.
The stated rationalisation target appears to fall short of addressing overcapacity in the country, it added.

"In addition, China's announcement did not spell out a timeline for implementing the capacity cuts. We expect the cut in Chinese steel capacity to be gradual with little impact on Chinese output and exports in the short term," Fitch said.