Profitability of steel mills may improve in near term: ICRA

The profitability of domestic steel mills is likely to improve in the near term due to firm prices of the metal and substantial export growth, a report said today.

Buoyant global steel prices have benefited Indian mills to increasingly tap overseas markets, as reflected in a 57 per cent Y-o-Y growth in exports during Apr-Aug 2017, helping the domestic steel industry operate at a capacity utilisation of above 80 per cent in the current fiscal.

This is expected to improve the profitability of domestic steel mills in the near term, said the report by rating agency ICRA.

Domestic steel prices have registered a healthy growth of 14 per cent during the last three months due to a sharp recovery in international steel prices and improvement in local demand growth.

Steel prices have reported a healthy growth of 14 per cent since June 2017, aided not only by a sharp recovery in international steel prices but also by an improvement in domestic demand growth to 4.4 per cent in Apr-Aug 2017, from 2.6 per cent per cent in FY17, ICRA said.

"The sharp rise in domestic steel prices has been fuelled by rising international prices. The Chinese hot rolled coil (HRC) export prices increased by about 40 per cent since mid-May 2017, reaching USD 588 per metric tonne (MT) in the third week of September 2017, supported by China's resilient domestic demand and its supply-side reforms to check the domestic steel overcapacity," said ICRA Senior Vice-President Jayanta Roy.

"Chinese steel production grew at a healthy rate of 5.1 per cent in Jan-Jul 2017 and kept the global steel capacity utilisation rates above 72 per cent in the last five months against 68.2 per cent in December 2016," he said.

Operating margins of the steel industry contracted to 12.5 per cent in Q1FY2018 from 15.7 per cent in Q4FY2017 on the back of lower steel prices and increased raw material costs, especially for coking coal in Q1 FY2018.

While the prices of coking coal and iron ore have also increased recently, the extent of increase in domestic steel prices in Q2FY2018 remains higher than that in raw material costs, which points to a sequential expansion in gross contribution levels of steel players.

ICRA believes that credit profile of domestic steel companies is unlikely to improve significantly in the near term despite the current buoyancy in steel prices.

Insolvency proceedings for stressed accounts have begun in the last few months wherein five accounts out of the first 12 accounts referred under the Insolvency and Bankruptcy Code, 2016 (IBC) are from the iron and steel sector, with a total debt of above Rs. 1.5 lakh crore as on March 31, 2017.

Reportedly, some of these assets have already attracted attention from foreign investors, given the long- term India growth story, Roy said.

ICRA believes that stronger domestic steel players with healthy financial profile also remain potential investors for such assets, which could result in industry consolidation to an extent going forward.