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The near-term outlook for the steel industry is likely to remain unfavourable due to factors like increase in competition, and a lesser probability of sustaining the recent rise in exports, a report by rating agency Icra said today.
"Short-term outlook on the operating profitability of the steel industry continues to remain unfavourable, even though there could be a gradual improvement in the availability of iron ore going forward," the report said.
Net profitability and the overall return on capital employed will also be negatively impacted due to higher capital charges associated with the commissioning of new capacities along with increasing the competitive intensity, it added.
As per Icra analysis, the operating profitability of steel firms continued with the downward trend in fourth quarter of the past fiscal, given the slow growth in demand, pricing pressure and rigidity in input costs despite significant fall in domestic iron ore prices since the second half of last fiscal.
Given the uncertainty in the global economy, export growth seen in the recent months may not be sustainable, the report said.
On the pricing front, the report said despite the sharp depreciation of the rupee, the industry will not be significantly benefited.
"Though global prices of HRC fell by around 6%, the steep fall in rupee led to firming up of landed cost of steel imports by around 4%. However, domestic prices still remained flat because of weak demand," Icra Senior Vice-President and co-Head of corporate sector ratings Jayanta Roy said.
He, however, noted that the weakness in the rupee would push the cost of imported coal, which would increase the cost of production through blast furnace route.
On steel import growth, the report said the imports continues to dip due to subdued demand.
"Overall growth in steel imports in FY13 stood at 14.6%, sharply down from a growth rate of around 38% posted in the first five months of FY'13, implying a moderation during the second half due to a reduced differential between domestic and imported steel prices. The decline in import also represents a weak demand and a higher base effect," it said.
However, it noted that steel exports increased by 12.7% in April-June period of 2013 mainly because of a depreciating rupee and export incentives.
"With a capacity of about 15 million tonne estimated to come up in FY'14, which is equal to almost 16% of the domestic capacity at the end of FY'13, we believe that it would be imperative for the industry to sustain exports till domestic demand revives," the report said.
