Steel: Tight hold on supply
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A rising trend in exports is good news for steel companies. Steel output has been rising in FY17, as is visible in Chart 1. Both August and September have been seeing double-digit growth rates. Exports have risen considerably, up by 110.6% in September. While output has been rising, higher exports are ensuring the domestic market does not see an oversupply, which can otherwise affect prices.
In fact, September saw a situation where output increased but availability declined (see chart 2). This happened due to a sharp increase in exports while imports continued to decline. This phenomenon has been seen earlier too but this time it was visible despite a sharp jump of 10.5% in output. But the highlight of September’s data has to be the rise in steel consumption, coming in at 7.6%, the highest in the fiscal year so far.
Thus, you have a situation where consumption is rising, but availability is tight. Domestic steel prices have been increasing, which is understandable given this scenario. Rising exports have also come at a time when overseas realisations have rebounded from their low levels. In India, imports have been declining partly due to higher realisations and the government continuing its efforts to protect domestic steel companies.
Lenders will be pleased to hear this as an improving industry situation, makes it easier to work a way out of the debt mountain. Mint reported last week that Bhushan Steel Ltd’s lenders are close to finalising a restructuring package for the debt-laden company. Higher profitability should mean better cash flows, making servicing debt that much easier.
The current trends are positive for steel companies although they also face an increase in costs, since iron ore and hard coking coal prices have increased globally. However, higher realisations should be able to absorb these costs without much difficulty. Higher output and higher prices are two factors that should benefit Indian steel companies considerably, especially as the threat from imports has abated considerably.
The main risk is if steel prices decline for any reason. While the domestic market may be protected, the sharp increase in exports now makes Indian companies vulnerable to global price fluctuations. The antidote to that is continuation of the growth in domestic consumption seen in September. The more steel that is consumed locally, the better it is for Indian steel companies.