India’s steel industry should be in a good mood if demand for steel is to be used as a gauge. The country’s real consumption of finished steel in the April-June period is up by 8.8% to 18.2 million tonnes, according to data from the Joint Plant Committee’s flash report.
Part of the reason is a low base effect, as consumption in the year-ago period had risen by only 1.5%, and producers were exporting steel to maintain the domestic demand-supply balance.
The changed scenario should come as a relief to steel companies, who faced a slowdown in domestic consumption in 2011-12. They have raised their output but collectively have not been in a position to cater to the increase in demand. Thus, total domestic steel output of local producers has increased by only 4.9%, which has led to an increase in imports to bridge the gap.
Despite an increase in imports, the tight domestic supply situation and the strong dollar have helped protect their realizations. Local steel prices, especially those of long products, have not displayed the kind of weakness seen in global steel prices. At the same time, international prices of key inputs such as coking coal and iron ore have turned soft, reducing the pressure of rising material costs on them.
The start to the year for steel companies has been on a positive note, and the June quarter results should bring some clarity on whether the changed demand scenario is having a positive impact on their performance. Some of the negatives will continue to be high domestic interest rates and their impact on working capital finance and losses related to foreign exchange volatility. For companies such as Tata Steel Ltd, its European operations will likely suffer due to lower demand in that region.
The key determinant will, of course, be the trajectory of steel prices. There is some bad news in the neighbourhood. The slowdown in China’s economic growth—which saw its central bank cut interest rates again last week—poses a threat. Angang Steel Co. Ltd, a Chinese steel maker, issued a profit warning last week, stating that its realizations for the six months ended June were down by 12% year-on-year. Shares of Indian steel makers have been buoyant since June. Investors will want to see in the June quarter results if the improved outlook on the demand side is also visible in realizations earned by steel makers, which should then result in improved margins.
And, of course, there’s also the larger question: if Indian industry is indeed doing as badly as is widely believed, how is demand for steel so buoyant?
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