Flimsy demand growth for steel makers

Flimsy demand growth for steel makers

New Delhi: Another day, another forecast and another cut in growth estimates. Taking cognizance of the changing demand environment, the steel ministry has halved the consumption forecast it made in May. According to Bloomberg, the ministry now expects steel consumption in the domestic economy to grow at 6% in the current financial year. In May, it estimated consumption growth at 12%. Read more...-

The weak consumption forecast further deteriorates outlook for steel companies. Steel consumption in the five months ending August 2011-12 grew by just 1.3%. With the ministry forecasting anemic growth in consumption and raw material prices holding high, margins of the steel firms will come under pressure.

Volumes at the domestic steel firms are already declining. According to PINC Research, sequential volumes at the Tata Steel fell by 7.7% in first quarter. While SAIL witnessed a 12.3% drop in volumes, the number for JSW Steel stood at 1.1%.

Even though volumes contracted, steel firms were able to report sequential improvement in realizations due to relatively stable prices. Tata Steel, SAIL and JSW Steel reported 2.9-4.4% increase in first quarter realizations.

However, realizations are increasingly coming under stress. The prices of hot rolled coil steel futures in the international markets fell by just 2.6% in the first quarter. But the recent bout of economic uncertainty has already led to a 5.4% dip in futures prices so far in this quarter.

The fall in steel prices wouldn’t have much impact if raw material costs have also declined by the same pace. Unfortunately, that is not the case. Despite the sharp fall in global equity markets, iron ore prices are yet to witness any notable correction. With the Supreme Court banning iron ore mining in Karnataka, the demand for the key raw material is expected to remain firm, providing support to prices.

The concerns have already taken a toll on stock prices. The BSE Metal index is down 17.6% so far in this quarter. While BSE 500 index lost 9.1%, any improvement in demand environment will heave a fresh lease of life into steel stocks.