Steel coils. (Reuters )
Steel coils. (Reuters )

Slowing domestic demand, global trade weigh on steel’s prospects

  • With Steel prices correcting 13% this past year, steel firms will see lower revenue realizations
  • Key raw material iron ore, too, surged 85% in the past year, which will also impact operating margins

Global steel prices are softening and that is reflecting on the prospects of Indian steel companies. Prices of hot-rolled coil declined about 13% in the last one year globally. Domestic hot-rolled coil prices have also corrected, although they are higher than import prices by about 6%, according to analysts. Little surprise then, stocks of Tata Steel Ltd, Jindal Steel and Power Ltd, Steel Authority of India Ltd, and JSW Steel Ltd are down between 4.4% and 13.1% year to date.

The knock-on effect of trade wars has been piling on the pressure on steel prices across the globe, with trade volumes slumping for the first time in nine years. As a result, exports are slowing down, leading to a rise in inventory. Domestic demand from infrastructure projects was soft due to the general election. A recovery in the domestic market is some time away.

“Domestic steel demand has also softened in recent months led by funding constraints in government-led infra projects around elections. This should improve but September quarter is seasonally weak due to rains and an uptick is likely to happen only by December quarter," said analysts at CLSA India Pvt. Ltd in a note to clients.

Besides, trade wars have meant that global growth has gathered some rust. Domestic exports are on the downswing. “We see risks for steel players since exports have declined 30% YoY (year-on-year) to 0.7 MT (million tonnes) due to a demand slowdown in the traditional markets of South-East Asia; weakness in the re-rolling segment owing to the auto slowdown; and inventory build-up of 0.5 MT. We believe lower export volumes are likely to heighten competition in the domestic market and impact export-heavy companies," said Edelweiss Securities Ltd in a note to clients.

On the flip side, iron ore prices have been firm due to supply disruptions. The jump in Chinese iron ore prices by 85% year-on-year to $110.44/tonne is starkly in contrast with the fall in Chinese hot-rolled coil prices. Being squeezed on both sides, the margin pressures on steel producers will be evident in their financial results.

To top it all, demand from one of the largest consumers of flat steel, the automobile sector, is likely to be curtailed. Auto sales have been contracting, leading to an inventory build-up in the auto sector.

“Weak automotive demand, coupled with the rising threat from imports and unattractive export markets have put flat steel producers at higher risk than long producers. Tata Steel and JSW Steel—India’s top-two flat steel producers accounting for the most sales to the auto segment—are likely to be impacted," noted HSBC Securities and Capital Markets India (Pvt.) Ltd in a note to clients.

Besides, analysts don’t rule out the possibility of greater imports, which could further dampen domestic prices. “Despite relatively healthy domestic consumption growth, we see challenging times ahead for the steel sector due to potentially greater imports and pressure on domestic realisations," said Edelweiss.

As the weak spots in global steel continue to remain, a pullback in the steel sector could be a long time away.

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