2 min read.Updated: 27 Aug 2019, 12:02 AM ISTR. Sree Ram
Current slump in auto sales and the slowdown in construction of houses have begun impacting demand for steel
Weak steel demand in global markets is driving cheap imports into India
Shares of Tata Steel Ltd and JSW Steel Ltd hit new 52-week lows on Monday. These stocks have been under pressure for some time now, tracking weak demand and subdued market prices. But the concerns intensified as steel prices in the domestic market continued to slide.
Domestic steel prices have fallen for the 11th straight week, marking the longest stretch of decline since the first quarter of FY16, said analysts at Edelweiss Securities Ltd. Hot-rolled coil prices are at a multi-year low. As a consequence, the difference between prices in the spot market and raw material costs, known as spreads, dropped to levels last seen in December 2016, they added.
Not surprisingly, investors are worried. The fall in spreads in a seasonally slow quarter (July-September) will intensify the pressure on earnings. But, that is not the only concern. The bigger challenge is demand growth.
Global headwinds notwithstanding, the steady growth in demand in India have been a source of strength for domestic steel companies. This helped them derive relatively better prices in the local market. However, the current deceleration in automobile sales and the slowdown in construction of residential houses, both large users of steel, have begun impacting demand in the country.
Domestic growth in steel demand slowed to 3.5% in July, from 6.5% expansion in the June quarter, showed data compiled by SBICAP Securities Ltd.
“FY20 to date demand growth is now at 5.7%, much lower than FY19 growth of 7.5%. This steel demand growth print now reflects contraction in end-user sectors like automobile sales and slowdown in infrastructure spending, as highlighted by steel companies’ commentary," said analysts at the brokerage firm in a note.
The softening of raw material costs can mitigate the impact of fall in steel prices. But, it can provide only limited relief.
Weak steel demand in global markets is driving cheap imports into India. The steady growth in the domestic market helped absorb the imports till now. But a prolonged weakness in domestic demand can further suppress steel prices, worsening the profitability of domestic producers.
“The downturn this time is more concerning as in FY09 and FY16, domestic consumption growth had remained robust," said analysts at Edelweiss Securities.
“This time around, we may see production cuts in Q2FY20 even for major steel players as domestic demand, particularly in the auto sector, is concerning. We expect profitability of steel companies to take a hit in ensuing quarters," they added.
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