One positive for the steel sector, however, is that input costs are on the decline
Steel firms have hiked domestic prices following a rise in international rates
The modest recovery in steel prices in November may not quite reverse the fortunes of the sector. However, the stock market seems to be pricing in a swift recovery as most steel stocks clocked decent gains in the last one month.
Steel firms have hiked domestic prices following a rise in international rates. In fact, domestic hot rolled coil steel prices have risen by about 3% in the past two months. Prices of bars have also increased by as much.
But demand conditions must be viewed with a steely eye. Rating agency Icra Ltd said demand growth for steel slipped into negative territory in the first two months of Q3 FY20, recording a fall of about 1.8% year-on-year. “Domestic steel demand growth has steadily decelerated throughout the current fiscal, declining from 6.9% YoY in Q1 FY20 to 3.1% YoY in Q2 FY20," it added.
Further, steel consumers such as auto and infrastructure, continue to reel under a slowdown. “There are no visible signs yet of demand revival in auto and capital goods sectors and hopes are pegged on construction demand from the infrastructure sector as the peak season has begun," said SBI Capital Markets Ltd.
One positive for the steel sector, however, is that input costs are on the decline. Prices of raw materials iron and coking coal have slipped. Iron ore, for instance, dropped by 15-17% over the past four months, while coking coal prices fell about 32% in the last six months. This should help alleviate the pressure on operating margins.
Note that the delay in auctions of iron ore mines in Odisha may lead to a spike in domestic iron ore prices, and that could be a sore point for the sector. “A delay in the auction process is a major risk to an adequate supply of iron ore in the domestic market, despite few mitigating measures, such as allowing warehouses for miners and permitting SAIL (Steel Authority of India Ltd) to sell low-grade ore," said IIFL Securities Ltd in a client note.
Another factor that weighs on a global demand revival is the China factor. Capacity expansions in China have been slow lately, hence, Chinese steel is not expected to derail the steel market. “Expectation of a stable market balance in China is a major positive," said Edelweiss Securities Ltd in a client note.
Additionally, some of the surplus domestic steel production is being diverted to the export market, which has posted a year-on-year growth since August. Although export volumes, at about one million tonnes per month, were not much to highlight, this is helping alleviate pressure on the domestic steel market.
But a bigger demand push is needed in the domestic market, particularly from the infrastructure and auto sectors. So, even while the rise in share prices of steel producers suggests an improvement in the steel market, ground conditions point to the contrary. A recovery, at best, could be very slow and gradual.