1 min read.Updated: 13 Mar 2019, 05:00 AM ISTR. Sree Ram
A slowdown in steel demand from auto and real estate sector raises questions on sustained steel production growth
The slowdown in large user industries can make it tough for Indian steel producers to pass on price hikes
After a slow start to the year, steel production in India picked up in February, rising 5.7% from a year ago. Data from the joint plant committee compiled by SBICAP Securities Ltd also shows a healthy growth in steel demand, with consumption increasing by 8.6% last month. However, amid the mounting evidence of demand slowdown in user industries such as automobiles and real estate, questions about the sustainability of the rebound in steel production refuse to go away.
Towards the end of last year, customers had reduced purchases, anticipating a further fall in steel prices. Responding to this, steel producers had tempered production. However, as the turn of the calendar year triggered new purchase cycles at the customers’ end, companies stepped up production. The rebound this time is aided by a disruption in iron ore production in Brazil and a subsequent rise in steel prices. The price rise appears to have prompted restocking by customers.
However, beyond cyclical factors, such as inventory restocking and advance purchases to hedge against the likelihood of a price rise, there is little evidence of a firm rebound in demand. Rather, the slowdown in large user industries can make it tough for the steel producers to pass on price hikes.
The automobiles industry, for instance, is a major user of flat steel products and the slowdown in vehicle sales is resulting in discounts by auto firms to reduce inventories. “Passenger vehicles and two wheelers demand continues to remain weak. Hence, not surprisingly, incentives are back. Channel inventory, which also had been in correction mode, has jumped to 60 days," add analysts at Edelweiss Securities Ltd.
The impact can be mitigated by sustained government-led spending in the infrastructure sector. Even so, the subdued demand conditions in key user industries remain a concern. Further, elevated prices of other raw materials such as coking coal, intensify profitability challenges, especially if cost increases are not fully passed on.