Slowdown in demand may take a toll on steelmakers
Weak realisations, rising imports, and inventories among bigger challenges
Stocks of steelmakers such as Tata Steel, JSW Steel, Steel Authority of India (SAIL), and Jindal Steel & Power (JSPL), which have been major laggards on the bourses in the past one year, clocked gains of 1.4-2.1 per cent on Monday.
The trigger came from some positive news flow on Us-china trade talks. Concerns over international demand growth and realisations on the back of the trade war are among key concerns for underperformance of domestic steel stocks, which are down 40-50 per cent since October last year versus a 12 per cent rise in the BSE Sensex.
Global worries apart, a slowdown in the country impacting steel demand — at a time when realisations continue to slide — has also added to the woes. While Monday’s news provides some hope and input prices have corrected recently, analysts aren’t positive yet on steel counters.
Steel volume numbers reported by companies recently have not been encouraging. Though Tata Steel’s domestic production grew 4.7 per cent year-on-year (YOY), sales volume at 4.14 million tonnes (mt) declined 4.2 per cent YOY for the September quarter. Analysts say Tata Steel’s India performance was supported by better-thanexpected volumes of Tata Steel BSL (Bhushan Steel, or BSL, was acquired by Tata Steel). The company, too, said India’s second quarter (Q2) 2019-20 (FY20) sales volume increased by 5 per cent sequentially, primarily with better volumes at Tata Steel BSL.
JSW Steel, on the other hand, reported about 8 per cent decline in crude steel production during Q2. Analysts say the decline in volumes in the seasonally weak September quarter is led by soft demand from the auto sector.
The only exception among top players (SAIL numbers not out yet) was JSPL, which registered a 16 per cent rise in production to 1.58 mt and 10 per cent increase in sales to 1.46 mt in its domestic operations, during the September quarter. The growth is being driven by the ramped-up capacities of its Angul plant, and this can drive operational efficiencies too for JSPL.
The scenario on realisations, too, is not encouraging, looking at weakening domestic steel prices. Analysts’ recent checks show that domestic hot-rolled coil prices have slipped for the 18th successive week and are now at ~35,150 a tonne (down 26 per cent YOY).
While weakening international steel prices are putting pressure on domestic prices, at a time when demand remains weak, cheaper imports from Southeast Asia, too, are on a rise. Analysts at Edelweiss say that weak domestic scenario is exacerbated by increased export volumes at a sharp discount of 14 per cent (~5,000 per tonne) to domestic prices.
If that wasn’t enough, inventory build-up is another cause for concern, which is likely to lead to slow recovery. Analysts at Emkay Global say high inventory across the system may hinder meaningful price recovery in the second half of FY20. The only respite for steel players is the softness in coking coal and iron ore prices. Coking coal prices have corrected by 19 per cent in the September quarter, but given the inventory lag, analysts expect only an $8-10 per tonne cost reduction during the quarter.
Even seaborne iron ore prices peaked during the quarter and have retracted by 20 per cent, from $120 per tonne to $95 currently. After doubling from $60 a tonne levels last year, global iron ore prices, too, have declined to around $90. And with domestic iron ore supplies expected to improve, steelmakers could find some respite on this front as well. However, analysts at Kotak Institutional Equities believe that weak domestic steel demand, higher exports, and lower steel prices are likely to result in a 14-28 per cent sequential decline in earnings before interest, tax, depreciation and amortisation per tonne for domestic steel companies during the September quarter. Some other analysts say that with demand not picking up, profitability of domestic steel players may revert to Q2 2017-18 levels.