Steel prices fall to 3-yr low, gross margins feel the heat

Steel prices, especially those of hotrolled coil (HRC), have dropped below ~35,000 a tonne in the backdrop of a demand slowdown. Prices have dropped for 19 weeks in a row. Analysts say this will impact the bottom line of steel majors, including Tata Steel and JSW, as major companies’ gross margins in the past 19 weeks have dropped by around ~6,000.

Companies are hoping for a revival in demand, which, so far, has proved elusive. A source in Essar Steel told Business Standard, “Volume sales are being managed by giving discounts to customers. But realisations are low and not in our (steel producers’) hands. Steel producers will end up taking a hit on margins. Exports of steel have gone up 30-40 per cent year-on-year (YOY). So, volume sales are being maintained.”

Domestic HRC prices, on average, are down by around 27 per cent YOY and 17.3 per cent this financial year at ~34,975 a tonne. Falling raw material prices are not expected to help much if demand remains low.

A senior executive from another steel company said he expects demand to revive from January, with the government’s renewed thrust to infrastructure.

JSW Steel’s Joint Managing Director and Group Chief Financial Officer Seshagiri Rao had stated earlier that many steel firms were not making money at prevailing prices. He was, however, hopeful, following a series of measures announced by the government in September. “We have to watch out for the second half,” said Rao. He was, however, of the view that steel prices have bottomed out.

Amit A Dixit, assistant vice-president, Edelweiss Securities, said, “We do not rule out further pressure on domestic prices because international prices are cooling off further and there are no signs of demand pick-up. Inventory build-up is yet another cause for concern, which is likely to lead to slow recovery.”

Exporting steel is one option to increase volumes as domestic prices are at a discount to landed cost. “We do not see the possibility of elevated imports. At the current level, domestic steel prices are at a discount of 4 per cent to the landed price of imports from South Korea and Japan. Major domestic steel players are tapping export markets as domestic demand remains lacklustre. Export realisations are also lingering at $423 per tonne, the lowest level since October 2016,” said Dixit.

Price outlook for raw materials is also on the wane. A source from Essar Steel quoted earlier stated, “Iron ore prices have softened, but the market is extremely volatile. The market is closely eyeing Chinese iron ore movement, where prices have dropped. Coking coal prices have also come down in the past six months.” This is expected to cushion the margins, but demand revival is crucial.

An industry observer said steel demand will recover when the auto sector turns around.