‘Steel sector profitability may improve in near term’
With rising global steel prices, the profitability of domestic steel industry is likely to improve in the near term. Due to a healthy trend in the international market, domestic steel prices have registered a growth of 14 per cent during the last three months following to a sharp recovery in international steel prices and improvement in local demand growth.
According to a report by rating agency ICRA, buoyant global steel prices have benefited Indian mills to increasingly tap overseas markets, as reflected in a 57 per cent Y-O-Y growth in exports during Apr-aug 2017, helping the domestic steel industry operate at a capacity utilisation of above 80 per cent in the current fiscal. "This is expected to improve the profitability of domestic steel mills in the near term," said the report.
Steel prices have reported a healthy growth of 14 per cent since June 2017, aided not only by a sharp recovery in international steel prices but also by an improvement in domestic demand growth to 4.4 per cent in Apr-aug 2017, from 2.6 per cent per cent in FY17, ICRA said.
"The sharp rise in domestic steel prices has been fuelled by rising international prices. The Chinese hot rolled coil (HRC) export prices increased by about 40 per cent since mid-may 2017, reaching $588 per metric tonne (MT) in the third week of September 2017, supported by China's resilient domestic demand and its supply-side reforms to check the domestic steel overcapacity," said ICRA Senior Vice-president Jayanta Roy. He added that Chinese steel production grew at a healthy rate of 5.1 per cent in Jan-jul 2017 and kept the global steel capacity utilisation rates above 72 per cent in the last five months against 68.2 per cent in December 2016.
Operating margins of the steel industry contracted to 12.5 per cent in Q1FY2018 from 15.7 per cent in Q4 FY2017 on the back of lower steel prices and increased raw material costs, especially for coking coal in Q1 FY2018.
While the prices of coking coal and iron ore have also increased recently, the extent of increase in domestic steel prices in Q2FY2018 remains higher than that in raw material costs, which points to a sequential expansion in gross contribution levels of steel players.