Q2: De­mand re­mains a bright spot for steel firms

Mint Asia ST - - Mark To Market -


com­pany shares have not been spared in the eq­uity bloodbath, but they have ended the Septem­ber quar­ter on a strong note. Do­mes­tic steel de­mand con­tin­ues to grow at a good pace. A mod­er­ate growth in out­put and a de­cline in im­ports also meant the mar­ket was not over­sup­plied.

Fin­ished steel de­mand rose by 6.8% in the Septem­ber quar­ter over a year ago, ac­cord­ing to data from the Union steel min­istry’s Joint Plant Com­mit­tee. This is lower than the June quar­ter’s 8.9% growth but was mainly due to slower growth in July. Both Au­gust and Septem­ber have seen de­mand at higher lev­els. Since July 2017 saw the goods and ser­vices tax roll-out, tak­ing the first half data could smooth out dis­tor­tions. April-septem­ber de­mand grew by 7.8% com­pared to 4.3% a year ago.

While de­mand growth has been healthy, steel out­put has been held in check. Pro­duc­tion rose by only 2.9%, chiefly due to a fall in Steel Author­ity of In­dia Ltd’s out­put. While large pri­vate sec­tor com­pa­nies saw out­put in­crease, this var­ied. On Mon­day, Tata Steel Ltd re­ported its pro­duc­tion num­bers. Steel sales vol­umes rose by 3.2% over a year ago, the slow growth at­trib­uted to it oper­at­ing at full ca­pac­ity. But its ac­qui­si­tion of Bhushan Steel Ltd in May will boost out­put, ris­ing by 6.7% over a year ago com­pared to 2.2% stand­alone.

Ris­ing de­mand and slow­ing out­put growth has af­fected steel trade. Ex­ports fell by 36.3%, while im­ports de­clined by 19.6% in the Septem­ber quar­ter. Com­pa­nies would pre­fer to sell in the do­mes­tic mar­ket, as they earn higher profit mar­gins.

While In­dia’s steel in­dus­try seems to be in good shape, the chief risk it faces is ex­ter­nal. There is some un­cer­tainty on the ex­tent to which China’s steel out­put could de­cline in the win­ter months.

China ap­pears to have de­cided to adopt a flex­i­ble ap­proach to­wards ca­pac­ity cuts that are meant to curb pol­lu­tion. A tight sup­ply sit­u­a­tion in China is one of the rea­sons steel prices are hold­ing up and if that changes, it could af­fect prices. But for ex­ter­nal risks, large in­te­grated steel com­pa­nies seem to be in a good place.

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