Source: The Economic Times
A 14% increase in domestic steel prices since June 2017, led by a sharp recovery in international steel prices and growth in domestic demand in the April-August period has brought much-needed cheer in the steel sector. Buoyant international steel prices have also led to a 57% year-on-year growth in exports during April-August 2017, helping the domestic steel industry operate at a capacity utilisation of above 80% in the current financial year. Analysts like ICRA feel this is expected to improve profitability of domestic steel mills in the near term.
Domestic demand has nearly doubled to 4.4% in April-August 2017, from 2.6% in FY17, as per ICRA estimates Industry experts feel the post monsoon period and the coming festive season is likely to boost demand further both in construction grade steel and in steel used by consumer durables sector like automobiles and white goods.
"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% since mid-May 2017, reaching US$ 588 per tonne 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”, Jayanta Roy, senior vice-president, ICRA said.
Earlier, increased raw material costs, particularly coking coal led to a squeeze in operating margins of the steel industry in Q1FY18. Citing a sample of 22 large and mid-sized steel players, accounting for about 60% of the current domestic capacity, ICRA said margins went down to 12.5% in Q1FY18 from 15.7% in Q4FY17.
While the prices of coking coal and iron ore have also increased recently, "the extent of increase in domestic steel prices in Q2FY18 remains higher than that in raw material costs, which points to a sequential expansion in gross contribution levels of steel players," the ratings agency said.
However, elevated debt levels of most steel companies are likely to keep the coverage indicators of the industry depressed. For instance, interest coverage ratio of the industry stood at 1.26 times in Q1FY2018 as against 1.53 times in Q1FY2017. Therefore, ICRA believes that credit profile of domestic steel companies are unlikely to improve significantly in the near term despite the current buoyancy in steel prices.