Capitalising on opportunities in a depressed market

Written by Sushim Banerjee | Sushim Banerjee | Updated: Sep 14 2013, 09:01am hrs
At 30.3 million tonne, steel consumption in the country, at the end of the first five months of the current fiscal, exceeds last years level by a mere 0.3%. If the first half of the year sees consumption at around 45% of the total and the balance 55% happens in the second half, India is likely to consume around 81 mt of steel in Fy14.

However, if a recent survey on CEOs sentiment is any indication, consumption may grow by more than 6-7%. This positive development, against the backdrop of a GDP downgrade to around 4% by Goldman Sachs and a series of articles by analysts lamenting the dismal economies of BRICS, is noteworthy as it places confidence in the effectiveness of the policy reforms pursued by the government, ably backed by the RBI. Hopefully, the September PMI should reflect this.

The rupees depreciation, leading to rising import costs of coking coal, scrap and even imported steel (was down over 28% in April-August 2013), has provided steel producers with a solid reason to raise prices by R1,500-2,500 per tonne in September.

Last month, the market witnessed inventory build-up by stockists and processors, apprehending an imminent price hike and a sharp rise in the exchange rate, thereby ruling out imports. Sales growth in the previous month by all producers, led by SAIL, RINL, Tata Steel and JSW, partially compensated for the low margins. Assuming that actual realisation may vary depending on local factors, competition among producers and, above all, the strength of market demand, market absorption is likely to keep the rise at a level lower than the total increase in view of subdued demand. But any increase in realisation is a net gain for producers.

International prices of billets (e.g., Turkish exports) have moved up from $500/tonne fob in July 2013 to $530/tonne fob in early September while prices of rebar have moved up from $583/tonne fob to $628/tonne fob during the same period, resulting in the spread widening from $83/tonne to $98/tonne. In fact, it should have been more but for the rise in scrap prices. Similarly, fob prices of HR coils have risen from $540/tonne (Chinese exports) to $580/tonne in the last three months, with CR prices (Chinese exports) increasing from $565/tonne to $635/tonne over the same period, with the spread moving up from $25/tonne to $55/tonne. Indias export realisations in HR are comparable to that in CR, with the latter fetching a marginally higher value.

Export volumes in the first five months are lower by only about 3% than last years . A sharp decline in the exchange rate has prompted all steel producers to target much higher export volumes in the current fiscal. Total steel exports in 2013-14 should exceed around 6 million tonnes. As all the BRICS partners except China have experienced a fall in exchange rates, the actual export realisation from India may be under pressure, but that should only encourage exports of high-value items from the country.

The author is DG, Institute of Steel Growth and Development. The views expressed are personal