Falling demand from infra, auto industries hit steel companies

Steel makers are caught in a bind as demand is slipping and their hope to sell more may fail to kick off as companies defer plans to build factories, power plants and delay real estate projects.

Steel companies sold 28.05 million tonne (mt) during the first five months of the financial year between April and August 2011, a marginal rise of 1.3% compared to same period in the previous year, data from Joint Plant Committee or JPC shows. JPC is a government constituted body for promotion of steel and co-ordination between various steel producers.

The growth is far below the projected growth of 9-10% for the financial year, but steel makers are putting up a brave face and are saying the projected growth can be sustained. Data on gross domestic growth or GDP is dipping and planned investments are off the target.

India?s GDP is expected to fall to 7.6% in financial year 2012, from the earlier projected 8%. A 1% rise in GDP will increase steel usage by 2.5%. Eight steel makers, including Steel Authority of India (SAIL) which makes three fourth of the 75 mt steel made in India, are hit by the slowing investments to build factories, plants and refineries.

Only 305 projects were commissioned, spending R63,274 crore in the first quarter of the financial year between April and June, as against R8.3 lakh crore targeted for the whole year, data from CMIE shows. ?We expect this slow creation of new capacities to hurt growth in power generation, steel and petroleum refining in 2011-12,? the agency said in a report released on its website on Sept 20.

?The demand for steel is generally tied to the growth of GDP which is expected to be around 8-8.5 % during 2011-12,? CS Verma, chairman, SAIL, said. ?It should be reasonable to expect that steel demand should see a growth of at least 9-10%.?

Despite around 30% cut in production, demand is slow, the managing director of a steel company said. ?The difference between selling price and production cost is also narrowing.? He did not want to be quoted.

?The impact of rising raw material continues to maintain pressure on margins,? Vikram Amin, director, strategy and business development, Essar Steel, said. ?The recent ban on mining does not give a leeway to steel producers to hike the prices.? But, some steel makers hope the government may step up infrastructure spend.

?The government is expected to intensify the creation of infra projects in the remaining period of the 11th Five-Year Plan,? SAIL?s Verma said.

The present Five-Year Plan ends in March 2012. According to him, the likely growth in infra projects indicates strong demand ahead for steel. Others say the activity may pick up in the festival season.

Companies rely on construction and infra to sell more steel.

?Resumption of construction activity after the monsoon and festival season demand may result in a stronger steel demand during the second half of the financial year,? said Amin of Essar Steel, which makes 14 mt in both India and abroad. Essar Steel has tweaked its product mix to sell its products to different kinds of consumers which helped them grow sales by 40% between April and August, 2011.

SAIL is banking on demand from car and truck makers and pipeline makers. ?Demand from automobiles and pipelines are also likely to help demand,? Verma said.

But car makers think the opposite, saying the consumption may remain subdued. ?The growth has been very slow this year,? Ajay Seth, CFO at Maruti Suzuki, said. ?But now we are putting all our hopes on the festival season.?

Lack of fresh steel capacity has helped steel companies improve the use of their plants? capacities. Companies, which were using 75% of their capacity between July and August, used 85-90% of their capacity in September as there were no fresh capacities built, says a senior official of a steel company.

Industry body Ficci predicts a gloomy outlook for long products or TMT rods used to build factories, power plants, refineries and developing real estate projects. ?It is also possible that the monetary tightening cycle, that started in March 2010, has resulted in sectors like construction beginning to feel the pinch,? the industry body said in its report released on October 10, 2011.

According to Ficci survey of top 15 companies by sales in each sector, 75% said their cash balances are increasing.

?An increase in cash balances typically implies corporates are holding on to their investment plans for better future opportunities,? the survey stated. The body observed that a similar trend was seen in 2002-03 in the aftermath of the dotcom bubble burst and the WTC attack.