The competitive advantage of Indian steel companies looks threatened and their export viability seems diminished as global iron ore prices have started falling, making imports cheaper once again.
This is largely due to an abrupt, 10% crash in iron ore prices since March 3, leading to a weakening of steel prices globally and making imports of steel cheaper yet again.
This, in fact, takes away the competitive edge of Indian steel companies such as SAIL, JSW Steel and Tata Steel, who are already battered by lacklustre demand in the country.
In the current fiscal, India is largely expected to close the year with the status of a net exporter as more and more steel companies pushed their products overseas with global iron ore and subsequent steel prices firm and high.
This was further aided by the rupee?s depreciation, which averaged almost R62 per dollar in the fiscal to date.
?Over the past six months, Indian steel producers have benefited in two ways from a weak rupee: It has given them a better domestic pricing power, and it has enabled double-digit export growth. From April to January 2014, India was a net exporter of finished steel ? a marked change from its net importer status during earlier years,? said a report from international brokerage HSBC.
However, the tables are turning now. In the last 10 days, the dynamics of the export market have undergone a surprise change with iron ore price having fallen to $105 per tonne as on March 10 from $117 per tonne on March 3.
In fact, since the beginning of 2014, global benchmark (62% Fe grade China imported fines) iron ore prices and consequently benchmark steel prices (China domestic HR steel sheet) have been on a steady decline.
As a result, while iron ore prices moved down from $135 per tonne as on beginning of January and $122 per tonne in early February, steel prices too fell from $579 per tonne as on January beginning to $566 per tonne in early February. They are now at $ 552 per tonne.
However, during the same time, Indian companies have been raising the price of steel, owing to domestic regulatory and supply pressures, especially for spot buyers.
?From January till now, the prices of various categories of long products in Mandi Gobindgarh (Punjab ? benchmark market) have risen by almost R2,000 per tonne. This has led to companies also going for a hike in their monthly contracts,? said Ramesh Iyer, vice-president ? product development, NCDEX ? the first company in India to start steel trading.
This has resulted in the difference between international and Indian prices shrinking, making imports almost viable.
?While traders are still saying imports are not viable, if international prices of steel products continue to weaken further, Indian companies will have to face the onslaught of imports,? said Goutam Chakraborty, analyst ? institutional research, Emkay Global.
This is expected to hurt steel companies badly, who were exporting heavily, especially as Indian iron ore prices are not likely to come down.
?A decline in realisation and in turn Ebitda/tonne of US$15/tonne (2% fall in steel prices) for the domestic steel industry would erode 20% of SAIL?s Ebitda/tonne, 12% of JSW Steel?s domestic Ebitda/tonne and 5% of Tata Steel?s domestic Ebitda/tonne,? said the Ambit report.
Currently, the imported cost of a $552 per tonne of benchmark HR sheet of China would cost close to $700 per tonne while, domestically, although steel is very heterogeneous and has various shapes and grades, an HR coil would cost $670 per tonne. Once this gap is bridged, India steel players will have to revisit their strategy.