A recent analysis has suggested that a global steel unit must aim for an EBITDA (earnings before interest, tax depreciation and amortisation ) margin at 17% of their turnover in order to become sustainable.
This is against the current global average EBITDA margin of 10%. In the current Indian scenario, EBITDA of most steel producers has been pulled down either by higher cost of production or by lower sales realisation. The cost of iron ore in the domestic market has gone up due to peak-season freight tariff hike by the Railways and raising of ore prices by NMDC in tandem with the international trend. The e-auction method of offering to the highest bidder has also contributed to the rise.
Coking coal prices by Australia and the US have also been hiked by nearly $20/t in the recent period. Global scrap prices have gone up by $25/t with corresponding increase in HBI prices. The net impact on production cost of steel is likely to be in the order of R400-500/t. Domestic prices of HR coils net of taxes and duties have dropped down from an average $702/t ex-works in April 2013 to $653/t in November due to subdued demand.
While the units with captive iron ore mines are spared the impact of ore price hike, the onus of completing ongoing brownfield expansion by SAIL and TATA has made it imperative for them to seek a price hike. The drop in realisation in the past few months on the back of lackluster demand scenario was dampening the investment mood and was instrumental in low capacity utilisation for JSW and Essar steel.
The global market is also paving way for a price rise in steel. The US is already on the path of positive growth with the manufacturing sector displaying rise in productivity and output. The EU market is exhibiting a picture of slow recovery. US domestic price of HR coils (ex-works) has staged a rise by 4% (from $716/t to $744/t) in the past three months. The Black-sea fob export prices of HRC by Russia have gone up from $ 517/t to $548/t, while Chinese export fob prices of HRC have moved up from $ 517/t to $ 525/t in three months.
This leaves scope for Indian steel producers to gain higher export realisation for HRC. Also, US domestic prices of GP and other coated products have shown a rise from $903/t ex-works to $931/t in three months, which is likely to fetch higher realisation for Indian steel exporters for this product in the US.
All this points to the fact that the marginal hike in steel prices in the new year is likely to be absorbed by the market, which is expected to shade off the depressing outlook and wake up as it happens with the upbeat mood associated with the fourth quarter. The only exception this year is that the country goes to the polls after four months and government expenditure is being curtailed to rein in the CAD .
The author is DG, Institute of Steel Growth and Development. The views expressed are personal