The gloom in the Indian steel sector is set to be reflected in the financial results of steel makers for the first quarter of fiscal 2013. The sector?s results are set to be impacted by multiple factors, including limited pricing power due to an oversupply situation, increasing imports and a weakening rupee, due to which which companies are unable to take advantage of weak global prices of iron ore and coking coal.
India’s steel consumption grew 8.8% in the first quarter, but despite this growth, steel production was still nearly 5% higher than consumption. However, domestic prices have remained flat as compared to last year.
?The positive thing is that companies are willing to cut production,? said Rohit Vohra, partner and director at Boston Consulting Group or BCG, a global management consultancy firm. ?Companies are okay shutting down a blast furnace to bring supply in line with demand.?
The demand supply mismatch for steel has risen as a result of new capacities coming on stream, which has propelled India to being the fourth largest steel producer in the world with an installed capacity of 89 mt a year, according to statistics from the World Steel Association.
However, demand for steel in India is only 71 mt as of 2011-12. Companies are tackling the current scenario by running their plants at lower capacity. According to World Steel Association, India?s average capacity utilisation in 2011-12 was 83%.
?We remain concerned on Indian steel industry demand-supply balance over next coming quarters which would adversely impact pricing capacity of steel companies,? said Saurabh Agarwal of Kotak Securities, a Mumbai-based brokerage, in the firm?s quarterly results preview released last week.
Imports in the first quarter grew 41% due to last year?s low base. But weak global prices have meant that prices of imported steel are comparable to domestic prices.
?Hot rolled coil prices declined across major geographies in the first quarter of fiscal 2013 and are now close to yearly lows,? stated Mumbai-based brokerage firm Motilal Oswal in its quarterly results preview released last week.
Consultants say weak rupee has helped to a certain extent in maintaining domestic prices at last year?s levels.
?Given the current scenario, the only thing helping the domestic steel industry?s pricing power is the weak rupee,? said Vohra of BCG.