Steel cos may cut output on slow demand, high capacity

Written by Debabrata Das | Mumbai | Updated: Nov 29 2011, 07:31am hrs
Indian steel makers may have to slash production by 20% from the next fiscal as demand continues to taper off and more capacity gets added. Demand has fallen to 2.9% in April-October 2011 from 8.5% in the same period last fiscal as high interest rates deter car and home buyers and companies cut down investments plans. Steel makers will add 15% more capacity by March 2012 from their previous planned investments.

Only 305 projects were commissioned, spending R63,274 crore in the first quarter of the financial year between April and June against R 8.3 lakh crore targeted for the whole year, CMIE data shows.

"New capacity coming on stream in the next 12 months will cause a supply-demand mismatch in the short term," says Prasad Baji, senior vice- president at Edelweiss Financial Services, a broker. "This will result in capacity utilisation of plants coming down to 75% from 90-95% now.

Steel companies produced 65.93 million tonnes in fiscal 2010-11, data by the Joint Plant Committee shows. This fiscal, fresh 10 million tonnes will be added with Tata Steels 3 million tonne at its Jamshedpur plant. After completion of the expansion project in December, we will become a 10 million tonne steel company, said H M Nerurkar, managing director, Tata Steel while announcing the companys fiscal second quarter results on November 10.

State-owned Steel Authority of India (SAIL) will add 4.2 million tonnes split between its Rourkela Plant and cold rolling unit in Bokaro."Next 3 years, steel demand will be muted and growth will be slower than GDP growth, said Edelweiss Baji. This fiscal, demand is expected to grow at 3.5% while next fiscal we are estimating 6.5% growth, much slower than the projected growth rates at the beginning of the year.

SAIL expects demand growth to be a little higher than analysts expectations. However, it will still be lower than the projected growth rates at the beginning of the year. Steel demand in the current fiscal is expected to be around 6% as interest rate is too high, impacting demand from key sectors like auto and construction in the recent time, SAIL commercial director Shuman Mukherjee said last week.

There will be some improvement in demand in the second half of the year but it is still nowhere near the projected growth, said VK Mehta, SAIL's executive director (long products and flat products). "Lower demand will also curtail producers' ability to raise prices resulting in a stable pricing regime till March."