The financial results of a few steel plants in Q1 of FY16 clearly indicate that a big push in domestic demand can only bring some cheers to the bottom lines of producers. However, it is also to be appreciated that unless the average global prices move up significantly in the coming quarter, domestic realisation would continue to be under pressure
Profitability of an industry determines its potential and growth prospects. It generates confidence in lenders on the ability of the sector to repay loans as well as to justify the credit required to cover investments for augmenting fresh capacities. While the government is trying to pump in more liquidity in the market by enhancing outlay in FY16 by additional R400 billion and announcing National Investment and Institutional Fund with capital infusion of R700 billion in the next five years, the volume is much less than what is required by some stressed sectors like iron and steel.
The financial results of a few steel plants in Q1 of FY16 clearly indicate that a big push in domestic demand, a major part of which is to be met by the indigenous producers, can only bring some cheers to the bottom lines of the producers. However, it is also to be appreciated that unless the average global prices (Chinese and CIS prices as a benchmark) move up significantly in the coming quarter, domestic realisation would continue to be under pressure.
During the first six months of 2015, the Chinese HRC prices (SS 400B-3mm) have come down by 29% from $445/t fob Tianjin to $315/t fob. CIS prices ex-Black Sea have come down from $430/t to $340/t, a decline of 21%. The drop in export prices by Japan and South Korea to India during the period was also indicative of the subdued steel market and consequent price depression.
Together these four sources account for major part of imports of HR to India, but the lowest price offered by one of them (China) has set the benchmark for HR cost in the country. This has caused a substantial fall in domestic prices of HR coils during the last six months.
The Chinese prices of re-bar have fallen by 27% from $388/t to $284/t and Turkish supply by 20% from $505/t to $403/t. The drop in global re-bar rates was caused by a steep fall in prices of billets (12%) from $395/t to $348/t fob Black Sea, and scrap prices by 26% from $305/t fob USA to $225/t (HMS: 1/2 80:20). Correspondingly, the domestic prices of sponge iron, re-bar and billets dropped down steeply due to fall in global prices and the subdued market demand for the finished products.
Although decline in iron ore and coking coal prices from $95/t CFR China (62% Fe) and $115/t fob Australia to $56/t and to $92/t respectively in the last six months and the resultant drop in selling prices by NMDC led to lowering of cost of production of finished steel, the poor market realisation more than neutralised the gain.
It appears that with MMDR, changes in real estate regulations, GST Bill, near normal monsoon and reduced interest rates, the government is able to enhance investment spending and would successfully go ahead with ‘Make in India’ programme leading to more demand for steel, the stagnant global market aggravated by fall in Chinese consumption may still not convince China to deviate from high export compulsions at much lower realisations.
Under the circumstances, the challenge for higher profitability on account of higher margin would continue to remain rather stiff before the domestic producers till such time the domestic market expands substantially.
The author is DG, Institute of Steel Growth and Development. Views expressed are personal.