Buoyant International Prices to Augur Well for Domestic Firms: ICRA

"Notwithstanding anaemic domestic demand, buoyant steel prices both in the local and international markets will help home-grown steelmakers such as SAIL and JSW Steel to improve their margins in the second quarter of the current fiscal", rating agency ICRA said in a recent report.

The first quarter of the current fiscal has not had been good for the domestic firms. Largely due to higher coking coal prices and subdued steel prices, their operating margins contracted to 13.1% during the April-June period compared with 15.7% in the immediate past quarter.

"However, given that steel mills stand to benefit from buoyant steel prices in both the domestic and international markets in Q2 FY'18, gross contribution levels of steel players are likely to improve sequentially in the current quarter," Jayanta Roy, Senior Vice-President and Group Head - Corporate Sector Ratings, ICRA, said.

Taking a cue from the buoyant international prices, Roy said, domestic steel makers raised prices for HR Coil, the benchmark steel product, by 10% to 39,250 /MT between July and August. They also pushed exports with support from favourable international steel prices. India's steel exports grew by 66% between April and July of the current fiscal.

During the same period, India's steel production grew by a healthy 7% and its capacity utilisation went up to 81%.

International steel prices have been on the upswing since June 2017, driven largely by the Chinese Government's supply-side reforms to reduce domestic steel overcapacity, a steadily declining trend in Chinese steel exports on the back of resilient Chinese domestic steel demand.

The Chinese hot rolled coil export offers rallied by over 30% between June and August 2017, reaching US$ 555 per tonne on August 29, 2017.

Saddled with a surplus steel capacity of over 300 MT, China closed steel capacities of 65 MT in 2016, and a further 42 MT in the current year till May, thereby tightening the demand-supply balance.

Roy, however, said that credit profile of domestic steel companies are unlikely to improve significantly in the near term despite the current buoyancy in steel prices.