As end-user demand for steel in India continues to fall,
CRISIL Research estimates domestic steel demand to grow at a subdued
rate of 2-4 per cent in 2013-14.
Due to execution
delays owing to environment clearances, many construction and
infrastructure projects have not taken off as expected.
Slowing economic growth has also put the brakes on consumption-driven sectors such as automobiles and consumer durables.
While near-term demand is expected to remain muted, long-term prospects are forecast to be steady.
CRISIL
Research expects steel demand in India to pick up from 2014-15 with an
expected pick-up in demand in key end-user sectors such as construction,
infrastructure and automobiles.
However, growth in demand will be lower compared with the robust growth rate of the last decade.
CRISIL
Research estimates domestic steel demand growth at 6-7 per cent CAGR
between 2013-14 and 2017-18 compared with around 9 per cent CAGR over
the last decade.
This rate of increase will see steel demand in India touching 93-94 million tonnes by 2017-18.
Since
incremental demand for finished steel is expected to be considerably
lower the demand-supply gap will widen, when majority of the planned
capacities are scheduled to be commissioned (16 million tonnes in
2013-14 and 8 million tonnes in 2015-16).
The
widening gap will encourage, even compel, steel manufacturers to
increase exports to arrest the expected fall in operating rates.
However, the demand-supply equation globally too is not favouring domestic steel manufacturers.
A
shift in China’s focus from investment to consumption, accentuated by
weak economic conditions in mature developed countries will force a deep
structural slowdown in global steel demand over the next 5 years.
We, therefore, expect global steel demand to grow by 2-3 per cent compared with 5.5 per cent growth over the last decade.
As
global demand growth slows at a time when there is acute global
overcapacity, competition is expected to intensify in the export market.
While
the cost competitiveness of India’s steel players, excess domestic
capacity and a weak rupee is expected to increase steel exports from
India, an extremely competitive global export market, weak global and
domestic demand, and the commissioning of huge domestic capacities will
rein in domestic capacity utilisation rates in the medium term.
Globally too, utilisation rates are expected to remain below 80 per cent over the next five years.
Global steel prices
Consequently,
global steel prices will continue to trend downward. This will, in
turn, exert tremendous pressure on global contract prices of iron ore
and coking coal. On the domestic front too, steel prices, both long and
flat, are expected to come under pressure and decline by around 3-4 per
cent y-o-y each.
On the raw materials front, although
coking coal prices are expected to decline the depreciation in the
rupee is expected to continue to partly negate the benefit of the steep
fall in coking coal prices in 2013-14. Additionally, while the domestic
iron ore supply constraints are set to ease marginally, non-availability
and high prices of thermal coal remains a worry for the marginal long
steel producers in India.
Profitability under pressure
We
believe that the profitability of the Indian steel industry will come
under pressure because of deterioration in the demand-supply equation on
the back of macroeconomic challenges being faced by the country (which
has led to a steady inventory build-up for Indian steel players) on one
hand, and a rapidly increasing supply base on the other. This is likely
to keep steel prices under check.
The prices of the
key raw materials (especially non-coking coal)are, however, expected to
remain high in the near term, given the concentrated industry structure
and the supply-side bottlenecks.
Raw material costs
Since
raw material costs account for the bulk of the total steel production
cost, firm raw material prices are likely to keep production costs high
even as weak demand conditions may make it difficult for steelmakers to
pass on the cost-increases to consumers. This is likely to adversely
impact the margins and cash flows of Indian steel companies across the
value chain:
•The profitability of integrated
steelmakers, with access to captive mines, will continue to be under
pressure at 17-19 per cent in 2013-14.
•Margins of
integrated players without access to captive mines are expected to fall
marginally in 2013-14 due to continued disruption in the supply of iron
ore. For these players, higher input costs, amid lower demand, will
cause margins to drop marginally y-o-y to 15-17 per cent during 2013-14.
•Small
and mid-sized manufacturers of long steel are facing issues over
availability and prices of iron ore and non-coking coal. Additionally,
sluggish demand for long steel is expected to limit the ability of these
players to fully pass on the rise in input costs, which will keep their
margins also under pressure in the near term.
The author is Director, CRISIL Research
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