Amid gloomy economic environment, domestic steel sector outlook remains weak with lesser possibility of turnaround in the current financial year, according to a report by Bank of America-Merrill Lynch.
Offering a negative outlook, the report blames it on demand slowdown from key industries like construction, auto and infrastructure, keeping the margins of steel firms under pressure.
“Demand is weak across most segments (autos, construction, infra). We believe a meaningful recovery in FY’14 is unlikely as weak rupee would delay rate cuts,” the report said, adding a negative impact from over capacity.
The rupee is hovering at its historical low level of around 59-60 per dollar in the recent months on the back of foreign fund outflows.
This has led the Reserve Bank of India to reduce the policy rates, creating fear of delaying the process of economic recovery.
The report also points out that while the demand for steel products remains low, many delayed steel projects are due for commissioning this fiscal leading to overcapacity.
Margin pressure
On the margin pressure, the report says, “We believe most domestic steel firms may face margin pressure on lower prices and limited benefit from lower input costs (especially for iron ore) due to vertical integration and dependence on the local demand-supply driven e-auction ore.”
It also notes that domestic steel sector will remain under pressure due to weak demand environment.
“We believe the recent rupee depreciation (down 10 per cent since March) could cushion the fall in domestic steel prices, but steel producers may not have the pricing power to lift prices as demand is weak, supply is rising and utilisations remain at 10-year low,” it said.
The report further says while some producers have attempted to raise prices this month, this is unlikely to stick due to weak demand.
“We believe domestic prices could sustain at a discount to import parity unless fundamentals improve, which is unlikely in the near term,” it said.
Rupee impact
Referring to the impact of rupee depreciation on net debt situation of companies like Tata Steel and JSW Steel, it says the net debt position would rise with higher foreign currency debt.
“We expect the net debt of steel companies to increase over the next few years as companies like SAIL and Tata continue to fund their ongoing projects...,” it said.
The report also says it remains bearish on top domestic steel firms like Tata Steel, JSW Steel and SAIL on the back of prevailing economic environment.