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The profitability of steel companies is expected to take a severe hit this fiscal, with slowing domestic demand and a challenging external environment.
Official statistics indicate that the domestic steel consumption growth had weakened to 3.5 per cent in July from 6.4 per cent in June, and this is expected fall further, putting pressure on steel companies profitability in September-quarter, said an ICRA study.
Operating profit margins of the domestic steel industry have been on a slippery ground, declining steadily to 18.2 per cent in the June-quarter, from 22.6 per cent logged in same quarter last year.
According to the ICRA report, the downward trend in profitability for steel companies is expected to continue as their margins get further squeezed between falling domestic steel consumption and a weak outlook for global growth, amid escalating trade war-related tensions.
Falling demand
Jayanta Roy, Senior Vice-President & Group Head, ICRA, said that steel prices have been retreating southwards across most steel consuming hubs globally.
Chinese hot rolled coil (HRC) spot export offers declined by about 13 per cent since April. Spot HRC prices by August-end hovered at about $462 a tonne, a level last seen when much of the industry was in distress in June 2017.
“Not surprisingly, the steel spreads have witnessed a significant contraction to last fiscal level. Unless steelmakers are able to supplement weak margins with higher sale volumes, a decline in industry earnings over last fiscal is a given,” he said.
Surprising most market participants, the Indian GDP growth fell to an over six-year low of 5 per cent in June-quarter of this fiscal.
Coal price drop
On the positive side, seaborne coking coal spot prices dipped 25 per cent between May and August. The benefit of price drop is expected to fully flow in the margins of domestic steelmakers from third quarter.
ICRA’s analysis suggests that the steel spreads for a domestic blast furnace-based flat steel producer in the September quarter is expected to be sequentially weaker by about $25-30 a tonne over June quarter. However, the benefit derived from lower coking coal consumption cost is expected to sequentially increase spreads by $35-40 a tonne in the third quarter.
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