Implied steel output loss seen at 14% in FY21: Analyst’s report

Steel Insights Bureau

India’s finished steel production loss stood at 53 percent till June (from 26.5 to 12.5 million tons), implying a full year loss of around 14 percent on last year base, research house JM Financial has said in its Metals and Mining sector report.

There was 12 percent loss for steel majors and 15 percent loss for secondary producers.

Consumption registered 57 percent decline over the same period, though up marginally on month from 4.5 mt in May to 5.1 mt in June.

India continued to be a net exporter of steel with exports of 3.3 mt (finished steel only - industry data excludes semis - billets/ blooms) over April-June.

Exports to get squeezed

Export prices of HRC continue to range at Rs 2.5k+/ton discount to domestic prices. Quality of exports remain inclined towards low value add billets/blooms/HRC. Avenues to export to come under pressure going forward as:

1) China steel demand is likely to wane due to seasonal rains/floods, slowing construction activity

2) EU modifies steel safeguard measures to country specific quarterly quotas as countries exhausted full year quotas in first few months.

India exported over 2 mt in 2019 to EU; Russia, Turkey, South Korea are other key exporters to EU which will likely re-direct material to other importing nations.

Domestic steel demand recovered marginally in June with domestic sales mix increasing to 50 percent from 40 percent in May with the recovery in rural markets like tractors, motorcycles and roofing sheets.

Domestic inventory levels in the industry increased marginally from 13.2 mt in March to 13.5 mt in June.

Margins to be under pressure

Gross margins are likely to face a squeeze sequentially as lower blended realisations (export price down Rs 4.5k+/t on quarter) is unlikely to be offset significantly by lower NMDC iron ore prices with its average prices down by Rs 740k/t).

Benefits of lower coking coal with average prices down $35/t on quarter, is likely to kick-in only by second quarter.

“Steel majors are eyeing a Rs 500-750/t hike in prices for the month of July on a low base (7 month low), counting on a marginal recovery in domestic demand,” the report said.

Domestic demand recovery remains the key to sustainable profitability for steel majors and continues to hinge on pick-up in construction/automotive sectors.