After 3-year Of Gap, India Finally Is A Net Exporter Of Steel!

After a gap of three years, India finally turned into the net exporter of steel. However, the nation is yet to come out of the clutches of sluggish demand. The overall steel consumption growth remained anaemic at 3.4 per cent in 11M FY2017, amid the slowdown activity in the key real estate and construction sector. It is expected to pick up in the third quarter after the retreat of monsoon and consequent pick up in construction activity.

Nevertheless, the Government’s thrust on infrastructure and affordable housing sectors in the Union Budget 2017-18 points to a favourable demand outlook for the steel sector in the medium term, according to the ICRA report.

While the steel imports declined 38.5 per cent in the first 11 months of FY2017 on the back of various trade protection measures including anti-dumping duties, safeguard duty and minimum import price, the exports saw a favourable rise of 77.6 per cent, thanks to the international prices.

Jayanta Roy, Senior Vice-President, and Group Head - Corporate Ratings, ICRA said, “This decline in steel imports has coincided with a strong growth in steel exports by domestic mills, supported by an improvement in the pricing scenario in international markets. As against a wide gap of 7.6 mt in FY2016 between India’s steel imports and exports, exports have surpassed imports in 11M FY2017 by a thin margin and as a result, India has now become a net exporter of steel in the current year”.

The bulk of the incremental domestic production has come from Odisha, where production is expected to cross 100 mt in FY2017. Additionally, supported by better export realisations, India’s iron ore and pellet exports has also reached 18.6 mt in the first 9 months FY2017, as against 2.7 mt achieved during the same period of the previous year.

However, what is concerning is that despite the operating margins of the steel industry improving at 16.3 per cent in the Q3 FY2017 from 13.4 per cent in Q2 FY2017 and the pick-up in the production, the profit margins of the steel producers is likely to remain under pressure. They are anticipated to loom under stressed balance sheets, despite increasing their production levels. For instance, JSW Steel’s flat steel production increased by 31 per cent to 1.93 million tonnes (1.47 mt) in the last two months.

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Reason- High-cost cooking inventory for this quarter and the overall weak demand scenario.

The international coking coal prices have declined to the tune of US $ 160-165/MT from the US $ 285/MT, which would benefit the margins in FY2018. However, this quarter would not reap this benefit as most of the high-cost coking coal inventory would be consumed in this quarter. These international prices have eased owing to the improvement in the supplies from Australia, Russia, and Canada and increase in the Chinese coal production which would reduce their imports and hence larger supply globally.

Sitting on high debt levels, according to the rating agency, small and medium-sized and secondary players are also a concern as these companies would also be adversely impacted by the increased input costs of sponge iron and scrap along with weakened demand.