Kolkata: A 30% spurt in global steel prices since June 2017 led by a significant cutback in China's production capacity is likely to boost fortunes of domestic steel firms in the coming months. The perk up in international prices has helped raise domestic steel prices by 10% in last 2 months and is likely to boost export earnings of steel firms given the moderate increase in domestic steel demand, according to the latest sector report by ratings agency, ICRABSE -0.76 %.
Benchmark prices of Chinese hot rolled coil (HRC) export offers rallied by over 30% between June and August 2017, reaching US$ 555 per tonne on Tuesday (August 29, 2017). International steel prices have staged a sharp recovery since June 2017, driven by the Chinese government efforts to reduce domestic steel overcapacity. This has also led to a decline in Chinese steel exports on the back of resilient domestic steel demand in that country, ICRA said.
Earlier saddled with surplus capacity of over 300 million tonne (mt), the Chinese government has closed down 42 mt steel capacity between January-May 2017, on top of shutting down steel capacity of 65 mt in 2016. Incidentally, the last time Chinese HRC prices averaged above US$ 550 per tonne was in April 2013. “Continuity of this price momentum hinges upon sustainability of demand from steel intensive real-estate and infrastructure sectors in China”, Jayanta Roy, senior vice-president, ICRA said.
Domestic steel prices too have taken a cue from the buoyancy in international prices despite a moderate domestic steel demand growth of 4.4% in the first four months of the current fiscal. Between July and August FY18, domestic HRC prices have increased by around 10%, reaching Rs 39,250/tonne in the fourth week of August from Rs 35,750/tonne in the first week of July. Additionally, domestic steel mills have also continued to push exports, which grew 66% between April and July FY18. “A steadily rising export volume has enabled domestic steel mills to register a healthy annualised production growth of 7% and a capacity utilisation of around 81% during the period from April to July FY18,” the ICRA report added.
ICRA said operating margins of the steel industry (out of its sample of 22 large and mid-sized steel players, accounting for about 60% of current domestic capacity) contracted to 13.1% in Q1FY18 from 15.7% in Q4FY17 led by lower steel prices and higher coking coal costs in Q1 FY2018. “However, gross contribution levels of steel players are likely to improve sequentially in the current quarter, given that steel mills stand to benefit from buoyant steel prices in both the domestic and international markets in Q2FY18,” Roy added. ICRA, however, believes credit profile of domestic steel companies is unlikely to improve significantly in near term despite the current buoyancy in steel prices since on an absolute level elevated debt levels of most steel companies will keep the industry’s coverage indicators depressed.
Source: economictimes.indiatimes.com