Major steel companies such as JSW Steel, Tata Steel and SAIL have all reported sharp fall in profits in the second quarter of this fiscal. Their margins may continue to remain under pressure in first two quarters of next fiscal due to increase in input cost and falling demand.
JSW Steel reported a net loss of Rs 669 crore in the second quarter of this fiscal, while Tata Steel's net profit dipped 89 per cent to Rs 212 crore. SAIL's profit more than halved to Rs 495 crore.
Input costs
While raw material cost pressures may ease in the coming months, reduced steel demand is likely to constrain steel prices, putting pressure on margins, said a Fitch Rating. A significant increase in coking coal prices due to supply disruption adversely affected the profit margins of Indian steel producers, it added.
Coal India, one of the largest suppliers of coal, has started pricing its produce based on the gross calorific value of coal against the current practice of ‘useful heat value'. The average price of non-coking coal is expected to increase by 22 per cent to Rs 2,590 (Rs 2,118) a tonne.
DEMAND SLOWDOWN
Steel demand has a high correlation with growth in GDP, which is showing signs of slowdown. Fitch has lowered its real GDP growth projections for India this fiscal and FY'13 to 7 and 7.5 per cent respectively, from 7.5 and 8 per cent, given the likelihood of India's economy being weighed down by higher domestic interest rates and a weaker global economy.
Despite the risk of a slowdown in the growth of domestic steel demand, Fitch expects the credit profiles of steel producers to remain stable due to pick up in demand from automobile, white goods, construction and infrastructure sectors, albeit at a low rate of 6 to 7 per cent.
OVER-CAPACITY
The rising interest rate scenario is expected to increase the overall cost of funding new projects. Although the interest rate cycle may have peaked, the cost of funding working capital to remain high due to increased interest costs. Fitch expects the domestic steel industry to suffer from overcapacity in the medium to long term.
About 30 million tonnes of steel capacity is expected to be added in 2012-13. Should domestic steel demand not grow as expected, steel producers would have to focus on exports to maintain their operating rates at profitable levels - a challenging proposition given the current slowdown in the developed world, it said.