India’s iron and steel sector are slowly regaining financial health, with demand for the metal finally coming close to the installed capacity. This has resulted in better profitability due to higher realisations on every tonne of steel sold.
The demand-supply balance has shifted in the first four months (April-July) of the current fiscal, with demand being higher. As per the Joint Plant Committee, under the Ministry of Steel, domestic consumption and exports led to 27.56 million tonne of steel being sold during the period, which was higher than the production at 27.39 million tonne. This is mainly on account of disposal of inventory from previous months.
In the same period, Indian steel makers produced 27.15 million tonne of the metal while only being able to sell 26.99 million tonne including both exports and domestic sales.
The result has reflected in the improvement of net sales realisations of the metal and boosted profitability of steel companies.
Steel Authority of India, which has largest installed capacity for producing the metal, saw its average net sale realisations improving 5 per cent to ₹ 36,858 per tonne during first quarter of the fiscal, while Jindal Steel and Power Ltd, JSW Steel, and Tata Steel in India also had a similar increase, according to their statements.
For SAIL, this meant a 18 per cent increase in net profit while its operating profit margin improved by one percentage point. The improvement in financial performance has been even better at JSW Steel which turned a loss in the first quarter of 2013-14 fiscal into a profit of ₹ 801 crore in 2014-15. The company’s operating profit margin also doubled.
Tata Steel, which continues to face headwinds in Europe, increased its net profit from India by 67 per cent to ₹ 2,267 crore. The Indian business sold 5 per cent more steel and had a nine percentage point increase in operating profit margin.
Analysts expect the improving trend to continue with global prices of coking coal, a key input for steel makers which is mainly imported remaining soft.
“Coking coal cost is expected to decline further in the current quarter by $13 per tonne. Average landed price of coking coal in the second quarter of the fiscal is expected to be around $150 per tonne. In addition, freight cost from Australia to India has fallen and is currently $10.5 per tonne,” said Prasad Baji, Senior Vice-President of institutional equities research at Edelweiss Securities Ltd.
Data from the Corporate Debt Restructuring (CDR) Cell reveals that debt servicing capabilities of previously stressed steelmakers has also improved. As on June 30, 2014 the ‘Iron & Steel’ category had 52 companies under CDR with a total debt of ₹ 40,783 crore, lower by around 24 per cent over June 30, 2013 with 9 companies exiting the CDR mechanism.