Steel prices to fall in the coming quarter

Despite the slowdown in demand, steel prices remain remained firm in India in the last couple of months due to a production cut and rupee depreciation. In contrast, the international steel prices went down on the back of a global slowdown in demand.

Also, if we look at the performance of major Indian companies during the September 2011 quarter, we will see that the results have been a mix bag. The net sales of companies like Tata Steel and SAIL grew by 15% and 2.2% respectively. Others like JSW Steel and Jindal Steel grew by 33% and 43% respectively. However, the bottomlines of the companies were hit by the higher input costs and huge forex losses due to a sharp movement of the dollar against the rupee.

The same performance was reflected in these companies' stocks. In the last one month, Tata Steel and SAIL were down by 7% and 12% respectively. JSW Steel and Jindal Steel were up by 13% and 5% respectively.

Most of the companies in the sector felt the heat of higher input costs during the fiscal year. Coking coal prices were up to US$ 300/tonne, and higher diesel prices led to an increase in the freight costs. However, we have seen some softening in the coking coal prices in the month of October 2011 due to a slowdown in finished steel consumption globally.

The domestic situation in the last 6 months also appears similar in terms of demand, which has grown by 1.8% due to a slowdown in consumption by various sectors such as construction, automobiles and consumer durables, marked by a further decline in the recent months. On the other hand, production has grown by 9.8%. Higher production and lower demand will further lead to an inventory pile up for the steel companies, which may resort to cutting down production and selling their inventory first.

Steel prices have been maintained in the last one quarter. However, a combination of the higher inventory, reducing input costs, a slowdown in industrial production and successive hikes in interest rates has resulted in sluggish demand. Therefore, we believe that steel prices will come down in the coming months, which will lead to lower margins.