Steel sector: Q3 results expectations

Has anything changed for the steel sector in Q3 FY12 after the strong headwinds it faced in the last one quarter, such as high input costs (coking coal), a depreciating rupee and the slowdown in demand?

Well, the scenario is still the same in the Dec 2011 quarter, with no significant change in the previous 3 months. The only thing that is in favour of the sector is the coking coal prices, which have come down by 10%-20% in the last 3 months. In the last one year, coking coal prices have come down to US$ 235/tonne from US$ 330/tonne in March 2011. However, the prices are still higher by 20% on a YoY basis. Also, the gains from the lower coking coal prices are negated by the higher rupee value, which has offset the gains.

On the demand side too, we don’t see much offtake in the major steel consuming sectors such as manufacturing, infrastructure and automobiles, which are still facing the problem of high interest rate. The high interest rate in the economy has lead to all new investments being postponed. Also, it has also forced companies to delay or postpone any new capex plans during the quarter.

The steel sector's growth can be linked to the growth of the economy and the investments made during the quarter. Macroeconomic indicators such as the GDP growth expectation that has been lowered down to 7%, and the credit growth off take that slowed down to 17% during the quarter, point towards the slowing down of economic activities in the country.

If we look at the steel demand in the last 3 months published by the Joint Plant Committee, it is quite surprising to see that steel consumption has seen the highest growth in this period on a YoY basis. The consumption in Dec 2011 and in the last 3 months has grown by 8.8% and 10% on a YoY basis respectively. For Apr-Dec 2011, the consumption has grown by 4.4% YoY. However, one cannot rule out that these numbers are a sum of production and external trade, and do not account for the inventory adjustments with the traders. Hence, one cannot go only with the numbers themselves.

Nevertheless, though the numbers alone may provide an erroneous picture, we still believe that there has been some uptick in steel consumption, largely on the back of a pick up in construction activity after the monsoon as well as the demand coming from rural areas.

Except for JSW Steel, most of the companies in the coming quarter will witness marginal or flat growth in volumes on a YoY basis. JSW Steel commissioned a 2.9 MTPA steel capacity in FY12, taking its total capacity to 10 MTPA. Hence, it will see a strong jump in the volumes in the coming quarter.

On the whole, we believe that due to some pick up in demand and higher domestic steel prices on a YoY basis, most of the companies will witness decent growth on the topline on a yearly basis and flat growth on a quarterly basis. The bottomlines will remain flat or may be up with marginal gains. We expect the margins to remain under pressure in the current quarter as well, due to an increase in the coking coal costs and the negated gains from a fall in international prices due to the higher rupee value.