Steel Prices May Fall Due to Rupee Appreciation

Rupee appreciating to near Rs 49/$ in last one month has raised the concern for the domestic steel players in the country. We have seen rupee trading at above Rs 50 levels against the dollar in the Dec quarter 2011 which has helped the steel players to hold the steel prices despite falling demand and falling prices in the international market. However with rupee getting appreciated we believe steel prices will see some a downturn in the near term. 

There are two main reasons why steel prices will come down, the first one is the lower international steel prices as compare to the domestic one and the second one is the rupee appreciation. The slowdown in demand across the globe has led most of the steel producers to carry inventory with them. However with rupee getting appreciated they have got the opportunity to dump steel products in the Indian market at lower prices. Also at import parity price level steel products will now be available at lower prices than the domestic one and we can see more imports coming in the near term. As per JPC report from April to December month import has come down by 10% to 48 mn tonne while Export has gone up by 22.7%.  And for April to January the import is down by just 0.6%. 

Therefore with muted demand, lower steel prices in the international market, coupled with higher inventory and continue rupee appreciation we believe steel prices to come down in the domestic market. 

Earlier JSW steel rolled out its plan for the price increase in the Jan month 2011 however with the outcome of INR appreciation and declining global levels Indian shores would be preoccupied with imported material earlier than anticipated.

The downturn in the steel prices will hurt the margins of the steel companies. However companies on the other side will get some relief on the coking coal cost as a large portion of the coking coal requirement is imported. The coking coal contract this year has been signed at 20% lower than the previous quarter at $235/tonne. The coking coal price in last six months has come down from $300 levels to $235 level.

As per JPC report demand in the first half of the fiscal remained muted at 2% on YoY basis however in the Dec ended quarter we have seen some pick up in the demand growing at 7.7%. And for the Nine month the demand has grown by 4.4% on YoY basis. Although demand in the country has seen some pickup in Dec quarter but they are still at lowers level and not robust at all therefore we may see some price cut which remains a concern in the near term.