Steel Sector Expectation for March 2012 Quarter

The path for the steel industry in the fiscal year 2012 was not that easy what with obstacles such as the slowdown in economy, higher interest rate regime, decrease in demand, falling rupee value and higher input costs, all of which did not leave much room for the steel companies to grow in India. This has in turn led to a dismal performance of the steel companies in Q3FY12. Therefore the question that comes up is whether the situation has improved or is it the same? When we looked at the scenario during the March quarter we found that the situation seems to be better than the previous two quarters. Marginal Improve in demand, lower coking coal prices and a marginal hike in the steel prices will help the steel companies to report better financial numbers in the March 2012 quarter.

As per the data available, the dispatch numbers in the months of January and February have grown by 7.3 per cent and 10.3 per cent on a YoY basis to 5.94 and 5.99 million tonnes. The other major factors that have proved beneficial for the steel industry are the coking coal prices and the rupee value which have cooled off from their highs. These two had been hurting the margins and bottomlines of the steel companies. Moreover, with the rupee getting appreciated from its peak level of Rs 53 per dollar to Rs 50 per dollar levels we can see some respite coming in for some of the major steel companies on account of lower coking coal import cost. Also, coking coal prices have come down to USD 200 per tonne from the high of USD 300 per tonne in November 2011.

On the price front, although the steel prices in the international market have remained flat after a fall seen in the Dec quarter by USD 10-15, domestically the steel prices have increased due to some improvement in demand coupled with higher import duty on alloy steel/hot rolled coil and higher rupee value against the dollar. All these factors have enabled the steel companies to go for a price hike in recent times. One of the reasons for the price hike can be attributed to the increase in the domestic iron ore prices due to supply shortages.

Most of the companies in the coming quarter will witness marginal growth in volumes on a YoY basis and a decent jump in the realisations due to the increase in steel prices. As per the consensus estimates provided by Bloomberg, steel and metal companies will do better in their topline but due to rupee depreciation and higher iron ore prices the bottomline will continue to remain under pressure. Higher rupee value will continue to result in forex losses which will impact the bottomline of these companies.

On the other hand, iron ore mining company Sesa Goa will be the worst performer this time mainly on account of the iron ore ban in Karnataka and other states which will result into lower output. Further, the hike in export duty from 20 to 30 per cent will lead to further downfall in the profits. JSW steel commissioned a 2.9 MTPA steel capacity in FY12 taking its total capacity to 10 MTPA. And that is why it will see a strong jump in the volumes and sales in the coming quarter. However, with continued forex losses the bottomline will remain under pressure.

On the whole we believe that due to some pick-up in demand and due to higher domestic steel prices on a YoY basis, most of the companies will witness decent growth in topline on a yearly basis and flat growth on a QoQ basis. Due to the rupee at the level of 50 we may see some notional loss coupled with higher iron ore prices both of these will impact the bottomline of the companies.

On the global front we believe that the slowdown in demand globally will continue in the coming quarters. The debt problems still persist at the outset of the major economies. High inventory pile-up and subdued demand will lead to price pressures internationally.  China in the last two months has reported lower production numbers which indicates the muted demand in China and other countries.