Growth Deceleration In China Weakens Steel Sector Outlook

China has always been the main source of optimism in the global economy and signs of a slowdown in China, coupled with trouble in Europe, show that industrial commodities are in for a bumpy ride.

Industrial production in Chinese economy has slowed down to its lowest levels in the last six months and the steel sector is one of the major contributors to its down fall. Falling demand from the real estate sector and lower exports due to weak demand from the western economies has led to an overall decline in demand for steel. Falling demand, high inventory levels and over-supply situation has further impacted the profitability of the Chinese steel companies. This can traced when steel companies in the year 2011 ramped up the production to tap the seasonal pickup in demand however cooling economic growth did not provided much room for the increased production later. This led to inventory pile up with the steel companies which then were sold at lower prices resulting into losses. However in the month of June the profitability of the steel companies improved marginally on the back of falling iron ore prices and falling coking coal prices since end-2011.

As per the recent data, China produced 60.21 million tonnes of crude steel in June, up by 0.6 per cent from a year earlier and down from 61.23 million tonnes in May. And steel output for the first six months rose by 1.8 per cent to 357.2 million tonnes from the same period last year. This came in despite weakening economic growth and falling steel demand, the Chinese production in the month of June has remained high. This has come on the back of steel makers which increased the utilisation levels in a bid to maintain their thin profits.  

Going forward, the slowdown in demand will continue to remain on the back of summer during the next two months.  Lower demand and over-supply situation will cap the steel prices and will also limit profitability. However, for the full year, if the China announces some policy stimulus measures then we may witness some improvement in the demand for steel and also in the profitability of the steel companies. The industry is expecting some ease on the monetary side to boost the slowing economy also it expects the steel demand to improve in the second half of the year. The steel demand as compared to last year’s growth of 8 per cent is expected to grow at 4-5 per cent, according to the World Steel Organisation

India to remain aloof from the downfall in international Steel Prices
Falling prices in the international markets would have surely impacted the domestic steel prices and realization of steel companies. However, due to high rupee depreciation during the quarter by almost 14.54% to 56.30 against dollar imports turned out to be costlier thus creating more demand for domestic steel. On the other hand, the benefits of the falling coking coal prices got negated with the fall in the rupee value, thus making the import of coking coal costlier and impacting the margins too.  That is why the domestic steel prices have not seen any major contraction during the quarter and are still trading at higher levels.

Steel companies in India for the June quarter will report decent growth in the topline mainly on account of the decent sales volumes and better realisation. However, the bottomline and profit margins will remain under pressure due to higher forex losses and higher coking coal cost because of the depreciated rupee value.