Steel mills in India to benefit from cheap raw material

5 June 2017

Domestic steel mills are likely to benefit from lower raw material costs iron ore and coking coal in particular and definitive anti-dumping duty on flat products in FY2018, according to domestic rating agency ICRA.

Prices of seaborne iron ore have corrected by 36% between February and May of 2017, dragged down by a correction in Chinese steel prices, rising inventory levels at Chinese ports, and addition of low cost fresh supplies from Australia and Brazil. Interestingly, during this period, domestic lump ore prices have shown a diverging trend, increasing by around 4%. However, this weaker seaborne price will make iron ore exports less remunerative and lead to higher domestic supplies. This could lead to correction in domestic ore prices in the coming months. Prices of seaborne prices of cooking coal, the other key steel making ingredient for which India relies largely on Australian exports, have also seen a sharp decline of around 46% from $314/tonne in mid-April 2017 to $170/tonne in mid-May 2017 after the resumption of supplies from Queensland post the disruption caused by cyclone Debbie during April 2017.

Sustained demand weakness especially in key end-user industries remains a concern for the domestic steel industry with a growth of mere 4.6% and 2.6% in FY16 and FY17 respectively. Weak demand has also led to a correction in domestic hot rolled coil (HRC) prices by 7% in May 2017. However, ICRA believes that domestic mills would stand to benefit from lower iron ore and cooking coal costs in the current year.

“Notwithstanding a correction in domestic hot rolled coil prices by Rs. 2,750/tonne in May 2017, an expected decline in coking coal and iron ore costs, the benefit of which would start flowing in from the second quarter, is likely to push gross contribution levels of blast furnace players higher by around Rs 2,000/tonne over Q4 FY17, assuming domestic steel price remain at prevailing levels”.

In the context of a global supply glut, coupled with persistent domestic weak growth levels in key steel consuming sectors, ICRA believes that the imposition of a five-year anti-dumping duty on import of hot-rolled and cold-rolled flat steel products is likely to give the domestic steel industry an opportunity to gradually improve its financial performance, provided the global pricing environment remains favourable. Moreover, the recent Cabinet clearance of the National Steel Policy 2017 is also a long-term positive for the steel sector, since it intends to meet the entire demand of value-added steel from domestic sources.

Source – ET