Strong domestic demand is likely to benefit Indian steel companies despite rising trade tensions

10-Sept-2018

Strong domestic demand is likely to benefit Indian steel companies despite rising trade tensions, ratings agency ICRA has said in its latest report on the steel sector.

The country’s steel exports dropped by over 33% in the first quarter of FY19 whereas imports grew by over 11% as India turned into a net importer after having been a net exporter for the last two years, the ICRA report said. However, with a sharp depreciation in rupee in the recent months, ICRA expects a slide in steel imports and a boost in exports in the coming months.

While a price cut effected in August 2018 due to seasonally weak demand has resulted in domestic hot-rolled coil (HRC) prices trading at a discount of about $40/tonne compared to landed offers at present, a weaker rupee is likely to translate to higher landed cost of steel imports, which in turn should support domestic price, the report added.

In Q1FY19, domestic steel consumption went up 9.2% year-on-year (YoY) compared to 7.9% registered in FY18, led by strong sales in the automobile sector, and a further uptick in demand for longs by the construction sector before the onset of the monsoons. India’s finished steel production also improved to 5.3% YoY in Q1 FY19 from 3.1% in FY2018 driven by domestic demand. This also kept exports low despite remunerative international prices.

Commenting on the domestic demand outlook, Jayanta Roy, Senior Vice-President, ICRA said: “The Government’s continued thrust on infrastructure spends and expected improvement in rural demand on the back of higher minimum support prices (MSPs) would drive the steel consumption in coming months, despite a seasonally weak second quarter.”

Global trade protectionism has been rising in recent months, with USA and China announcing retaliatory tariffs. The European Commission also imposed provisional safeguard duties on 23 steel products in July 2018, valid for 200 days.

The safeguard duty of 25% would kick-in if the import level for a product crosses the level of the average annual imports recorded between CY2015 and CY2017. “Unlike the US, the EU tariffs would be more worrying for Indian steelmakers, given that export volumes by Indian mills to EU are over five times of volumes exported to the USA.

Moreover, as per India’s Q1 FY19 steel import data, redirection of impacted steel volumes from countries like Japan and South-Korea, with whom India has Free Trade Agreements (FTA), is clearly visible as was expected by ICRA earlier,” Roy added.

Source: THE ECONOMIC TIMES