The outlook for domestic steel prices, which has largely remained firm until third week of March, now appears bleak. Domestic steel prices, which had been trading at a premium to international prices, will face pressure as the lockdown is leading to build up of inventories. Care Ratings says the performance of domestic steel makers is likely to be impacted in Q1FY21 because of the Covid-19 pandemic and the 21-day nationwide lockdown.
Just a few days before the lockdown, steel prices
in March had corrected merely 2 per cent, while those in the Far East countries had cooled off by 6 per cent on an average. This had already led to domestic prices trading at 2 per cent premium to the landed price of steel from Far East countries, according to analysts’ data. Global prices have softened further since then. On April 3, the free-on-board China hot-rolled coil (HRC) prices on the London Metal Exchange (LME) were another 4 per cent lower as compared to prices on March 23.
As customers negotiate and renew contracts, it will soon reflect in revenues of steel companies.
Even as this was putting pressure on pricing, the impact of lockdown on demand and rise in inventories are likely to put further pressure on domestic steel prices.
The impact on performance will not only be led by demand loss and realisations, but also pressure on margins. Profit margins are expected to fall, led by higher input prices and weaker steel pricing. According to analysts, the aggressive bidding in mine auctions in Odisha will keep iron ore costs high in the near term. The normalising situation in China means that Chinese demand for iron ore and coal will start rising, thereby keeping input prices steady. Thus, while realisations take a hit, pressure on margins may intensify.
The start of production in China would also mean higher Chinese exports. China has recently increased VAT rebate on exports from 9 per cent to 13 per cent. This would also mean reduced opportunities for Indian exporters. Manufacturers as JSW Steel, which have exposure to exports, may feel the heat not only in Asia but in Europe too.
Further, with rising inventories and higher input costs, steel makers may see impact on their working capital requirements as well. Not surprising, analysts at Emkay Global say they expect steel margins to contract sharply in Q1FY21 and continue at the same levels until Q2FY21 given the onset of monsoons, which is traditionally a soft period. Analysts have been generally cutting target prices for Tata Steel, JSW Steel, Jindal Steel & Power, even as the stocks trade near their 52-week lows.