Low prices, weak demand, volumes issues led to steel sector's muted Q2 show

Lower commodity prices, fragile demand and slowing volumes throttled the performance of metal sector companies during the September quarter of this financial year.

For steel firms, heavy monsoon, liquidity issues and weakness in automobile sector led to a slump in demand. All steel companies faced sagging volumes in the quarter, but they expect a recovery in the second half or the October-March period of FY20.

The metal sector companies covered by brokerage firm Motilal Oswal in its research had to contend with a muted show in Q2. On an average, the earnings before interest, taxes, depreciation and amortisation (Ebitda) declined by 35 per cent whereas the net profit tanked 67 per cent year-on-year.

Steel companies witnessed contraction in margins, dragged down by lacklustre demand and lower global commodity prices. Margins of top steel firms- Tata Steel, JSW Steel, Jindal Steel & Power Ltd (JSPL) and Steel Authority of India Ltd (SAIL) contracted by Rs 1200-2400 per tonne in Q2. The margin squeeze was the most pronounced for JSW Steel. Ebitda for Tata Steel Europe remained weak at $10 per tonne due to a fall in steel spreads, weak demand and planned summer shutdowns.

For JSW Steel, crude steel production in Q2 was down eight per cent year-on-year (y-o-y) at 3.84 million tonnes (mt). Saleable steel sales, too, were lower nine per cent y-o-y, standing at 3.6 mt. The company said that performance in Q2 was marked by a confluence of multiple headwinds- prolonged and severe monsoon impacting operations and logistics at its Dolvi plant, weak demand environment, sustained tight liquidity conditions, certain planned shutdowns and a  sharp correction in steel prices. To partially mitigate the headwind of weak domestic demand, the company tactically increased exports which surged 68 per cent y-o-y to 1.09 mt with exports accounting for 31 per cent of consolidated saleable steel sales in Q2.

Tata Steel's crude steel production was flat on quarter-on-quarter basis while total deliveries grew by four per cent. Despite the slowdown, deliveries in branded products & retail segment and industrial product & projects segment were largely maintained. Lower volumes to automotive segment were compensated by higher exports.

For aluminium companies, the net sales  realisations declined in line with lower LME (London Metal Exchange) prices though volumes were higher quarter-on-quarter. Cost of production at Nalco and Vedanta Ltd was impacted by higher power costs. Power costs increased on account of lower linkage coal availability.

At current LME prices, more than 20 per cent of the global aluminium smelters are expected to be making losses. “We believe
this is unsustainable and expect LME to recover. Given its low-cost integrated production, Hindalco is well placed to benefit as LME recovers. Novelis should drive growth through investment in high-margin auto-rolled products”, the report by Motilal Oswal noted.

Among steel companies, JSW Steel has revised down its sales volume guidance of 16 mt for FY20 by three per cent. Capital expenditure (Capex) guidance for this fiscal has also been cut from Rs 15700 crore to Rs 11000 crore of which Rs 5000 crore is already spent till September end. Tata Steel has recalibrated its Capex guidance from Rs 11000 crore to Rs 8000 crore. The company expects coking coal costs to reduce by $15 per tonne in Q3 compared to Q2.

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