Faced with reduced offtake from the construction and industrial sectors, steel producers have started luring customers through discounts of up to Rs 1,500 a tonne, depending on the quantity and quality of purchase.
Anticipating a spurt in demand in the coming construction season, steel producers had raised prices of both longs and flats by five to seven per cent in the first quarter of the current calendar year. But, demand has continued to remain under pressure, with the government’s forecast of lower growth in gross domestic product (GDP) this financial year. From last year’s 7.5 per cent, 2012-13 is set to end with 5–5.5 per cent GDP growth. This indicates activity in both construction and industrial sectors are set to remain subdued, resulting in lower steel consumption.
“Steel demand in India is expected to remain lacklustre at 4.1 per cent (growth) this year, as against 6.8 per cent last year. Hence, mills have started offering discounts,” said Rikesh Parikh, vice-president (equities), Motilal Oswal Securities.
A recent report by credit rating agency Icra showed only 3.9 per cent increase in steel consumption over the first nine months of the current financial year. Given the weakness in user-industries and an expenditure control exercise by the government, consumption is unlikely to witness any significant jump for the full year.
The growth is likely to remain subdued in the near term, on account of slowing demand from the key consuming sectors and limited iron ore availability, as a result of continued restrictions on mining activities in major iron ore producing states.
In the third quarter of this financial year, slowing demand from key consuming industries affected sales volumes and also led to a softening in overall sales realisations of steel majors. Input costs remained at high levels, despite a moderation in international coking coal prices and, to a limited extent, domestic iron ore prices. This led to a reduction in the operating profitability of most companies. Beside lower operating margins, high capital charges also dented their net margins during the quarter.
“The incidence of discount is prompted by two major factors, a decline in global steel prices and lower demand from consumer industries locally,” said Jayanta Roy, an analyst with Icra.
Steel prices started declining in the benchmark European markets in the second fortnight of February. The decline has been about three per cent. However, companies here, led by Jindal Steel & Power, raised steel prices by Rs 1,000 a tonne effective March 1, citing a spurt in raw material prices, including coking coal.
A CARE Ratings report said all major steel producing and consuming countries recorded a robust year-on-year double-digit growth, consequently leading to a rise in global steel consumption by around 15 per cent and six per cent, respectively, during calendar years 2010 and 2011. However, since the start of CY12, the global steel industry saw a rather significant shift, with rising over-capacity and slowing demand.
Despite these, the global industry continues to add capacity, resulting in another 130 million tonnes of net addition in capacity during the next three years, while consumption during the period is likely to increase by about 120 mn tonnes. Global steel majors have programmes to save a total of $3 billion by 2015 through optimising assets and other cost-cutting.