The buoyant global steel prices augers well for the domestic steel industry despite moderate demand, according to a report by ICRA.
International steel prices have recorded a sharp recovery since June 2017, driven by the Chinese government's supply-side reforms to reduce domestic steel over-capacity, a steadily declining trend in Chinese steel exports on the back of resilient Chinese domestic steel demand, it said.
"The domestic steel prices have taken a cue from the buoyancy in international prices despite a moderate domestic steel demand growth of 4.4 per cent in the first four months of the current fiscal.
"Between July and August of FY2018, domestic HRC prices have increased by around 10 per cent, reaching Rs 39,250/MT in the fourth week of August from Rs 35,750/MT in the first week of July," the rating agency said.
Moreover, supported by favourable international steel prices, domestic mills continued to push exports, as reflected by a 66 per cent growth in Indian steel exports between April and July of FY2018.
This steadily rising export volume has enabled domestic steel mills to register a healthy annualised production growth of 7 per cent and a capacity utilisation of around 81 per cent% during the period from April to July of FY2018.
As for financials, operating margins of the steel industry contracted to 13.1 per cent in Q1FY2018 from 15.7 per cent in Q4FY2017 on the back of lower steel prices and increased raw material costs, especially for coking coal in Q1 FY2018, it said.
"Last time when Chinese HRC prices averaged above USD 550 per metric tonne was in April 2013. Apart from structural factors like closure of excess capacity, we believe that up-fronting of production and purchases ahead of a planned winter shutdown in China is also a factor leading to the buoyancy in steel production and prices witnessed since June 2017.
"Therefore, continuity of this price momentum hinges upon the sustainability of demand from the steel intensive real-estate and infrastructure sectors in China," ICRA Senior Vice-President Jayanta Roy said.
"However, given that steel mills stand to benefit from buoyant steel prices in both the domestic and international markets in Q2FY2018, gross contribution levels of steel players are likely to improve sequentially in the current quarter," Roy added.
On an absolute level, elevated debt levels of most of the steel companies are likely to keep the coverage indicators of the industry depressed.
ICRA believes that credit profile of domestic steel companies is unlikely to improve significantly in the near term despite the current buoyancy in steel prices.
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