Steel Sector Continues To Face Pricing Pressure As Demand Slows Further

Steelmakers face pricing pressure at a time when demand has slowed, driving down spreads.

Domestic steel prices fell to their lowest in nearly two years, in line with the global slowdown, according to Edelweiss Securities. But the cost of raw materials remained elevated, lowering spreads—product prices minus costs—which may impact profitability.

That caused an inventory build-up, partly impacting the volumes of JSW Steel Ltd. and Tata Steel Ltd. (excluding Bhushan Steel). Jindal Steel & Power Ltd. is the only outlier.

The Naveen Jindal-led company reported a double-digit volume growth in the first quarter of the ongoing fiscal and is expected to outpace peers in this year as it’s the only steelmaker, barring Steel Authority of India Ltd., to ramp up production, Edelweiss Securities said. Sales of JSPL rose 16.2 percent year-on-year to 1.51 million tonnes in the quarter ended June.

Tata Steel’s Sales Trend

Tata Steel acquired Bhushan Steel in May last year. The domestic sales of Tata Steel (including Bhushan Steel) rose nearly 16 percent in the first quarter of the financial year ending March 2020. But the sales are not comparable with the year-ago figures.

Bhushan Steel’s sales in the April-June period remained in line with the last year amid sluggish demand in domestic and international markets.

Tata Steel Europe’s production was impacted by planned shutdowns and unplanned outages. This, coupled with sluggish demand, affected sales volumes in the first quarter, the company said in a press release.

Steel Prices Fall

Steel prices fell below Rs 40,000 per tonne in July, the first time since December 2017. JSW Steel, citing Worldsteel in its 2019 annual report, has forecast domestic steel demand to fall to 7 percent in 2019 and 2020 compared with 7.5 percent in 2018 due to higher imports.

Contracting Spreads

Steel spreads have contracted due to relatively unchanged iron ore prices domestically and lower prices of the commodity. Tata Steel, in its June quarter results, highlighted that steel prices across many geographies declined in the first three months of this fiscal which, combined with a sharp rise in iron ore prices due to supply disruptions and elevated coking coal costs, has affected steel spreads across the globe. According to Edelweiss, the steel spread is now at a two-year low.

Most brokerages, including Goldman Sachs, HSBC and Jefferies, have been bearish on the steel sector due to trade war concerns and elevated iron ore prices globally. Although Jefferies expects steel prices to stabilise, it expects margins to remain under pressure due to higher iron import prices. This may have a bearing on domestic pricing as well.