While a recent announcement by the Indian government imposing a minimum import price on a wide range of steel products would provide protection from cheap imports, and give Indian producers some flexibility to raise prices and increase their margins, producers will continue to face pressure from soft domestic demand growth and prevailing overcapacity, Fitch Ratings said,
“As a result, a meaningful improvement in profitability for Indian steelmakers is unlikely before 2017,” it said.
The government imposed minimum prices on imports of 173 steel products on 5 February 2016. The latest move followed a 20 percent safeguard duty on certain steel-product imports in place since September 2015. Fitch said it estimates that the minimum import prices will allow domestic producers to raise product prices for most steel products by around USD50-70 a tonne from current levels.
“However, producers are unlikely to realise price increases of this much because of competition to improve their capacity utilisation and weak demand. Producers have raised prices only by around USD10-15/tonne since the announcement. We believe domestic steel production could rise by around 3%-4% as imports reduce,” it said.
With new capacities coming on line in 2016, Fitch does not expect capacity utilisation levels to rise significantly, the report said, adding that additional price increases, if any, will be similar to the current levels but spread out over the next three months.
“Consequently, Fitch expects the profitability of steel producers to remain weak compared to the level in the financial year ended 31 March 2015 (FY15). We believe that further steel price increases and a significant improvement in steel producers’ profitability will depend on a strong revival in domestic demand growth.”
Steel prices have continued to fall so far in FY16, and current prices are around 30% (USD 200/tonne) lower than at end-FY15. Prices for key raw materials – iron ore and coke – have also declined, but the falls are insufficient to offset impact on manufacturers’ profits from lower steel product prices, the report said.
Globally, supply continues to outstrip demand. The recent announcement by China, the world’s largest steel producer, that it would cut domestic steel capacity by 100 million-150 million tonnes fails to adequately address concerns. China’s capacity is close to 1.2 billion tonnes, with an output of around 800 million tonnes in 2015. The stated rationalisation target appears to fall short of addressing overcapacity in the country, the report said.
“In addition, China’s announcement did not spell out a timeline for implementing the capacity cuts. We expect the cut in Chinese steel capacity to be gradual with little impact on Chinese output and exports in the short term.”