Declining Demand likely to cut Margins of Steel Firms.

Given steel overcapacity, falling scrap prices and declining demand, experts feel that even the steep fall in iron ore and coking coal prices will be unable to sustain current high steel margins. Analysts are of the view that Indian steel prices could correct. At present, Indian (hot rolled coil) HRC and longs prices are out of sync with global prices. The current spot HRC price in India is 10 per cent higher than import parity. While globally steel prices have corrected quickly, the depreciating Indian currency was keeping imports at bay.

A recent research report by Standard Chartered Securities India titled “India Steel Sector: Fall in iron ore prices unlikely to sustain steel margins”, suggests that the trends which are likely to keep steel margins in India in check include huge over capacity in the system, rising scrap availability and falling scrap prices, competition from technologies like IF (Induction Furnace) and EAF (Electric Arc Furnace) and decline in demand in key consumption regions.

Satish Kumar and Saurabh Prasad, who authored the research report on behalf of Standard Chartered Securities, said, “In our report, we have argued that scrap availability would increase, putting pressure on scrap prices. A fall in scrap prices, in turn, would shift production from blast furnaces to electric arc furnaces, resulting in a decline in blast furnace margins. Falling iron prices have also made DRI furnaces viable in India.”

On the exports front, the Standard Chartered report said that while India had exported around 120 MT of iron ore in 2009, in 2011, this would decline to around 60-70 MT, given the ban on iron ore mining in Karnataka. Given the fact that India’s domestic steel players, who mostly operate EAF and IF units, receive iron ore on an export parity basis, their costs would drop. And this in turn spell trouble for Indian blast furnaces.

“India has 42 million tonne of EAF capacity, which operate mostly on DRI. With the fall in CFR China prices, the export parity prices of iron ore has dropped from $80/tonne to $41 per tonne. Exporting at this price will make little sense for Indian producers and hence they may be better off selling it to local DRI users,” the report said.

The research report also touched upon the issue of imports. It said while importing long products is difficult, importing billets is relatively easy. At the same time, the cost of converting billet to longs (that is Refining Combined Burner technology (RCB) is hardly $30-40per tonne. The steep decline in the billet price has made re-rolling operations viable. This is turn has the potential to impact long product prices negatively.

Source : mydigitalfc.com