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Metals & Mining Q1FY13: Indian steel consumption grew 8.1% YoY

HDFC Sec | 19 Jul, 2012  | Follow Author | Add to my Favourites 


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Indian steel consumption grew 8.1% YoY during Apr-May 2012 to 11.8 mt primarily due to lower base, as growth was less than 2% last year. On a QoQ basis, steel consumption is down by ~5% primarily as historically Q4 consists of peak season. Weak IIP performance and slowdown in GDP growth is not helping in reviving weak domestic steel demand. Q1FY13 is expected to be a lack luster quarter for the metals and mining industry due to expected lower volume on QoQ basis and lower realizations due to sharp fall in metals prices. Exchange rate also had a key role to play. While a depreciating Rupee helped non-ferrous metal companies in terms of better domestic pricing, it hurt ferrous metal companies with higher coking coal costs. Like in the previous quarter, there was no respite from the regulatory issues during the quarter.


Steel prices for the quarter remained steady however there could be pressure in the near term due to surge in imports. EBITDA margins are expected to improve. However, due to depreciation of Indian rupee, impact on profitability could be negative for companies having foreign currency loans leading to high MTM charges. Going ahead, steel prices are expected to remain subdued whereas margins will come under pressure due to rupee depreciation and high coking coal prices. Global steel spot prices have declined by more than 10% over last two months but Indian steel mills were largely cushioned due to sharp Rs depreciation. European manufacturing PMI data remained quite weak during whole of Q1 while weakness is also witnessed in China. China steel inventory has risen for the first time last week after sliding for 11 weeks. HDFC Sec is entering into weak seasonality for steel markets in Asia, Middle East and Europe and that should result in lower steel prices in coming months.


Steel realizations are expected to be largely flat for Q1FY13 despite 2-3% hike in steel prices on the basis of an expectation that discounts would have been made to push volumes. Steel inventory is also expected to have risen for most of the companies during Q1. Recently price cuts have been announced whose impact should be in Q2FY13. Sharp Rs depreciation of 9% during Q1FY13 would largely take away benefits of lower Q1 coking coal prices.


Aluminium prices are also expected to be weak. Regulatory issues (iron ore mining restrictions, regulatory clearances, coal linkages, MMDR Bill) continue to surround the metals and mining space. On operational basis, going forward non ferrous metals are expected to do better than ferrous metals, as steel prices broadly are likely to remain under pressure on weak domestic demand.



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Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor IndiaNotes.com accept any liability whatsoever arising from the use of any of the above contents.



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