Sponge iron in doldrums...!!!

We recently visited Raipur in the state of Chhatisgarh,India to understand demand and prices of steel.

We visited the plants and met with few executives of Godawari Power (GPIL) and Sarda Energy (SEML) to understand the mood. We found that demand situation continues to be challenging worsened by the cheap imports thereby keeping the prices depressed. We do not expect a recovery even by the next year and believe that the prices will remain depressed for long time.

Mood Indigo to continue, losses to mount

We believe that price situation will not change and mood will continue to remain depressed as prices are not going to go up for long time. Companies are struggling to remain above water as they are expected to incur losses going forward with low prices and high interest charges because of high level of debt.

Strict Quality controls to reduce cheap imports

Government has recently come out with new quality control order titled “Steel and titled “Steel and Steel Products(Quality Control) order, 2015 which will come in effect from March 2016. The order makes it mandatory for steel and steel products (covering most flat and long products)

mentioned in the notification to conform to the specified standards of Bureau of Indian Standards (BIS). As such all steel producers and dealers have to mandatorily obtain license from BIS. This is positive for domestic steel producers as it will help in reducing cheap and inferior quality imports.

However we believe that the positive impact of this order would be limited as it does not impact direct imports by end users or imports against advance License scheme for duty free imports of inputs for export production.

Minimum floor price for imports only can help if imposed

There are expectations that government may announce safeguard duty on imports of all steel products (currently safeguard duty of 20% is levied only on HRC imports) to help domestic steel industry which is in distress because of low price situation aggravated by cheaper imports. There are also demands by the steel industry to fix minimum floor price for import of steel below which it cannot be imported. We believe that “Minimum floor pricing” can help steel sector much more than safe guard duty as prices are adjusted down by the exporters in response to the increased duty.

Prices at all time low below production cost

Steel prices have declined below average production cost also. Pellet prices have declined to Rs3,800 /t, sponge iron prices at Rs11,500/t, billet prices at Rs20,500/t, wire rods (equivalent to HRC)- Rs24,000/t, TMT bars (equivalent to CRC) at Rs26,000/t. As royalty rates on iron ore and coal are the highest in the world (15% and 14% respectively) and with additional levy of DMF (District Mineral Fund), production cost has remained high.

*Note: For detailed report on the sector and companies SEML and GPIL, Kindly contact me on- niraj@steelanalyst.com