The Indian steel sector is in a crisis and the government cannot ignore it for too long, according to a CGS CIMB Securities report.
"At the current spot steel prices, even the most efficient companies in the sector in India are in a crisis. The sector's financial health is important to the banking system too as the proportion of steel in industry credit is 10 percent. Steel sector and the ecosystem is a huge employment generator and GDP contributor too. So, the government can’t ignore the crisis for long in our view," the research house said.
Globally, contraction in various Purchasing Managers' Index (PMI) across major countries, Chinese crude steel production at an all-time high, weak exports and insufficient stimulus measures to match strong supply have together resulted in correction of steel prices by approximately 30 percent since 2018 high.
Also, Russian steel companies which are amongst the most profitable in the world, have the ability to undercut prices worsening the situation further.
The research firm expects the government to intervene and help revive the sector as manufacturing has been a key focus for the government and it plans to grow steel capacity to 300 mt by 2030 which requires an investment of $100-150 billion.
The report adds that the minimum import prices (MIP) imposed in 2016 on steel are redundant now and the current basic customs duty of 12.5 percent is ineffective as it is not applicable to free trade agreement (FTA) nations which are exploiting the situation.
Thus, there is a need to review the MIP and FTAs and fix the anomalies, it said.
"The government has been pro-actively addressing stress in various sectors of the economy and we believe steel sector will not be an exception. In the worst case of no government intervention, we expect this crisis to self-correct as the invisible hand of the market to comes into play," the report said.
It suggests that the Anti-Dumping Duty (ADD) will have to increase by c. $100/ton to $580/ton for hot-rolled coils (HRC) after adjusting for the increase in global raw material prices.
Further, fixing price anomalies will result in higher prices and lower imports into India.
"Pricing tailwind will help boost EBITDA/t, while lower imports will drive market share of domestic companies, both of which will result in higher profits and return ratios," the report said.
It's noteworthy, that the steel industry is cyclical in nature and its profitability is closely tied to the global economic cycles which remain a risk on the sector.
Moreover, other risks include oversupply from China, trade wars between prominent countries and any sudden spike in premium coking coal prices that could impact the profitability of the sector adversely.
The brokerage upgraded the sector to an ‘Overweight’ rating and has 'Add' ratings on JSW Steel, Tata Steel, JSPL and SAIL.
First Published: Nov 20, 2019 3:05 PM IST
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