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Steel industry poised for a tougher time ahead

Aggressive marketing, correcting of balance sheets could help the sector

Mumbai, 19 August

The domestic steel industry, already facing an increase in the cost of production due to the relentless fall in the rupee amid sluggish demand in the quarter ended June, might be headed for worse in the days to come. The road ahead looks tougher, with thin hopes of steel demand revival, coupled with unpredictable trends in the rupee, amid stressed balance sheets due to high debt and poor investment climate, said brokerages. In the quarter ended June, among the top domestic producers, JSW Steel and Steel High debt levels might slow project expansion among major steel producers PHOTO:REUTERS Authority of India took a hit on Medium and small-sized ing quarters, said brokerages. their bottom lines due to the one of the main raw materials Since the rupee is deprecisteel companies, which lack rupee volatility. Tata Steel Ltd used in the making of steel. The rupee has weakened by good product mix and have ating, benefit could be derived and Jindal Steel & Power manweak backward integration, by the companies exporting aged to escape on the back of 12 per cent since May-end. Apart from the slowing eco- might witness some capacity steel products, said Giriraj high deferred tax and increased other income, nomic growth in the country cuts or even shutdowns in the Daga, analyst with Nirmal and abroad which is weaken- coming quarters, said analysts. Bang Institutional Equities. respectively. Usha Martin, Monnet Ispat This seems like some greening steel demand, high debt Demand-side challenge levels might keep the balance & Energy, Adhunik Metaliks shoot amid the challenging The demand-side challenge for sheets of most companies and Godavari Metal Industries, environment the industry is the industry would continue under stress, prompting them among others, are some of the facing, he added. and it might be difficult for the to lower expansion and focus medium and small-sized steel Rural demand sector to even beat the 3.5 per more on repayment of loans, companies. Of the various challenges Focusing on higher penetracent demand growth achieved said analysts. Among the top producers likely to be faced by producers tion in the rural areas of the in 2012-13 (April-March), said Abhisar Jain, equity research of the domestic industry, as on in the coming quarters, bro- country could be another area analyst-metals from Centrum June 30, Tata Steel has a net kerages are hopeful that a brief steel companies could look at debt above ~60,000 crore, demand recovery in the final to improve sales, said Jain of Broking. Domestic steel demand while that of JSW Steel is close quarter of the current financial Centrum. The current per capita congrew only 0.3 per cent in April- to ~30,000 crore. Steel year could help companies Authority of India has a debt of improve their profit-and-loss sumption of steel in rural areas June. of India stands at 13-14 kg, far On the currency front, the ~23,300 crore and that of Jindal statement to some extent. Normally, the final quarter lower from the 47-50 kg per depreciating rupee is expect- Steel & Power is ~25,500 crore. High debt levels might also of a financial year is seen as a capita consumption in urban ed to further hurt the cost of production of steel companies, trigger slowing of project peak demand season for steel regions. It is this gap producers in turn affecting their margins, expansion among major pro- since industrial activity is high could tap in the coming quarduring this period. Though the ters to improve their toplines, ducers, said brokerages. said analysts. Companies are expected to demand this year might not be said analysts. Coking coal prices, which Refinancing of debt could have been low at $135-140 a restrain on the capex side till as high as in the corresponding tonne, might only rebound demand returns, said Jain of period last year, some revival is also be another option compafrom the current levels, they Centrum. A delay in capex is expected which might lend nies might exercise to lower its some support to producers this interest cost outgo, analysts also likely, he added. said. suggested. Tata Steel, one of top 10 year, said analysts. This, along with the depreAll in all, the picture conAggressive marketing, ciating rupee, is expected to producers of steel in the world, swell the import bill of steel is setting up a six-million- exporting of various steel prod- tinues to look grimmer for the companies, taking their cost of tonne plant in Odisha and is ucts and correcting of balance domestic industry but close production even higher in the scheduled to bring the first sheets could be some of the monitoring for business opporcoming quarters, said analysts. phase of three million tonnes options the industry could tunities and timely decisions Coking coal, largely import- of this plant on stream in 2014- exercise to mitigate the nega- could be the key to sail tives it is set to face in the com- through. ed by the domestic industry, is 15 (April-March).