India’s much-touted infrastructure surge makes it a market extremely hard to miss for steel and cement players. Yet, the Q1 results for both these sectors would make one wonder if this potential is actually what it is made out to be. B&E analyses the results closely for a more objective view.
In fact, steel majors have had a spectacular run since January 2009 till the end of the last fiscal. But Q1 has been an anomaly. SAIL posted net profit of `11.76 billion, a drop of 11.56% y-o-y. Consolidated net profit of Jindal Steel & Power Ltd. (JSPL) was down by 3% y-o-y for the quarter while sales of steel products were down by 4%. Bhushan Steel saw a decline of volumes by 14.4% to 309,333 tonnes. JSW Steel managed to improve its turnover and net sales by 21% and 19% respectively due to improved sales mix, but semis were down by 66%. Tata Steel, however, was an exception as it posted profits of `18.25 billion over a loss of `22.09 billion for Q1, FY 2009-10. In Tata’s case, revival in European operations was a key contributor and domestic sales remained flat on a y-o-y basis.
SAIL Chairman C.S. Verma said: “Greater availability of steel worldwide coupled with pressure on demand made the market conditions quite testing.” The reasons, actually, emanate from neighbouring China that accounts for around 50% of global steel production and consumption. Monetary and fiscal tightening by China to prevent overheating of its real estate market has created oversupply situation and these products are finding their way into markets like India. Moody’s projects that prices of Chinese Hot Rolled Coils (HRC) are down by around 11% y-o-y, while rebars are down by 8% y-o-y since April.
Talking to B&E, Vinod Garg, ED, Commercial, Ispat Industries, said: “Since import prices are low, lot of material is being dumped. Excessive supply is affecting margins of all players.” Figures indicate that Chinese imports have risen to over 60% of the total. In the week ending March 12, HRC (CR-Grade) price dropped by 5% m-o-m to `32,700 per tonne. Steel imports increased by 116% y-o-y to 973 thousand tonnes in April 2010. The government, however, placed anti-dumping duty on certain stainless steel products from target countries including China in early 2010. Cyclical impact of monsoons also leads to slowdown in industrial activity and buyers tend to postpone purchases. Further, a Motilal Oswal report expects more margin contraction, as it states, “Realisation will fall sharply in 2Q FY11 due to sharp price cut in June, while costs of coking coal will go up further.” Iron ore prices are also up by 90% y-o-y for Q1 at $117/tonne, and are likely to continue that trajectory.
The cement sector also saw pressure on both toplines and bottomlines due to oversupply. Aditya Birla Group-owned Ultratech Cement saw net sales drop by 8.3% y-o-y for Q1 to `17.93 billion and net profits falling more steeply by 41.83% to `2.43 billion. For ACC, net sales stayed flat at `21.67 billion but net profits again showed a sharp drop by 26% y-o-y to `3.49 billion. The results for India Cements were also much below expectations, with net sales falling by 7.8% y-o-y to `8.6 billion and EBITDA down by 65% y-o-y to `1 billion.
The causes for oversupply are two-fold. Firstly, there has been a capacity addition of at least 60 mtpa since the past two years but demand isn’t growing at the same pace. Rakesh Singh, Joint President, Marketing Head, India Cements, comments to B&E: “Capacity has been increased by 12-13%, but demand has increased by only around 7% y-o-y.” Industry observers point out that these capacity additions were done with a 2-3 year time frame in mind. Prices in May were down by 3.8% (Mumbai) to 14.3% (Hyderabad) y-o-y in different regions (Angel Broking-CMA research). Markets of South and West India were particularly impacted by sluggish growth, lower offtake and shortage of wagons. The monsoon effect is visible here too, and is likely to last till September. But for companies relying on the southern market, oversupply may persist for at least two years. Raw material costs will also continue to pester players. In Q4 2010-11, raw material costs are expected to grow (y-o-y) by 34.11% for Ultratech, 4% for India Cements and 25.4% for J. K. Lakshmi Cement (Jaypee Capital).
Jinal Joshi, an analyst with Jaypee Capital, feels the prospect of cartelisation cannot be ruled out in such situations. It is possible that players create artificial scarcity to push up the prices. The Builder’s Association of India, however, has alleged that this has already happened in the April-June period, citing price increases in certain regions. But the Cement Manufacturer’s Association refutes the claim, saying that prices have actually been falling.
From a 2-3 year perspective, the tidings are pleasant for both steel and cement. India is reaching the close of the 11th Five Year Plan and infrastructure spending is expected to double in the 12th five year plan. At that time, players of both segments should see the pricing game move more convincingly in their favour.
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