Gobal economic uncertainties and high interest rates in India have slowed down steel consumption growth. Industry leaders however forecast a revival in the coming months on the back of improved activity in project construction and demand from the railways, real estate and power equipment manufacturers.

Rating agency Icra says in a report that steel consumption growth dropped sharply to 2.5 per cent in April-September this year from 14.5 per cent a year ago. Demand was low during the monsoon when construction activities plummet. Plus, said Steel Authority of India chairman C S Verma, interest rates were high and global economic conditions uncertain. In China also demand slowed due to high interest rates used to arrest inflation, Verma told Financial Chronicle.

China’s clampdown on the property sector and restrictions on credit growth would slow that country’s demand for steel, Jiming Zou, a Moody’s analyst in Hong Kong said recently.

Sanjay Jain, analyst at Motilal Oswal, said demand had gone down globally. “Normally, demand picks up after the monsoon but this year demand would remain muted due to high interest rates.

Besides, tardy project implementation, other macro-economic factors are also coming into play. Icra says the outlook has weakened because of an expected deterioration in the demand-supply equation and a rapidly increasing supply base. “This is likely to keep steel prices under check and margins of steel companies under pressure,” the agency said.

The moderation is expected to continue, given the continuing slowdown in demand from key consumer sectors. “The prevailing high interest rates are also likely to keep demand growth in the interest rate-sensitive sectors like automobiles, real estate and housing at moderate levels,” Icra adds.Moody’s has a stable outlook with a negative bias for Asia’s steel sector over the next year or so. “Persistent overcapacity in China, sizeable capacity expansion in Korea, and longer-term capacity increases in India, as well as a current glut in a sluggish Japanese market constrain price increases and trim margins,” said Chris Park, senior credit officer with Moody's in Hong Kong. But India’s steel industry itself sees a revival coming. “Projects are likely to take off in several major sectors, particularly railways, roads and power. In October-December contract prices of coking coal, a key input, have also come down to around $250-270 a tonne from $350-360 earlier,” said Verma. He forecasts stable steel prices in the near term and falling raw material prices.

Seshagiri Rao, joint managing director of JSW Steel, said the first half of every year usually was weak, which has also corrected. But growth is expected to accelerate in the second half. Moreover, the softening of prices of key raw material like coking coal and iron ore will help steel companies.

A senior Tata Steel official said that even in the second half steel prices had softened. At the moment they are stable with a slight downward bias. “But going forward demand will be strong due to the revival in construction,” he said.

Nevertheless, Icra believes the margin outlook for Indian steel companies has weakened. Jayanta Roy, its senior vice-president and co-head of corporate sector ratings, said, “This calendar year global demand conditi-ons has deteriorated, with growth prospects uncertain in developed countries, even as China, the world’s biggest steel user, presents the possibility of a slowdown in steel demand following its government’s attempts to prevent overheating of the Chinese economy.”

Icra estimates that almost 25 million tonnes of new capacity (about 30 per cent India’s current capacity) is expected to be commissioned in the next 18 to 24 months. “This could alter the domestic demand-supply position, keeping realisations under check, notwithstanding any benefit that may accrue to steel players from a depreciating currency,” said Roy.

Icra says raw material prices may stay buoyant in the short to medium term, even though some moderation cannot be ruled out because of the weakness in the steel industry.

A weak demand-supply scenario will stymie producers in passing on cost increases. The higher capital costs of expansion projects will add to the pressures on steel makers’ net margins in a scenario of high interest rates, analysts say. The higher working capital requirements to operate expanded capacities, especially in a buoyant raw material price scenario.

jharnamazumdar@mydigitalfc.com