Weak domestic steel demand growth of just 2.8 per cent inApril-May 2016-17 has also been a dampener
New Delhi: The health of over USD 100 billiondomestic steel industry will depend on the continuation of minimum import price (MIP) beyond this month, among other factors, Icra said today.
MIP failed to have a material impact on steel imports till April due to a lead time of about one-and-a-half to two months for the shipment to arrive in India, the credit rating agency said in a statement.
However, the full effect of the MIP did set in from May, and as per initial trends, steel imports in April-May 2016-17 have declined by close to 30 per cent year on year, it added.
The uncertainty surrounding government's decision on extending MIP beyond August has impacted domestic steel prices, which have been on a decline since mid-June 2016, correcting by 8 per cent in the last one month, it said.
Weak domestic steel demand growth of just 2.8 per cent in April-May 2016-17 has also been a dampener as the capacity utilisation remained suboptimal, at about 78 per cent in last fiscal and large capacity ramp ups are lined up now.
These include JSW Steel's 3.7 million tonnes per annum (MTPA) brownfield capacity and Tata Steel's 3 MTPA greenfield capacity. Though the government has extended the SGD regime till March 2018, the coverage of steel products under it is not as exhaustive as that under the MIP scheme, Icra said.
"In this challenging scenario, the health of the domestic steel industry in the second half of 2016-17 would critically depend upon the government's decision on MIP extension beyond August 2016, and/or final outcome of the recent anti-dumping investigations initiated by the Directorate General of Anti-Dumping and Allied Duties," it added.
Icra is of the opinion that domestic steel price increase of around 25 per cent till the middle of June 2016 would have led to better profitability of steel companies in April-June quarter of 2016-17 despite rise in iron ore and coking coal price of about 11 per cent and 9 per cent, respectively.
However, this is unlikely to significantly boost their liquidity and coverage indicators, given the continuing high debt levels of the steel companies, it added.
The interest coverage ratio of the industry slipped to 1.06 times during the fourth quarter of 2015-16, from 1.56 times during the same period of 2014-15, and 2.36 time during third quarter of 2014-15.
Globally, steel prices have been extremely volatile since February 2016. Chinese export hot rolled coils (HRC) offers, after increasing sharply by around 80 per cent and reaching a recent high of around USD 470 per tonne in April 2016, has seen a steep correction of almost 30 per cent since then.