In the last couple of months, China hot rolled coil (HRC) export prices have fallen 20% and CNY depreciation has nullified India's import duty hike of 5%. In addition to imports from China, are imports from Free Trade Agreement (FTA) countries, which are up 70% YTD in FY16. Because of this the government's efforts to boost steel prices have not been effective, according to Bank of America Merrill Lynch (BofA ML).
"Falling prices, higher electricity costs and interest burden have hit tier-II steel mills. Almost half of these capacities are already closed in major production centers like Raipur and Mandi Gobindgarh. If prices do not improve, we believe the rest (around 30% of overall capacity) may shut down too," BofA ML said.
To prevent the small steel mills from going out of business and their debt (Rs 1.95 trillion) from becoming NPAs, domestic steel prices need to be up by 7-8%, as per BofA ML. "We believe the government might impose a 'safeguard' duty of at least 20%. If this is implemented, it could boost prices across product categories."
"If a 'safeguard duty' is imposed, we believe SAIL and JSW Steel will see twin benefits - higher realization and volumes, and lower costs. Our sensitivity analysis shows that a 10% 'safeguard duty' should drive prices up by 4% (estimated), boosting SAIL's earnings by 46% and JSW Steel's by 23% for FY16E," said BofA ML.
Source: IRIS
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