Devangi Gandhi
With an exposure of close to $50 billion, India’s banks have a lot riding on the country’s steel companies. But with steel prices having come off sharply, imports surging and demand anaemic, revenues and profits for most producers are shrinking. On Wednesday steel stocks crashed as the price of the metal continued to slide — China domestic HR sheet prices fell to $330 per tonne from $344 on Tuesday, clocking a loss of more than 42% since January.
Most analysts predict Tata Steel, JSW Steel and JSPL will report losses for the three months to June. “Steelmakers will report 2-20% qoq decline in Ebitda for their Indian operations, courtesy 4-5% decline in steel realisations and increased cost pressure due to provisioning of DMF (district mineral foundation) costs,” Kotak Institutional Equities said in a note.
Those steelmakers that have access to captive iron ore mines may be better off but the problem is that almost all companies are highly leveraged. JSW Steel, for instance, has a gross debt of R34,885 crore while its Ebitda last year was R9,400 crore. Credit Suisse wrote on Wednesday that “interest costs on the P&L have risen rapidly — $50/t for industry, $200/t-plus for some — and could rise another 40% once capitalised interest starts getting expensed”. The brokerage added, “We believe FY15 cash costs for all Indian steel companies exceeded current Chinese prices — down $150/t versus the FY15 average. For all but a few, even if interest costs were zero, losses are likely.”
What happens if prices trend further down? A back of the envelope calculation suggests that if global benchmark prices (China HR sheet spot) continue to trade below the $385 a tonne mark, JSW Steel’s standalone operations may report net losses, unless iron ore costs fall faster than steel realisations.
JPMorgan believes that if global prices stay where they are — $340 to $370 per tonne — margins can’t expand unless imports come off sharply or demand revives. However, if there’s more import protection and demand picks up, margins could rebound by R2,000-3,000 per tonne from those levels.
“SAIL’s current P/B at 0.6x is near its lowest level in the last 14 years as the markets essentially expect the company to start making losses at the net level, and the new capacities to be unused,” the brokerage said.
Unfortunately, capacities have expanded fast — SAIL and Tata Steel will soon have 20 million tonnes and 10 million tonnes of capacity, respectively — but consumption hasn’t kept pace, growing at a weak 3-5%. In FY15 total demand was 76.35 million tonnes compared with domestic supply of 90.55 million tonnes. In the April-June quarter, demand grew at 7% even as imports rose 53%.
Average realisations per tonne for SAIL in Q4FY15 fell to Rs 36,284 from 38,194 in FY14; the state-owned firm saw revenues fall 2% to Rs 45,710 crore in FY15 and Ebitdta decline of 9% to Rs 4,603 crore.
Tata Steel reported a steep fall in the Ebitda per tonne to Rs 2,237 in the January-March quarter compared to Rs 6,166 in Q4FY14. The Ebitda margins for the top three Indian producers, Tata Steel, SAIL and JSW Steel, have come down from 15-30% in FY08 to 9-18% in FY15.
Essar Steel has already asked banks to refinance loans of Rs 12,000 crore, Firdose Vandrevala, executive vice-chairman, had told FE in March 2015. Even as it reported a net profit of Rs 684 crore in FY15 after reporting net loss in the previous three years, the firm owes lenders a whopping Rs 38,000 crore for which the interest outgo is Rs 3,865 crore. Bank of India is understood to have classified its exposure of Rs 500 crore to the company as a non-performing asset (NPA) while HDFC Bank is understood to have sold off its exposure of Rs 500 crore.
In June, the government upped import duties on both long and flat steel products by 2.5% to 7.5% and 10% respectively last month. But that is not going to make much of a difference to domestic steel prices even now at a premium of Rs 3,000-4,000 per tonne (or 10%). India has free trade agreements (FTAs) with South Korea and Japan and imports from these nations accounted for nearly 40% of FY15 imports.
Local prices have come off by 10-12% in H2FY15 but imports surged, and increased cost structure of the domestic players owing to higher royalty on iron ore, increased railway freight as well as levy of DMF under the MMDR law has made them less competitive compared with their counterparts from some of the exporting countries.
In the last one year, benchmarks like the world export HR coil and China domestic HR sheet average spot prices have both come down by 30% to 40%. But a relatively strong rupee saw imports surge 72% to 9.3 million tonnes. Average realisations per tonne for SAIL in Q4FY15 fell to Rs 36,284 from 38,194 in FY14; the state-owned firm saw revenues fall 2% to Rs 45,710 crore in FY15 and Ebitdta decline of 9% to Rs 4,603 crore.
Source: FE
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