Fifteen years after Essar Steel defaulted on its $250-million floating rate notes (FRN) in July 1999, the company is looking to get $2 billion worth of loans refinanced under the Reserve Bank of India’s 5/25 scheme. Bankers to Bhushan Steel have lent the firm an additional R7,000 crore even though the company owes them R35,000 crore and has reported losses for the last five quarters. And last week, rating agency Fitch lowered the outlook Steel Authority of India’s long-term foreign currency issuer default rating to negative.
With demand at an anaemic 3% and more supply coming in, the country’s steel makers are staring at tough times. A sharp 28% drop in global prices over the past six months has seen imports rise by 71% to 9.3 million tonnes last year and local prices come off by 10-14%.
In its commentary, Fitch noted that continued weak steel demand growth in India or high steel imports or a further softening in global steel prices could derail SAIL’s efforts to deleverage. The company’s net leverage increased to 5.5 times in FY14 while the Ebitda/interest cover fell to 4.3. While the larger companies are unlikely to default, their margins could be badly dented. Analysts estimate that the average realisation per tonne for JSW Steel is likely to fall to R35,660 in FY16 from R38,028 in FY15; for Tata Steel (India) the average prices of HRC are estimated to fall from $526 in FY14 to $485 in FY15 and further to $410 in FY16. However, both companies are likely to be able to improve volumes at the cost of other players.
That’s only if the flood of imports from China, Japan, South Korea and Russia, whose production costs have come down significantly thanks to the fall in the prices of iron ore and the depreciation of their currencies against dollar, stops. As Anjani Agrawal, national leader (mining and metals), E&Y points out, the rupee, has remained stable or even appreciated against most currencies save the dollar against which it has fallen by 1.6% over the last six months.
Meanwhile, as Jayant Acharya, director, commercial and marketing, JSW Steel, points out, the cost of iron ore in the local market remains higher than that in the International markets.
“Prices globally have corrected by about 58% over the last 12 months but prices locally have fallen by just 12%,” Acharya says. While the industry is lobbying for a hike in import duties, they might not be of too much help.
Firdose Vandrevala, executive vice-chairman, Essar Steel, points out that given the lower import duties from Japan and Korea, which are protected by the free trade agreements, the effectiveness of such a duty hike may be diluted. Vandrewala adds that with NMDC’s iron ore prices on the higher side margins could be under pressure.
Unless demand picks up quickly, the industry could see a prolonged period of weakness since supply is rising. SAIL recently commissioned its 4.5 mtpa Rourkela steel plant and expects production capacity to rise to 23 mtpa in September this year. Tata Steel’s Kalinganagar plant will contribute another 3 mtpa in the next couple of years. By March 2016, the country’s steel making capacity is expected to go up by 10% with 10 mtpa being added to the existing capacity of approximately 100 mtpa.
source: Fianacial Express