Covid-19-led demand destruction, firm input costs to impact steelmakers

While realisations take a hit, pressure on margins may intensify with input costs remaining steady.

The outlook for domestic steel prices, which has largely remained firm till third week of March, now appears bleak. Domestic steel prices, which had been trading at a premium to international prices, will face pressure as the lockdown is leading to a build up of inventories. CARE Ratings says that the performance of domestic steel makers is likely to be adversely impacted in Q1FY2021 as a result of Covid-19 pandemic and the 21-day nationwide lockdown.

Just a few days ahead of the lockdown, steel prices in the month of March corrected 2 per cent, while those in Far Eastern countries cooled off by 6 per cent on an average. This had already led to domestic prices trading at a 2 per cent premium to the landed price of steel from countries in the Far East, according to analysts' data. Apart from cooling prices, the impact of lockdown on demand and rising inventories are likely to put further pressure on domestic steel prices.

The impact on performance will not only be led by demand loss and realisations, but also pressure on margins. The latter is expected to be led by higher input prices apart from weaker steel pricing. The aggressive bidding in recent mine auctions in Odisha will keep iron ore costs high in the near term, feel analysts. The normalising situation in China means that Chinese demand for iron ore and coal will start rising, thereby keeping input prices steady. Thus, while realisations take a hit, pressure on margins may intensify with input costs remaining steady.

The start of production in China would also mean higher Chinese exports. China has recently increased VAT rebate on exports from 9 per cent to 13 per cent. This would also mean reduced opportunities for Indian exporters. Manufacturers as JSW Steel, which have exposure to exports, may feel the heat not only in Asia but in Europe too.

Further, with rising inventories and higher input costs, the manufacturers may see an impact on their working capital requirements as well.

Not surprisingly, analysts at Emkay Global say they expect steel margins to contract sharply in Q1FY21 and continue at the same levels till Q2FY21 given the onset of monsoons, which is traditionally a soft period. Analysts have been generally cutting target prices for Tata Steel, JSW Steel, Jindal Steel & Power (JSPL), even as the stocks tradrd near 52-week lows.

Searching for a turnaround push, Tata Steel Europe may cut 1250 jobs

It had in November decided to cut 3,000 jobs across its European business.

Tata Steel Europe is planning to cut 1,250 jobs as it faces "challenging circumstances" and "needs to urgently improve profitability", Chief Executive Officer Henrik Adam said in an internal memo seen by Reuters on Tuesday.

"Our financial situation is serious and there's an urgent priority to improve the performance of the business and our cash position," Adams said in the memo.

Besides the job cuts, which would be less than half of what the company had announced last year, Tata Steel said it will not replace employees who have retired or left the company.

It had in November decided to cut 3,000 jobs across its European business.

The company has outlined details of a transformation programme and continues to be in talks with its European works council to minimise job losses, according to the memo.

"Although it's good news that we are able to minimise the impact on our current employees, we need to progress with speed to secure the future for the business," Adam said.

In response to the Tata Steel's plans, Britain's Unite union has called 

https://unitetheunion.org/news-events/news/2020/march/urgent-talks-call-as-tata-steel-job-losses-across-europe-on-cards for "urgent talks" with the company to discuss the implication on the company's UK operations, including the Port Talbot site in South Wales.

Analysts see Tata Steel stock rising in 2020 as firm revamps Europe biz

Tata Steel has been closing and selling plants in the UK since the 2008 financial crisis to make its business there more profitable.

Market News : A revamp of its European operations, an improved product mix and a ban on cheaper steel imports to India may bolster the fortunes of Tata Steel Ltd.’s shares, the least valued stock on the South Asian nation’s benchmark equities gauge.

Tata Steel shares have lost nearly half of their value since Jan. 2018 to trade at a price-to-earnings ratio of 4.7, the lowest on the S&P BSE Sensex Index. The company, which last year got more than 50 per cent of its sales abroad, last week outlined job cuts and other measures aimed at cutting costs in Europe, which it called a “dumping ground” for steel.

“Indian steel prices may have found a floor, thanks to the minimum import price, and have already started moving up,” said Siddharth Gadekar, an analyst at Equirus Securities Pvt., “That kind of stability in prices gives investors confidence.”

Tata Steel has been closing and selling plants in the UK since the 2008 financial crisis to make its business there more profitable.

It’s now focusing on India, and aims to ramp up capacity as demand is set to expand by as much as 7 per cent in 2020, according to the World Steel Association. That’s the most among the top 10 steel using countries.

While protection from cheaper shipments from abroad will also benefit Tata Steel’s domestic peers, its valuation advantage, product mix and debt reduction steps may increase its appeal to investors. India imposed a minimum import price for steel products in 2016.

“Tata’s volume of sales should beat the rest of the industry because of their value for money offering, and their entrance into the pipeline steel category,” said Richard Leung, an analyst with Bloomberg Intelligence, “The rest of the industry may see muted growth next year because of reliance on legacy demand like automobiles.”

To be sure, Tata Steel’s debt-to-equity ratio is higher than most local peers, largely due to its 2007 purchase of Corus Group Plc for about $13 billion and its acquisition of Bhushan Steel for about $5.3 billion last year. Still, Moody’s Investors Service said in a Nov. 25 note that the company’s European cost cuts will support a turnaround in less profitable operations that have hurt the company’s overall credit quality.

“In a down cycle the companies that have higher debt tend to trade at a discount,” said Equirus Securities’ Gadekar, “With their earnings profile and current steel prices, they can service their debt easily.”

JSW Steel, Tata Steel see no threat to business with ArcelorMittal's entry

Both companies see ample scope for new players in the market, where steel demand is likely to grow by a good 7-8% a year as against the global pace of demand growth of around 5%.

Large domestic steel players see no threat to business even if Luxemburg-based ArcelorMittal enters the Indian steel market.

Both Sajjan Jindal-led JSW Steel and Tata Steel, the country’s oldest alloy producer, see ample scope for new players in the market, where steel demand is likely to grow by a good 7-8 per cent a year as against the global pace of demand growth which is seen at around 5 per cent.

"With the quality of steel that we produce and the technology we have along with cost efficiencies and product mix, we are quite competent. I don’t think we have to be concerned about what others will do. In fact, we are already competing with the same players in the global market at present," said Seshagiri Rao, group chief financial officer and joint managing director, JSW Steel.

ArcelorMittal has emerged as the preferred bidder for Essar Steel, which has a capacity of 10 million tonnes in Gujarat. The company faced stiff competition from Mumbai-based JSW Steel and Numetal Mauritius--led by Russia's VTB Bank.

As per industry officials, Essar Steel does have scope for brownfield expansion at the existing Hazira facility as large-sized blast furnaces with multi-million-tonne capacity, if installed, can take the capacity to 18 million tonne from 10 million at present.

“A healthy and mature competition is always welcome. We feel that with new players, the Indian steel industry will only benefit as customers will get choice. As for us, we have the needed technology, equity and capabilities to compete with them since we are familiar with this competition in the global market,” said T V Narendran, chief executive officer and managing director at Tata Steel.

Apart from Lakshmi Mittal-led ArcelorMittal, UK-based Liberty House will also be a new entrant in the domestic steel industry, as it acquired insolvent Amtek Auto and Adhunik Metalliks from among the National Company Law Tribunal (NCLT)-listed companies.

Currently, JSW Steel has a total capacity of 18 million tonnes, which it aims to take to 25 million tonnes and then to 40-45 million tonnes by 2030. Tata Steel too is focused on increasing capacity in the domestic market and aims to take it to 30 million tonne by 2025 from 13 million at present.

Meanwhile, the two domestic players are also looking to broaden their market share by differentiating its product line and transitioning from a volume-to value-based player. “We already have 60-70 per cent of our business in downstream and going ahead we aim to grow this as we aim at customised products,” informed Narendran.

To maintain a 14-15 per cent of market share, JSW Steel aims to take its downstream business to 60 per cent from the current 35-40 percent. “De-commoditising steel is our plan and we are focused on having speciality and value-added steel in our portfolio which will create value and not just volume for the company,” explained Jayant Acharya, director commercial of JSW Steel.

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