Hiking Steel Prices Not Enough For SAIL’s Turnaround: India Ratings

New Delhi: Raising steel prices by SAIL after the implementation of minimum import price will not help the country’s largest steelmaker post a turnaround as benefits are for the short term, India Ratings and Research said on Tuesday.

The ratings agency said that SAIL had raised steel prices by 10 per cent after minimum import price (MIP) was imposed and is expected to raise them by another 5-10 per cent in the current financial year.

The recent imposition of MIP on 173 steel products could alleviate the distress faced by steelmakers in the short term as the coverage has been wide and the duty has been defined in absolute terms, India Ratings and Research (Ind-RA) said in a statement.

“Around 80 per cent of SAIL’s products are covered under MIP and the company has effected price hikes of 10 per cent post the imposition and a further hike of 5-10 per cent is likely in 2016-17,” it added.

It further said: “However, this will not be enough for a turnaround as steel prices corrected by 35-40 per cent in 2015.

“Also, implementing sustained hikes in steel prices would remain challenging because of the commissioning of additional capacity of close to 12 million tonnes (MT) in 2016 and the MIP being currently valid till August 2016.”

Ind-Ra today downgraded SAIL’s Long-Term Issuer Rating to ‘IND AA’ from ‘IND AAA’ and the outlook is negative.

It said the downgrade reflects its credit metrics being lower than Ind-Ra’s expectation for April-December of 2015-16.

The steep fall in steel prices since January 2015 led to EBITDA losses for the company during the period and the consequent worsening of its credit metrics, it added.

On SAIL’s modernisation programme, Ind-Ra said: “Benefits of the capex are likely to be visible from 2-16-17. Till the benefits of increased capex begin to reflect by way of significantly higher volumes and improved efficiency, the leverage is likely to remain high.”

The state-run firm is undertaking a capex of Rs. 61,870 crore for upgradation (Rs. 22,740 crore) and expansion (Rs. 39,130 crore) of its facilities, it added.

An additional Rs. 10,260 crore has been earmarked for augmenting raw material availability. At end-December 2015, Rs. 69,080 crore of capex had been undertaken, which included regular maintenance capex, it said.

The agency said SAIL’s net sales realisation (NSR) fell 16.7 per cent y-o-y to Rs. 33,252 per tonne in April-December of 2015-16 driven by a 29 per cent y-o-y increase in imports, excess domestic capacity and moderate consumption growth of 4.7 per cent y-o-y.

“Ind-Ra however expects the net realisation to increase by Rs.3,000-4,000 a tonne post the introduction of MIP for steel in India effective from February 2016,” it added.

Ind-Ra also said the Maharatna firm’s gross debt rose substantially to Rs. 29,900 crore in FY 2014-15 from Rs. 25,300 crore a year ago, and is likely to have reached Rs. 33,000 crore in 2015-16 due to the capex undertaken and cash losses incurred.

“Even after the expected improvement in EBITDA in 2016-17, the leverage is likely to remain above 5.5x, higher than the category medians. The agency believes increase in NSR
is necessary for an improvement in SAIL’s overall credit metrics,” it added.
Ind-Ra expects SAIL to achieve volume growth of 10-15 per cent in 2016-17. It also believes that post the implementation of MIP, import of steel in the country would decline, but most of the other players who have also expanded their capacities would also look at producing incremental volumes.

“This could lead to higher competition which would manifest itself in aggressive pricing to gain volumes,” it added.

According to the data released by Joint Plant Committee, the Indian steel demand grew 4.3 per cent y-o-y in 2015-16.

However, domestic producers have not benefited as the incremental demand was largely met through imports which rose by 20.2 per cent, while domestic production declined by 1.1 per cent.

“Ind-Ra expects steel consumption demand to grow by
6.3-6.5 per cent in 2016-17,” it forecasted.

According to industry data, the average cost of coking coal fell to USD 84 in the first 9 months of last fiscal from USD 113 in the year-ago period and SAIL has benefited from the fall in terms of lower raw material costs.

“However, the fall in iron ore prices has not benefited SAIL as it has 100 per cent captive iron ore linkages. SAIL’s iron ore cost per tonne has in fact increased because it is required to contribute Rs. 3,600 crore annually towards District Mineral Foundation,” it added.

Additionally, the increase in clean cess to Rs. 400/tonne from Rs.200, applicable on coking and thermal coal will also increase raw material cost, it added.