High-Cost Inventory Likely To Hurt Q3 Margin, Says JSW Steel
Falling steel prices will hurt margin as higher carrying cost of inventory has to be absorbed over a quarter, says JSW Steel.
JSW Steel Ltd. said the fall in global steel prices will hurt operating margin due to relatively high inventory costs.
“Steelmakers may take at least a quarter to recover from the effect of the decline in price,” Joint Managing Director and Group Chief Financial Officer Seshagiri Rao told BloombergQuint. Margin, he said, will be under pressure when steel prices are falling as higher carrying cost of inventory has to be absorbed over a quarter. “After that, factors will normalise as either steel prices will go up or cost of production will come down.”
This comes at a time the government’s spending on infrastructure is expected to boost demand. Rao expects the 7-8 percent growth in domestic steel demand to sustain. The incremental demand, according to him, is likely to be 8-10 million tonnes a year. But concerns are more around inadequate supply, Rao said.
Fall In Chinese Steel Prices
- Correction in Chinese steel prices due to excess supply, tight financial conditions and rising trade tensions; price fall is temporary.
- China ramped up production despite trade tensions and supply-side reforms in the first 10 months of 2018.
- Strong demand for steel globally due to a cyclical upturn after 2016.
- China is moving towards cost reduction and moderating supply, which will trigger an imbalance in the next few months.
Impact Of Global Price Correction On Indian Steelmakers
- There will be a correction in Indian steel prices as they move in correlation with global prices.
- Demand push, cost push and landed cost of imports determine domestic prices.
- Need to keep an eye on India’s imports from China, Japan and Korea; should not impact domestic steel supply.
- India’s imports have fallen only 3-4 percent, while exports have declined around 33 percent.
ArcelorMittal’s Entry To India
- Demand in India growing at 7-8 percent, hence not concerned about additional capacities stemming from insolvent plants or new entrants.
- Concerned over supply to meet the growing incremental demand in India and not supply glut.
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