Domestic steel industry is keenly watching trends in inventory correction, iron ore prices and Chinese steel production projections post Chinese New Year to get a sense on the direction of steel prices in the current year.

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Since the middle of last year, steel prices have been on a downhill roll due to slowing global, particularly Chinese growth, that has resulted in lower demand for the base metal. In the domestic market, after declining more than 10% till November, they fell another 4% last month.

Analysts are expecting a further correction of 5-6% in the current year if the current situation persists but R K Goyal, managing director of Kalyani Steel, said there were already some upward pressures building up on the steel prices.

He expects firm iron ore prices and correction in inventory levels across global steel industry to push prices upwards. He would also keep an eye on the announcements to be made by Chinese steel players during their New Year beginning February 5 and ending February 19.

"Steel business is largely controlled by China. So, we are yet to see what happens after the Chinese New Year because after that the behaviour of Chinese steel players will be very different. That will tell us exactly how the situation will be. Also, there has been some correction in inventory, which will help prices to bounce back," he said.

Seshagiri Rao, joint managing director and group chief financial officer (CFO) of JSW Steel, told DNA Money the current margin pressures due to rising raw material prices could see companies revising their prices upwards.

"Raw material prices have, more or less, remained the same but steel prices did correct. Therefore, there was definitely margin pressure in the last (September) quarter. Now, in this (December) quarter, if you see the coking coal prices have already corrected while iron ore prices remain at elevated levels. Steel prices in the last few days of last one week have seen an uptick by almost $8-10 per tonne globally. If raw material prices remain at these levels then I don't expect steel prices to come down. Companies will try to stabilise margins at current levels by upwardly revising the prices," he said.

Goyal said despite a rise in raw material costs, domestic steelmakers have not been able to pass it on to customers because of slowing global demand and competitively priced imports.

"There has been a tremendous increase in costs but we are not able to pass them on to the customers," he said.

As per the credit rating firm Icra, domestic steel demand rose 8% annually to 63.6 million tonne between April and December last year. In contrast, production has climbed 6% to 64.7 million tonne during the same period compared to the year before. The same period witnessed a 22% jump in iron ore prices. This is expected to adversely hit the margins of domestic steel companies in the quarter gone by.

An industry insider, who spoke off the record, projected the earnings before interest depreciation tax and amortisation (Ebitda) of local steel firms to shrink 17-19% sequentially in the third quarter of the current fiscal.

Domestic steel players are also facing headwinds from tumbling steel exports, which has fallen over 35% in the last few months. In comparison, imports have dropped just by around 2%.

"Falling exports is a matter of concern. Compared to last year, it has fallen more than 38% this year whereas imports have more or less remained the same. That is why we are requesting the government to protect the steel industry. Every country has put restrictions on (steel) imports, whereas as far as India is concerned, we have not revised our tariffs. That is what we are looking for in the Budget. We are requesting that the customs duty on steel should be increased from 12.5% to 25% like in Europe and the US," said JSW's Rao.

The senior executive of one of the leading steel manufacturers said despite gradual winding down of capacity utilisation in the last few months, he continued to believe in the "Indian steel industry story" and sees domestic players being on course with their expansion plans.

"We are quite optimistic on the Indian steel industry story and the country's economy. Therefore, our expansion plans will remain," he said.

JSW CFO expects domestic demand to grow above the global average of 1.4% at 7-7.5% in the next fiscal. Rao also informed that in China steel production has come down from 84 million tonne to 76 million tonne between October and December; "there is a huge drop in (steel) production. In India also you will see a drop in production but at JSW we are (continuing to) produce more," he said.

An analyst with a broking firm, who did not want to be named, said a lot would depend on what action China took to curb excess production in a market with subdued demand.

"People are waiting for the Chinese New year. China is also taking steps to cut down their production. Ideally, if it (China) continues (to cut production), it will impact the (steel) prices in a big way but currently, the prices are little subdued and will remain that way for some time now. Only if the demand improves, the prices will get back to their normal levels. Otherwise, overall things are not looking very good and promising at this point," he said.