The Hindu Business Line : Output cuts may slash volumes for steel cos

With user industries in trouble, several steel companies in the domestic and international arena have resorted to production cuts to prune output to adjust to the likely decline in demand.

Production cuts may impact volume growth for Indian steel companies over the next few quarters and make for a sober earnings outlook. Realisations have already fallen quite sharply in line with the correction in global steel prices.

A slew of cutbacks

The US slowdown and a sharp slippage in growth in China, the largest producer and consumer of steel, have triggered recent declines in steel prices. JSW Steel, Ispat Industries and Essar Steel have already announced cuts in their production. SAIL has also indicated that it is likely to cut production from its Rourkela Steel Plant, as global demand has considerably reduced. Visa Steel had shut down its ferro chrome unit due to slump in the market. Many companies are operating at below their optimum capacity.

Domestic production cuts follow a trend of leading global steel producers also opting for production cutbacks.

Corus plans to reduce its third quarter output by one million tonne of crude steel, equivalent to one-third of its output. ArcelorMittal plans to reduce output over the rest of this year by up to 35 per cent in an effort to put a floor under steel prices. Reports suggest that steel companies are also engaging in sell-out of inventory in anticipation of a further weakening of prices.

Price cuts

Global steel prices have declined from a high of $1250 a tonne in March-April this year to $500 a tonne. Indian steel firms have reduced prices to between Rs 32,000 and Rs 36,000 a tonne from the high of Rs 55,000 a tonne earlier this year. In this context, investors in steel stocks may have to look mainly at China’s $586 billion stimulus package for housing and rural infrastructure, to revive steel demand in the Asian region.

China is the largest consumer of steel and a major driver of the world steel demand.

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