The shares of Tata Steel Ltd rose after the company’s steel figures in September showed a surge in India and Europe, both more than a year ago and sequentially. The quarter also saw a rise in steel prices, and selling more is expected to result in higher profits, although higher input costs could be a buffer. However, production data showed slower than expected growth. This trend was evident in government data published for the entire steel industry.
Tata Steel’s sales in India increased 19.5% from the previous year and 13.8% sequentially, while in Europe the equivalent number increased by 15% and 8.3% respectively. Data from the Joint Plant Committee (CPM) show a 4.1% increase in domestic steel consumption in India during the quarter. The data show that exports increased by 56.1% compared to the previous year, while imports increased by 47.6%. Indian steel producers preferred to export and the availability of domestic steel was strict, rising only by 2.8%, also due to increased imports.
Indeed, September saw the slowdown in imports and companies sold the inventory. This could be explained by an investment in rising iron ore prices, which has given rise to uncertain prospects for international steel prices. Companies would not want to have high-priced stocks at this point. The stable domestic consumption trends in the quarter and export growth are expected to be reflected in the steel producers’ performance in the September quarter. Investors will also want to hear from management on the impact of the GST on the business.
Although the temporary impact is one thing, the most permanent change is what should interest you. Research conducted by India Ratings and Research Pvt. Ltd. offers an advance. The impact of the locked-in tax credit in pre-GST shares is one aspect. But the report indicates that the organized sector will benefit from it, since its cost of production will be reduced by about two percentage points due to the availability of credit for inputs. However, a higher tax rate in and of itself means a sharp increase in working capital requirements, since an enterprise must pay the initial tax while the credit will be granted with a delay. Even then, the big organized companies will benefit because they can look for better credit conditions or even if they accept loans to finance their working capital, their cost will be relatively lower.
India Ratings also expects the costs of the unorganized sector to increase due to a higher compliance cost after the GST of about one or two percentage points. From July to September, the “other” steel mills saw their production decrease by 12.3% compared to the previous year. Others refer to a cluster of factories in the CPM data, excluding large integrated mills. While GST deployment may be a reason, demonetization and increased capacity of larger (and therefore more profitable) firms could also be contributing factors.
Therefore, the organized sector should have an advantage and India Ratings expects its market share to increase at the expense of small businesses. The government has put in place measures over the weekend to make life easier for small producers under the GST, and whether this can make a difference. Stocks of major steel companies increased after Tata Steel data, and JPC data also indicates that large companies are likely to report good numbers in the September quarter. The strong sales performance of car manufacturers is a healthy signal for the steel industry.
Continuing, it is a seasonally low period in Europe and China due to winter and holidays. This and the weakening of iron ore prices are likely to cause steel prices to fall for some time. Volatility in international markets, particularly in China, remains a major factor. In the domestic market, how much time the real estate and construction markets are recovering and when private spending on infrastructure revives, it is the uncertainties that must be taken into account.