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Steel Companies May Report Subdued Q3 Numbers

The quantum of steel price decline will be higher and operating margins are expected to decline, says a study

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Domestic steel companies are set to report subdued numbers in the third quarter due to 5-8 per cent sequential decline in prices on the back of weak demand globally, says a research report.

"Domestic steel companies are expected to report subdued numbers in Q3FY16 due to 5-8 per cent sequential decline in steel prices on the back of sharp fall in prices, weak demand and increased pressure from cheap imports largely from China and CIS countries, which resulted in price cuts during the quarter," the report by Reliance Securities said.

The report said though some respite for non-integrated steel companies is expected from the fall in raw material prices, the quantum of steel price decline will be higher and operating margins are expected to decline.

While the government has implemented a 20 per cent safeguard duty on steel for a period of 200 days in September last year, global prices continued their downward trend during the quarter.

Further, while raw material prices have also corrected, the positive impact of the same comes with a lag. This coupled with weak domestic demand is expected to weigh on the performance of ferrous companies, it said.

Reliance Securities said that the December quarter is once again expected to be a soft one for both ferrous as well as non-ferrous players.

While non-ferrous companies will benefit out of higher volumes both on a yoy and qoq basis due to continued aluminium capacity ramp-ups and higher mined metal production (in case of zinc); LME prices have seen a sharp fall, which will result in revenue contraction both on a yoy and qoq basis.

"We anticipate domestic non-ferrous companies like Hindalco & Hindustan Zinc to benefit from higher volumes on a yoy and qoq basis ... However, a steep fall in LME prices coupled with higher input costs for Hindalco, will impact its performance both on a yoy and qoq basis," Reliance Securities Research Analyst Kunal Motishaw said.

Going forward, at-least in the near-term we expect LME prices to remain muted on the back of steady increase in exports from China, thereby helping plug the global aluminium deficit.

On the zinc front, the outlook on prices is dominated by structural issues of whether mine supply growth will be able to keep pace with consumption growth or not, he said.

LME aluminium prices have corrected by 6 per cent qoq and 24 per cent yoy to average at $1,495/tonne, while zinc prices have corrected by a steeper 13 per cent qoq and 28 per cent yoy. Further, while aluminium prices are currently trading at around the same level as Q3FY16 average, Zinc is trading 8 per cent lower.

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steel financial results reliance securities