Steel sector has seen its first casualty. Lenders have taken over control of Kolkata based Electrosteel Steels after the Reserve Bank of India cleared the path for banks to take over management of companies.

However, taking over of the company is not the end of the problem in the current scenario, especially in the steel sector. It is the beginning of a new one. Bankers have realised that there are no takers for these companies, not atleast at the price at which the bankers want to exit.

The problem with steel companies is that their debt is higher than their market capitalisation. Neelkanth Mishra of Credit Suisse has pointed out that the outstanding debt of the steel sector is nearly four times its market capitalisation. Unless banks are willing to take a hair-cut, there is little hope for the sector in the near future. And there is more to worry looking at the manner in which events are unfolding globally.

China is slowing down, which is catastrophic for the steel sector. China now exports more steel than the production of the second largest player in the world, Japan. A slowdown in domestic demand has resulted in China flooding the world market with steel. The country exported 52.4 million tonnes in the first half of 2015, up by almost 28 per cent compared to the same period of 2014. Monthly exports are growing at an annualized pace of around 107 million tonnes that's close to last year's production of the whole of North America.

Trade tensions globally are rising. U.S. Steel Corp. and ArcelorMittal are among group of producers in the U.S. who have filed a case against imports of cold-rolled steel. ArcelorMittal South Africa Ltd. said last week that they will fight against the import of steel from China, which is being sent to ports at prices as much as 25 percent below local output costs. ArcelorMittal wants the government to increase tariffs.

Indian companies too would want the government to increase tariffs. Total finished steel imports in India rose 53.1% in the April-June period on a year-on-year basis. The average spot price of hot-rolled steel sheets in China, a major exporter for steel to India, corrected 12% from April to June-end.

China’s slowdown of 1.3 per cent in the first half is expected to pick up as both the consuming sectors in the country – real estate and automobile are going through a rough patch. This would mean that imports will continue into India and steel companies will continue to face difficulties in servicing their debt.

Mishra pointed out that the total debt outstanding to Indian steel companies was nearly $50 billion. This was nearly ten times the industry’s Ebitda (earnings before interest, taxes and depreciation). Last year average Ebitda per tonne was just $63. But after that steel prices have come down by almost $160 per tonne, indicating that companies would have lesser money left in their hand to service debt.

Under such circumstances, finding a buyer for steel companies will be a tall task for the bankers. But with steel industry holding nearly $50 billion in debt, bankers have reason to feel jittery.  India is one of the few countries where demand is growing at a respectable pace. What both the steel industry and bankers need is protection from imports. Hope the government has its ears to the ground.

Source:business-standard.com