Challenging times ahead for the domestic steel industry says Icra

Mar 31,2020

Domestic steelmakers 'output is likely to be adversely affected in Q1 of FY21 because of the Covid-19 pandemic and the nationwide 21-day lockdown, Independent Credit Rating Agency said it's in a note.

Domestic firms may face challenges such as low domestic demand, which is likely to pile up inventory, pressuring steel prices, it said.

Although reported Covid-19 cases in China have slowed in recent weeks, the number of reported cases in March is spiking globally. That will keep seaborne demand muted until the condition improves.

Going ahead, Icra does not anticipate a turnaround in the growth of domestic steel consumption in FY21. Consumption growth is likely to settle at around 2-3 percent in FY2021 compared with a growth rate of 3.8 percent in FY2020, considering that Q1 may be a very weak quarter.

With the export market still remaining tepid and the introduction of the incremental capacity of 10 million tonnes per annum next fiscal year, industry capacity utilization levels are seen to be lower from 81 percent in FY2020 to around 79 percent in FY2021 assuming an improvement in demand conditions in the second half.

Currently, the seaborne hot rolled coil export price offers collapsed in March 2020 for purchasers seeking. However, due to the high shutdown costs, most major domestic steelmakers have continued production throughout the lockdown.

Jayanta Roy, senior vice president, and group head at ICRA was quoted as saying “Margin improvement is doubtful in FY2021; as a result, the debt protection metrics of the Indian steel industry are likely to remain subdued in FY2021. The operating margin of the industry is expected to decline from around 21 percent in FY2019 to around 16.5 percent in FY2020 and around 16 percent in FY2021. Total debt / operating profit before depreciation, interest, and taxes (OPBDIT), which improved to 2.9 times during the upswing in FY2019, is expected to deteriorate to approximately 4 times in FY2020 and FY2021. The decline in industry earnings can also be measured by the credit ratio of our rated portfolio, which stood at 0.8 times in 11 M FY2020.”

As regards prices, the rally seen in domestic steel prices since November 2019 is focused on internationally supportive markets, but this is likely to be halted due to the outbreak.

In March 2020, domestic hot-rolled coil prices stood at Rs 38,000 per tonne, and a correction looks highly probable in the next quarter despite the shock of demand amid the lockdown.

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