Icra sees FY20 steel demand growth shrinking to 5-6% from 7.9% in FY19

Industry's total debt/OPBITDA seen at 4.5 times in FY20 vs 3.5 times in FY19

Domestic steel consumption growth is expected to decelerate to around 5-6 per cent this fiscal, from 7.9 per cent in FY2019, on the back of an unprecedented slowdown in economic activity, said Icra in its report today.

The country’s GDP growth tapered to 5.0 per cent in Q1 FY2020.

Consequently, margin outlook for steelmakers has weakened in Q2 due to a sharp fall in steel prices and firm raw material costs, it said.

According to Icra, the demand environment is expected to improve somewhat in the second half of FY2020, following a likely pick-up in infra spending.

“Industry operating environment remains challenging in FY2020 thus far. However, a likely pick-up in infra spending in the second half and softer coking coal prices could benefit steelmakers for the remainder of the year. Profitability may recover somewhat in Q3, with a sharp fall in coking coal prices in August 2019 and expectation of better demand from the construction sector during that quarter,” Jayanta Roy, senior vice-president and group head – corporate ratings was quoted as saying.

Given the challenging operating environment prevailing at present, ICRA estimates the industry’s operating margin to decline to around 18 percent in FY2020, compared to 23 percent in the previous fiscal.

In line with deterioration in profitability, the industry’s debt protection metrics have also weakened, said the report. The interest coverage ratio for the ICRA sample declined to around 3 times in the first quarter of FY2020, down from the intermediate peak level of 3.5 times recorded in Q2 FY2019.

With steel spreads steadily gravitating to lower levels, the industry’s total debt to OPBITDA is poised to deteriorate to around 4.5 times in FY2020 as against 3.5 times in FY2019, it said.    

Bulk of the domestic steel industry’s ongoing capacity expansion projects are being undertaken by the larger integrated steel players who have the benefit of a stronger balance sheet. In FY2019, the industry operated at a capacity utilisation rate of around 84 percent. With fresh capacity addition of only around 3 million tonne per annum being planned in the current fiscal, the industry’s capacity utilisation rates are expected to remain at a healthy level of 85 percent in the current year as well, notwithstanding a slower demand growth.

“Demand worries will continue to keep steel prices under pressure, which are at present trading at a discount to imported offers. Domestic HRC prices have dropped 13 percent since March 2019, whereas domestic rebar prices have dropped 14 percent in the same period. In FY2020, domestic iron ore prices are expected to remain range-bound and there is a possibility of an ore supply deficit in the next fiscal, if mine auctions are delayed. On the other hand, blast furnace players would benefit in H2 from a steep correction in coking coal prices in recent months,” said Roy.

Globally, steel production growth remained healthy at 4.6 percent in 7months CY2019 on the back of a high output growth in China in H1 CY2019. However, due to rising trade tensions, slowing Chinese demand, and increasing concerns on the global macroeconomic health, steel production growth is expected to soften in H2 CY2019.

China’s steel exports have remained low due to its healthy domestic consumption, providing a respite to other economies including India. While the steel imports by India de-grew by 6 percent in first four months of FY2020, even steeper fall of 23 percent in steel exports and unrelenting imports from free trade agreement (FTA) countries including Japan and Korea, are likely to keep India a net importer of steel in the near term.

Nevertheless, given the fact that domestic steel prices are currently trading at a significant discount of 16 percent to landed cost of Chinese HRC and at a discount of 8 percent to landed cost of Japanese HRC, India’s steel imports would remain low at an absolute level in the coming months.