India Ratings maintains negative outlook on domestic steel sector

India Ratings and Research (Ind-Ra) has maintained a negative outlook on the steel sector and expects an operational recovery to pre-Covid-19 levels in second half of FY22, though large players could recover earlier.

While the domestic demand did show initial signs of recovery in mid-Q2FY21, with the unleashing of pent-up demand, its sustenance would depend on a macroeconomic pick-up from timely government reforms and stimulus to push up domestic consumption and investment activity, said the ratings agency.

Also, government’s increased investments in infrastructure, especially frontloading of the Rs 100 trillion infrastructure investment plan could be a key steel demand growth driver, it said.

Meanwhile, deleveraging efforts of sector participants are likely to be delayed with credit metrics expected to return to FY20 levels by end-FY22. Accordingly, Ind-Ra believes that all players would remain focused on managing liquidity and defer capex until operational cash flows fully recover.

The liquidity position of large integrated players is likely to remain adequate, while already stressed mid-sized and secondary steel producers would face elevated liquidity stress, it said.

Ind-Ra believes that iron ore prices could increase further with only five out of the 19 Odisha iron ore mines, which were auctioned in March 2020, being operational as on date.

Also, previous mine owners have time till end-October 2020 (previously end-September 2020) to exhaust accumulated inventory, though a further extension in this timeline could partially reduce availability issues.

Iron ore availability in H2FY21 would also depend on the pace at which new merchant miners in Odisha ramp-up their output and ex-mine owners to dispose of accumulated stock.

Industry participants without captive iron ore mines could face iron ore availability and price risks in the near term. Raw material cost per tonne could further increase, given the high auction premium on new mines and/or a delay in ramp-up of these mines and increased demand for procurement from existing merchant miners.

In addition to iron ore availability and price risk along with the timeliness of governments infrastructure spending, the movement in international prices and import pressure from Free Trade Agreement countries would be a monitorable.