While the performance of domestic steelmakers is likely to be lower in the first quarter of the current financial year as compared the previous year due to several headwinds, the construction sector will be at the forefront of demand recovery in the second half, according to investment information and credit rating agency ICRA.
The new government's thrust on infrastructure creation will be known when it presents the full Union Budget for 2019-20 in July, it said.
According to an ICRA report, domestic steel consumption growth eased to 7.5 per cent in FY19 from 7.9 per cent in FY18 due to liquidity and fuel price related headwinds faced by the auto sector during the second half.
The demand growth moderated further to 6.4 per cent in April and is likely to remain lower than the FY19 levels in the first quarter due to continued weakness in the auto sector and reduced construction-related activities during the general election period.
This, coupled with elevated coking coal prices, is likely to affect the financial performance of domestic steelmakers, said the report.
Spot price of seaborne premium hard coking coal, which accounts for 40 to 45 per cent of the steelmaking cost for a domestic blast furnace operator, has remained above 200 dollars per tonne, supported by a healthy 10.1 per cent growth in Chinese crude steel production during January to April of 2019.
Given that domestic steel hot rolled coil prices have weakened sequentially from Rs 41,250 per tonne in January to March to Rs 40,500 per tonne in April to June, elevated coking coal prices are likely to keep the profitability of domestic blast furnace operators under pressure in the current quarter.
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"We have already seen a contraction in gross contribution levels of a domestic blast furnace operator by around Rs 3,000 per tonne in Q4 FY19," said Jayanta Roy, ICRA's Senior Vice-President and Group Head for Corporate Sector Ratings.
"In the current quarter, with coking coal prices remaining firm and steel prices under pressure, we see a further contraction in gross contribution levels by about Rs 400 to 500 per tonne over Q4 FY19," Roy said.
However, in the case of iron ore -- the other key steelmaking ingredient -- Indian mills have benefited from the domestic supply glut due to a significant ramp-up in mining activities in Odisha where a large number of iron ore mines would witness lease expiry in March 2020.
"This has helped partly insulate domestic ore prices from the steep rally in sea-borne prices following the supply disruptions from Brazilian Miner Vale," Roy said.
Despite expectations of reduced imports, domestic steel production growth is likely to remain modest in the second quarter of current fiscal due to the seasonal weakness in demand and will recover in second half mirroring steel consumption trends.
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