An over-capacity situation looms large on the steel sector in the medium- to long-term as around 30 million tonne (MT) new capacity may go on stream by the end of next fiscal amid reduced demand, Fitch said today.
"Fitch expects the domestic steel industry to suffer from overcapacity in the medium to long-term. About 30 MT of steel capacity is expected to be added in 2012-2013, due to the completion of several brownfield projects," the agency said.
India's steel making capacity at the end of FY11 stood at 78 MT, which is expected to increase by nine MT in the current fiscal and by 18 MT in the next.
Country's steel demand rose by mere 3.9% during the April-November period of the current fiscal to 45 MT over the corresponding period last fiscal.
"Growth in automobile industry has already slowed down and growth in the construction sector, which accounts for the bulk of steel demand, is also heading south. These factors could adversely affect demand for steel in 2012. Fitch expects demand to grow at 6-7 per cent through 2012," it said.
Additional capacity and subdued demand might force steel producers to focus on exports to maintain their operating rates at profitable levels, which is a challenging proposition given the current slowdown in the developed world.
Fitch, however, projected that profit margins of most Indian steel producers will continue to remain under pressure, as in the first half of the current fiscal, on account of reduced demand, though raw material cost pressures may ease in the coming months.
The quarterly contract price for coking coal, for which India is mostly dependent on imports, touched a new high of $330 per tonne in Q2 FY11 due to the floods in Australia.
It, however, came down to USD 235 per tonne in Q1 FY12, but depreciation of the Indian rupee has offset advantages that could have accrued due to the reduction in input costs.
