Reviving demand, and not protective duties, is the most important driver of profitability of the domestic steel industry over the next three to five years, says Standard & Poor's in a report.
"Demand revival and not safeguard duties will determine the profitability and development of the steel industry over the next three to five years here," Standard & Poor's credit analyst Mehul Sukkawala said in a note today.
"The last week's 20 per cent safeguard duty imposed on hot-rolled coil imports can eventually damage the economy by curbing competitiveness of its manufacturing sector, which consumes steel, and by increasing the cost of building infrastructure," he added.
He also opined that subdued demand has shackled the steel sector, which is currently facing capacity underutilisation.
S&P believes that steel consumption can increase by 9-10 per cent in next fiscal year and FY18, if economic growth accelerates, compared with 1-4 per cent growth since FY13. This can help absorb oversupply and improve profitability, the report said.
The rating agency said the latest 20 per cent safeguard tax on HR coil imports from China for the next 200 days may only protect the industry for a limited time.
The new anti-dumping duty is on top of the 5-percentage-point increase in import duties over the past three months for most steel products. The latest government action on steel imports came after significant downward price pressure on India's steel producers.
Steel companies have also accumulated huge debt over past five years because of capacity expansion, acquisitions, and rupee depreciation. Net debt rose at a CAGR of 23 per cent on a cumulative basis between fiscal 2011 and fiscal 2015 while EBITDA declined for three of the four biggest players--Tata Steel, JSW Steel, SAIL, and Jindal Steel.
"Steel companies' high debts present a risk to the asset quality of banks as their performance has not kept pace with their investments," Sukkawala said.
S&P believes strategic deleveraging such as asset sales or equity raising can play an important role in improving financial performance. For example, Tata Steel last week raised about Rs 2500 crore selling a stake in Tata Motors.
Such efforts, along with potential improvement in operating performance, can help companies become more resilient to the weak steel industry environment.
Another factor that can play an important role in boosting domestic steel industry is improving its access to raw materials such as iron ore and thermal coal. Steel producers face hurdles from government policies and regulations, it said.
