Ind-Ra revises outlook on steel sector to 'stable-to-negative'

Ratings agency India Ratings and Research (Ind-Ra) has revised its outlook on the steel sector to 'stable-to-negative' for the remainder of the ongoing fiscal due to sluggish steel demand growth expectations.

Ind-Ra has revised downwards its FY2019-20 steel demand growth expectations to around 4 per cent from the previous forecast of 7 per cent.

"Ind-Ra has revised its outlook on the steel sector to stable-to-negative from stable for the remainder of FY20 given sluggish steel demand growth expectations owing to mix of structural and cyclical concerns in end-user sectors, primarily auto and real estate construction. Hence, Ind-Ra has (also) revised downwards its FY20 steel demand growth expectations to around 4 per cent from the previous forecast of 7 per cent...," it said in a statement.

 

The outlook, Ind-Ra said, also factors in increased import risks especially from Free Trade Agreement (FTA) countries such as Japan and South Korea due to adverse impact of the slowing global growth and continuing trade frictions.

Furthermore, raw material availability and price risks may escalate in the fourth quarter if the uncertainty over iron ore mine auctions prolongs.

Ind-Ra also expects overall steel sales volumes and margins to weaken further in the second quarter of FY20 after industry witnessed margin correction in the fourth quarter of FY19 and the first quarter of FY20.

Steel prices have been continuously softening, while raw material cost have only seen partial declines, thereby squeezing the gross spreads for steel producers, it said.

"However, Ind-Ra expects steel demand to recover in H2FY20, supported by pickup in government investments, fiscal stimulus measures, improvement in market sentiment and H2FY19's lower base," it said.

The agency believes that limited new capacity additions in FY20 will help balance the demand-supply situation amid sluggish demand in second half of FY20.

"Steel producers are likely to see moderation in cash flows from operations as strong margins moderate over FY20 from the highs of FY19. Large integrated players should continue to have adequate liquidity supported by their sound market access and high financial flexibility, despite moderating profitability pressures, ongoing challenges in market liquidity and increased risk perception among investors," it said.