Ratings agency ICRA on Wednesday said the country's steel consumption growth is likely to decelerate to six per cent in the current financial year, impacted by economic slowdown.
The growth of domestic steel consumption was recorded at 7.9 per cent in the previous financial year, the rating agency said in a report.
However, the profitability of steelmakers may recover somewhat in the third quarter of 2019-20, with a sharp fall in prices of coking coal, key steel-making ingredient, in August 2019, and expectation of better demand from the construction sector during that quarter, it said.
"The domestic steel consumption growth is expected to decelerate to around 5 per cent-6 per cent in FY2020 as compared to 7.9 per cent in FY2019, on the back of an unprecedented slowdown in economic activity, as reflected by GDP (gross domestic product) growth tapering down to 5 per cent in Q1 FY2020," ICRA said in the report.
Consequently, the report said the margin outlook for steelmakers has weakened in the second quarter due to a sharp fall in steel prices and firm raw material costs, though some recovery is expected in the third quarter of 2019-20.
According to ICRA, demand is expected to improve somewhat in the second half of 2019-20 following a likely pick-up in infrastructure spending.
Jayanta Roy, senior vice-president and group head (corporate ratings), ICRA, said, "Industry operating environment remains challenging in FY2020. Our analysis of prevailing trends of 22 companies comprising 60 per cent of industry size indicates that reduced demand and steel prices amidst firm raw material costs have restricted the revenues and operating margins of the industry in Q1 FY20."
The decline in steel prices and seasonally weak demand are also likely to keep second quarter financial performance muted for the domestic steelmakers.
He also said that given the challenges prevailing at present, ICRA estimates the industry's operating margin to decline to around 18 per cent in 2019-20, compared with 23 per cent in the previous financial year, and demand worries will continue to keep steel prices under pressure, which are currently trading at a discount to imported offers.
Domestic hot-rolled coil (HRC) prices have dropped 13 per cent since March 2019, whereas domestic rebar prices have dropped 14 per cent in the same period.
In 2019-20, domestic iron ore prices are expected to remain range-bound and there is a possibility of an ore supply deficit in the next fiscal, if mine auctions are delayed. On the other hand, blast furnace players would benefit in H2 from a steep correction in coking coal prices in recent months, Roy said.
"Globally, steel production growth remained healthy at 4.6 per cent in 7M CY2019 (seven months of the calendar year 2019) on the back of a high output growth in China in H1 CY2019," the report said.
However, due to rising trade tensions, slowing Chinese demand, and increasing concerns on the global macroeconomic health, steel production growth is expected to soften in second half of the calender year 2019.
China's steel exports have remained low due to its healthy domestic consumption, providing a respite to other economies, including India.
While steel imports in India de-grew 6 per cent in the four months of 2019-20, even steeper fall of 23 per cent in steel exports and unrelenting imports from free-trade agreement countries, including Japan and South Korea, are likely to keep India a net importer of steel in the near term.
Nevertheless, given the fact that domestic steel prices are currently trading at a significant discount of 16 per cent to landed cost of Chinese HRC and at a discount of 8 per cent to landed cost of Japanese HRC, India's steel imports would remain low at an absolute level in the coming months.
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