Capacity utilisation of domestic steel may hit 4-year low in FY25: ICRA

Capacity utilisation of the domestic steel industry in FY2025 is poised to slip below 80 per cent for the first time in four years as cheap imports nibble at market share, ICRA said in its latest note on the steel sector.  The credit rating agency noted that the fresh upcoming capacity addition plan of 90-95 million tonne per annum (mtpa), entailing investments of $45-50 billion, could be at risk of a slowdown unless earnings of domestic steel mills inch up from prevailing levels.  In a statement, Girishkumar Kadam, senior vice-president and group head, corporate sector ratings, ICRA, said that the domestic steel industry witnessed an all-time-high capacity addition of 18.2 mtpa last fiscal, and in the current year, another 15.3 mtpa of new capacity is lined up for commissioning.  “However, while the domestic steel demand is expected to maintain its solid growth track record of 10-11 per cent in FY2025, domestic mills are struggling to protect their market share from cheaper imports. This is reflected by the much lower 5 per cent growth in domestic finished steel production that we expect in the current fiscal. Coupled with the record ongoing expansion plans, the industry’s capacity utilisation rates are expected to slip from 85 per cent in FY2024 to an estimated 78 per cent in the current fiscal, the lowest we have seen in the last four years,” Kadam said.  Following the post-Covid metals rally, the domestic steel industry was able to achieve the “impossible trinity” of maintaining above 80 per cent capacity utilisation rates, a strong investment pipeline, and comfortable leverage levels for three consecutive years between FY2022 and FY2024.  But ICRA said this trinity is unlikely to sustain going forward as the recent surge in cheap imports has nibbled at the market share of domestic steel companies, leading to pressure on industry profit margins, lowered capacity utilisation rates, and steadily increasing leverage levels to support ongoing growth plans.  Major steel producers that are on an expansion spree have been flagging the issue of cheap imports for a while. Trade flows have been redirected to high-growth markets like India in the wake of the sub-par economic growth outlook in China, along with other leading producing and consuming hubs.  China accounted for the highest share of 30 per cent of the steel imports to India in the first seven months (7M) of FY2025, while 59 per cent of the imports were from free trade agreement (FTA) countries like Japan, South Korea, and Vietnam, which have duty-free access to India.  Apart from the 7.5 per cent basic customs duty, most of the earlier tariff protection measures implemented during the 2015-2016 metals meltdown, like anti-dumping duty, safeguard duty, and minimum import price, have expired.  The ICRA report highlights that domestic hot-rolled coil (HRC) prices have generally been trading at a premium to the landed cost of cheaper imports for most of the current fiscal, keeping domestic steel mills on tenterhooks.  By end-November 2024, domestic HRC prices were trading at a premium of $12-16 per tonne compared to the landed costs of imports from China and Japan, indicating that import pressures are unlikely to alleviate materially in the coming months unless there is a meaningful recovery in international steel prices.  According to ICRA, India’s finished steel imports are expected to corner about 7.0-7.5 per cent of the domestic market share in FY2025, the highest level recorded in the last six years.  “Moreover, with export demand remaining lacklustre, FY2025 net finished steel imports (indicating finished steel imports less exports) are poised to spike to levels last witnessed during the FY2016 metals meltdown,” the report said.