India Ratings revises steel sector growth forecast downwards to 4% from 7%

Shobha Roy Kolkata | Updated on September 04, 2019 Published on September 04, 2019

Rohit Sadaka, Director-Large Corporates, India Ratings and Research   -  Debasish Bhaduri

Slack demand, uncertainty over auction of iron ore mines behind muted outlook

The demand growth in the steel sector in India is expected to be lower at around 4 per cent in 2019-20, as against the earlier estimated growth of 7 per cent.

India Ratings and Research (Ind-Ra) has revised its outlook for the steel sector to stable-to-negative from stable for the remaining part of FY 20 due to sluggish demand growth in the segment.

The poor demand growth is mainly on account of a mix of structural and cyclical concerns in end-user sectors including auto and real estate construction.

According to Rohit Sadaka, Director-Large Corporates, India Ratings, growth in the auto sector — which accounts for 12-13 per cent of the total steel demand in the country — is likely to be either stagnant at last year’s level or even slightly negative. Infrastructure and construction, which together account for nearly 55 per cent of the total steel demand, is also likely to see a muted or slightly lower growth this year.

Lower demand growth

“On account of slowing domestic steel demand we have revised our growth projection to 4 per cent from the previously estimated 7 per cent for this fiscal. The lower growth will be mainly on account of the auto sector which is at an all-time low, capital goods, real estate and infrastructure,” Sadaka told BusinessLine.

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

This apart, there is uncertainty over sourcing of iron ore, the key raw material for steel manufacturing, with mining lease for a number of mines expiring in March next year. These mines will be auctioned in line with the Mining and Minerals Regulation (Development) Act.

Margins to moderate

“Sourcing of iron ore will be a big concern for steel industry. If the process of auction of mines is not expedited then it might impact the availability of iron ore which will also affect raw material prices,” he said.

The overall sales volume and margins are expected to weaken further in the second half of FY20 after the industry witnessed a marginal correction in the last quarter of previous fiscal and first quarter of this fiscal, the agency said.

Also read: Fitch Solutions lowers 2019 global steel price forecast

Steel prices have been continuously softening, while raw material cost prices have only seen partial declines thereby squeezing the gross spreads for steel producers. The raw material availability and price risks may escalate in the fourth quarter of FY20 if the uncertainty over iron ore mine auction persists.

Ind-Ra expects EBITDA per tonne for most major steel producers to soften by ₹2,500-3,000 in FY 20.

However, the limited new capacity additions in FY20 will help balance the demand-supply situation amid sluggish demand. Ind-Ra also expects steel demand to recover in the second half of this fiscal supported by a pick-up in government investments, fiscal stimulus measures, improvement in market sentiment and the lower base.

Published on September 04, 2019
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