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Fall in demand, higher cost to put pressure on steel firms’ margins

Our Bureau Mumbai | Updated on February 28, 2020

China’s steel demand growth risks, amid increased ramifications from the coronavirus outbreak, could also impact global and domestic steel prices

India Ratings revises steel sector outlook to negative for next fiscal

Steel companies’ profit may come under pressure with the moderate recovery in steel demand next fiscal and higher prices committed for iron ore mines during the recent auction.

Following this, India Ratings and Research has revised its outlook on the steel sector for the next fiscal from stable-to-negative, to negative.

Steel demand is expected to grow just 5 per cent next fiscal, as against the estimate of 4 per cent in this fiscal. Margins may also come under pressure led by iron ore price risks. High iron ore premiums for new mine owners (both captive and merchant) could shift the cost positions of steel mills, said Ind-Ra.

The slowing economic activity is reflected in Ind-Ra’s GDP estimates of 5 per cent and 5.5 per cent for FY20 and FY21, respectively.

Auction premiums

Considering the fierce competition among bidders and high final premiums in the recently auctioned mines, Ind-Ra expects cost pressures to build up majorly for non-integrated and new captive steel producers.

The average premium for about a quarter of newly auctioned iron ore mines could be above 100 per cent, resulting in a significant increase in iron ore prices, even if some of the cost is absorbed by merchant miners.

China’s steel demand growth risks, amid increased ramifications from the coronavirus outbreak, could also impact global and domestic steel prices.

Modest margins

However, some benefits are also expected on softer imported coking coal and international iron ore prices. Global steel prices may come at risk, if Chinese steel producers cannot reduce production growth in FY21 in line with the reducing demand in housing construction and the slowing Chinese economic growth.

Ind-Ra expects the overall steel margins to remain modest next fiscal. Margins this fiscal are expected to fall 30 per cent year-on-year, after the industry witnessed EBITDA margins dropping around 35 per cent year-on-year during the first nine months of this fiscal.

Ind-Ra expects the margins to bottom out in the December quarter. The ratings agency believes if the steel demand does not strengthen by the second half of next fiscal, new capacity additions along with stressed asset ramp-up could put further pressure on the prices and plant capacity utilisation rates.

Published on February 28, 2020

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