HYDERABAD: India Ratings and Research (Ind-Ra) on Thursday revised its outlook on the domestic steel sector to negative from stable for FY21, indicating that the stress in key sectors will prolong to the next financial year. The downward revision in outlook is based on the modest steel demand growth expectations and margin pressure led by iron ore price risks. China steel demand growth risks amid adverse impact of the Coronavirus outbreak could also have a bearing on global and domestic steel price.
Overall, it expects steel demand growth to remain modest, in line with gross factor capital formation of 5.3 per cent in FY21 (FY20 estimate: one per cent, average FY16-FY19: 8.5 per cent). According to Ind-Ra, the slowing economic activity as reflected in Ind-Ra’s GDP estimates of 5 per cent and 5.5 per cent for FY20 and FY21, respectively, would continue to affect demand growth in the sector and any significant pick-up is unlikely. It added that high iron ore premiums for new mine owners (both captive and merchant) could alter input costs for steel mills.
The ratings firm also expects overall steel margins to remain modest in FY21, with slight improvement, after the industry’s EBITDA margins dropped by about 35 per cent y-o-y as on December 2019. Margins may bottom out in the current quarter, it added.
Ind-Ra also believes in case the steel demand doesn’t strengthen up by second half of FY21, new capacity additions along with stressed asset ramp-up could put further pressure on the prices and plant capacity utilisation rates. Although, some benefits are expected on softer imported coking coal and international iron ore prices.