India Ratings lowers domestic steel sector outlook for FY21 to negative

India Ratings and Research (Ind-Ra) has revised its outlook on the domestic steel sector to negative for FY21 from stable-to-negative, given modest steel demand growth expectations of 5 per cent (FY20: 4 per cent estimate) and margin pressures, led by iron ore price risks.

High iron ore premiums for new mine owners (both captive and merchant) could alter input costs for steel mills, it said.

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.

Ind-Ra estimates 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).

Considering the fierce competition among bidders and final premiums in the recently auctioned mines, Ind-Ra expects cost pressures to build up majorly for non-integrated and new captive steel producers. This is because average premiums for a quarter of India’s newly auctioned iron ore mines could be above 100 per cent, resulting in a significant increase in iron ore prices, even if some part is absorbed by merchant miners.

China steel demand growth risks amid increased impact of the coronavirus outbreak could also have a bearing on global and domestic steel prices. 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 producers could not reduce production growth in FY21 in line with the reducing demand in housing construction and slowing Chinese economic growth.

The agency expects the overall steel margins to remain modest in FY21, with slight improvement, after the industry's EBITDA margins dropped by around 35 per cent year-on-year in 9MFY20. Ind-Ra expects the margins to bottom out in 4QFY20.

The agency believes in case the steel demand does not strengthen up by 2HFY21, new capacity additions along with stressed asset ramp-up could put further pressure on the prices and plant capacity utilisation rates.