Covid-19: Challenging times ahead for domestic steel industry, says Icra

Weak domestic demand is likely to lead to inventory pile up, exerting pressure on steel prices, agency says

The performance of domestic steel makers is likely to be adversely impacted in Q1 od FY21 on account of the Covid-19 pandemic and the 21-day nationwide lockdown, Icra said its in note today.

Domestic firms may have to face challenges such as weak domestic demand, which is likely to lead to inventory pile up, exerting pressure on steel prices, it said.

Though reported Covid-19 cases in China have slowed down in recent weeks, there is a spike globally in the number of reported cases in March. This will keep seaborne demand muted until the situation improves.

Going ahead, in FY21, Icra is not expecting a rebound in domestic steel consumption growth. As against a growth rate of 3.8 per cent in FY2020, consumption growth is likely to settle at around 2-3 per cent in FY2021, given that Q1 could be a very weak quarter.

With the export market also remaining tepid, and incremental capacity addition of 10 mtpa next fiscal, industry capacity utilisation rates are seen to be lower from 81 percent in FY2020 to about 79 percent in FY2021 assuming a recovery in demand conditions in the second half.

Currently,the seaborne hot rolled coil (HRC) export price offers have plummeted in March 2020 for want of buyers. However, most large domestic steelmakers have continued production during lockdown, given the high shutdown costs.

“Margin improvement is unlikely in FY2021; consequently, Indian steel industry’s debt protection metrics are likely to remain subdued in FY2021. The industry’s operating margin is expected to weaken from around 21 percent in FY2019 to around 16.5 percet in FY2020 and around 16 percent in FY2021. The industry’s total debt/operating profit before depreciation, interest and taxes (OPBDIT), which improved to 2.9 times during the upcycle in FY2019, is expected to deteriorate to around 4 times in FY2020 and FY2021. The fall in the industry’s earnings can also be gauged from the credit ratio of our rated portfolio, which stood at 0.8 times in 11M FY2020,” Jayanta Roy, senior vice president and group head at ICRA was quoted as saying.

In terms of prices, the rally witnessed in domestic steel prices since November 2019 is based on supportive international prices, but this  is likely to be halted due to the outbreak.

Domestic HRC prices stood at Rs 38,000 per tonne in March 2020, and given the choking of demand amidst the lockdown, a correction looks highly likely in the next quarter.