India Ratings lowers domestic steel sector outlook for FY21 to negative

High iron ore premiums for new mine owners could alter costs for steel mills

India Ratings and Research (Ind-Ra) has revised its outlook on the domestic steel sector to negative for 2020-21 (FY21) from stable, given the 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 shift the cost positions of 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 steel sector and any significant pick-up is unlikely. 

Ind-Ra believes steel demand growth to remain modest, in line with gross factor capital formation of 5.3 per cent in FY21 (FY20 estimate: 1 per cent, average FY16-FY19: 8.5 per cent). 

Considering cues from 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 about 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 of it is absorbed by merchant miners. 

China steel demand growth risks amid increased ramifications from the coronavirus outbreak could also impact global and domestic steel prices; however, some benefits are also expected on softer imported coking coal and international iron ore prices.