Steel stocks slip up to 5% as Moody's changes outlook to negative

Moody's Investors Service says that rising input costs and an inability to pass on higher costs to customers are pressuring the profitability of Asian steel producers

Shares of steel companies were under pressure, falling by up to 5 per cent, in intra-day trade on Wednesday after global rating agency Moody's changed its outlook for Asian steel producers to negative on weakening profitability.

Jindal Steel and Power (JSPL), Steel Authority of India (SAIL), Tata Steel and JSW Steel from the Nifty Metal index were down in the range of 3 per cent to 5 per cent on the National Stock Exchange (NSE). At 10:45 am, Nifty Metal index, the largest loser among Nifty sectoral indices, was down 2 per cent, as compared to 0.39 per cent decline in the benchmark Nifty50.

For the April-June quarter of financial year 2019-20 (Q1FY20), a total of 131 listed companied posted a 67 per cent year-on-year drop in their aggregate net profit of Rs 2,301 crore, against a profit of Rs 7,077 crore in Q1FY19. The same sample of companies had posted a combined net loss of Rs 2,054 crore in Q1FY18.

Moody's Investors Service says in a new report that rising input costs and an inability to pass on higher costs to customers are pressuring the profitability of Asian steel producers, and has as a result revised its outlook for the sector to negative.

"We expect steel producers' profitability -- as measured by EBITDA (earnings before interest, taxes, depreciation, and amortization) per ton -- will decline by around 15 per cent in the 12 months to June 2020, following an 8 per cent drop in the 12 months to June 2019," said Chris Park, an Associate Managing Director in Moody's Corporate Finance Group.

"India's steel demand will remain the strongest in Asia but slow to  mid-single-digit growth, as weak auto and manufacturing demand offsets demand growth in the infrastructure and construction industries," adds Kaustubh Chaubal, a Moody's Vice President and Senior Credit Officer, and co-author of the report.

Prices of iron ore and coking coal, two key steelmaking inputs, have surged by more than 60 per cent and 20 per cent, respectively, in the year till June 2019 and are likely to stay high for some time. At the same time, weak demand in end-markets is limiting the ability of producers to pass on these prices increases to customers, resulting in narrowing product spreads.