Capacity utilisation of steel industry to decline: Ind-Ra

Problems for the domestic steel sector is likely to continue in the near term as capacity utilisation in the sector is expected to decline amid sluggish demand, a report said.
"We expect the capacity utilisation of Indian steel manufacturers to decline, as close to 12-14 million tonnes of crude steel capacity will come on board by FY16 with no significant hike in consumption demand," India Ratings and Research (Ind-Ra) said in its report here.
"This would put further pressure on large steel producers in terms of end-product pricing and EBITDA per tonne," it added.
The important challenges before the industry are lower-than-expected increase in domestic demand and sustained low prices on account of the global glut in steel.

Significant revival of domestic demand and firming up of international steel prices are not possible in the short term, it said.
An increase in demand is likely to benefit the industry in general, whereas an increase in inputs prices, such as coal and iron ore, will yield greater benefits to integrated players, said the report.

The current stress in the steel industry is mainly on account of both domestic and international overcapacity, a slower-than-expected pickup in demand and the consequent fall in steel prices, Ind-Ra said.
Global crude steel production capacity increased by almost 30 per cent over the last five years to reach nearly 2.3 billion tonnes in FY15. Of this, 70 per cent or about 350 million tonnes/year was from China alone.

This is in comparison with the total Indian capacity of 110 million tonnes/year in FY15, 46 per cent higher than 75 million tonnes/year at FY10.
The domestic steel consumption growth, which was a robust 11.9 per cent during FY11, declined 2.4 per cent each year over the last two years due to a slump in construction, capital goods and automobile industries.
Capacity utilisation in India fell to 81 per cent in FY15 from 88 per cent in FY10. Global capacity utilisation has also fallen to around 68 per cent from about 75 per cent two years ago, Ind-Ra said.
It does not expect the debt levels of steel companies to come down immediately given their negative free cash flows.

Responding to the plight of the domestic steel industry, the government in September 2015 imposed a 20 per cent safeguard duty on hot rolled coil (HRC) flats for an initial period of 200 days.
If this is continued and extended to other products, it will provide substantial relief to domestic producers, the report added.