Ind-Ra lowers outlook on domestic steel sector from stable to negative

India Ratings and Research (Ind-Ra) on Thursday said it has revised its outlook on the steel sector from 'stable-to-negative' to 'negative' for FY2021-21.

The revision has been made seeing the steel demand growth expectations of 5 per cent and margin pressures led by iron ore price risks, the agency said in report.

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 said in a report.

The rating agency said it expects steel demand growth to remain modest, in line with gross factor capital formation of 5.3 per cent in FY21.

The Chinese steel demand growth risks amid increased ramifications from the corona virus 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, it said.

"Global steel prices may come at risk, if Chinese steel producers could not reduce production growth in FY21 in line with the reducing demand in housing construction and the slowing Chinese economic growth, " it said.

The agency further said it expects the overall steel margins to remain modest in FY 2020-21, with slight improvements after "the industry witnessed EBITDA margins dropping. Ind-Ra expects the margins to bottom out in 4QFY20".

The agency also believes that in case the steel demand does not strengthen up by

2HFY21 (second half of FY 2020-22) new capacity additions along with stressed asset ramp-up could put further pressure on the prices and plant capacity utilisation rates.