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Icra revises domestic steel industry outlook to negative from stable

Sees domestic demand for the alloy declining by 20% in FY21

ICRA | Steel Industry | Coronavirus

Aditi Divekar  |  Mumbai 

Steel, iron, metal, manufacturing, core sector, industries, manufacturing
The ratings agency’s outlook on the domestic steel industry has been revised to negative from stable.

India’s domestic steel demand is expected to remain subdued until the Covid-19 pandemic is brought under control. This follows the back-to-back extensions of the lockdown, till May 31, said in its report today.

Early indications of an unprecedented demand slowdown are visible in the official data for March and April, which point to a steep year on year (YoY) contraction in steel demand of 22 per cent and 91 per cent, respectively.

As per Icra’s latest report on the sector, domestic demand is estimated to decline by 20 per cent in FY2021, which will be the sharpest fall on record.

Consequently, the ratings agency’s outlook on the domestic has been revised to negative from stable.

“Quickly rebooting the from hibernation is going to be a tough task. The first half of FY2021 is expected to be especially challenging for steelmakers. Many buyers could prefer to sit at the sidelines, given the uncertain demand environment and liquidity pangs of steel consumers, amid dwindling sales and fixed cost obligations. Moreover, despite higher borrowing levels of state governments that have been allowed subject to conditions, infrastructure spending by the centre and states could be partly deferred to the next fiscal, due to dwindling tax collections, limiting possibility of a sharp bounce back in steel demand post the lockdown,” the report quoted Jayanta Roy, senior vice-president & group head, corporate sector ratings at as saying.

Icra’s analysis suggests that the steel demand “hotspots” are overlapping with the Covid-19 hotspots, which would hurt the recovery of steel demand over the near term.

Key steel consuming states of Maharashtra, Gujarat, Delhi, Tamil Nadu, Andhra Pradesh, Telangana, Rajasthan and Punjab have a sizeable portion of their population living in districts marked as red zones.

With around 51 per cent of the urban population living in red zones, steel demand from the construction and real-estate sectors could take some time to return to the pre-Covid-19 levels, limiting the possibility of a steep rebound in domestic steel demand.

In addition, slackness in demand, migration of labour, timely availability of raw materials, and liquidity/working capital availability remain some of the key challenges grappling the end-consumers of steel.

The recent announcements on liquidity injection measures by the Government of India (GoI) and the Reserve Bank of India (RBI) could partly help alleviate the interim stress for both steelmakers and end-users of steel.

notes that the bulk of the allocations of the recently announced Rs 20-lakh-crore Covid-19 package have been directed towards social sector spending and enabling credit flow to the stressed/vulnerable sectors of the economy.

Unlike an investment-led stimulus, the measures announced so far by the GoI may not lead to an immediate rebound in domestic steel demand in the prevailing weak demand environment.

In the current fiscal, steelmakers would not only have to grapple with weakening spreads, but also lower deliveries, as companies jostle for space to protect volumes amid shrinking domestic demand. This would adversely impact the operating profitability and debt protection metrics of steelmakers in FY2021.

Moreover, as fresh steel capacity of 10 million tonne (mt) is expected to be commissioned in the coming few months, the capacity utilisation rate of the domestic industry is expected to plummet to less than 65 percent in FY2021.

“Steelmakers have focused on export deliveries as domestic demand dried up during the Our channel checks suggest that most of the industry’s export consignments made during the have been to China, the Middle East, Vietnam and other South-East Asia countries. Despite exports being less remunerative than domestic sales due to the duty protections available within India, steelmakers have continued to focus towards the export markets in May as well. De-stocking inventory and shoring up the balance sheet liquidity seems to have assumed a higher priority over profitability to tide over these challenging times for steelmakers,” Roy was quoted as saying.

First Published: Tue, May 19 2020. 17:24 IST