Domestic steelmakers are likely to put Rs 75,000 crore to Rs 80,000 crore in capital expenditure or capex between FY19 and FY21, said ratings agency Icra in a forecast.
Steelmakers' plan to ramp up capacities by 16 million tonnes and freeing up of stressed assets after takeovers will fuel capex, Icra said.
Aided by conducive domestic demand and low greenfield capacities in the medium term, capacity utilisation of the steel companies is projected to remain at 82-83 per cent through FY19 to FY21.
The report is bullish on the profitability of steel companies this fiscal, saying it will improve the FY18 figures on the back of superior performance during April-September period of FY19. “As the industry moves into FY20, and steel prices look poised for a sequential moderation, mill margins would register a sequential weakening. Notwithstanding the same, the steel industry’s FY20 absolute earnings are expected to remain at a similar level as FY19, as lower margins would be largely compensated by higher despatches supported by a strong domestic demand. This would allow companies to maintain their credit profile”, the report outlined.
The projection for domestic steel production growth is subdued at 2.5-3 per cent in this fiscal despite a healthy demand. This is because of enhanced threat from cheaper imports and considerable de-growth in steel exports amid escalating global trade tensions. In FY20, with export volumes seen stabilizing at a lower level, domestic steel production is likely to expand by 5.5-6 per cent, egged on by healthy demand. But a flat demand growth forecast for China in calendar 2019 would moderate international prices and in turn, pull down domestic steel prices in FY20 than the current fiscal levels.
Chinese hot-rolled coils exports offers declined from $560 per tonne in the first week of October to $476 a tonne during the first week of December, a fall of 15.3 per cent in two months. “The steep reduction in international steel prices recently would make domestic steel imports cheaper in the coming weeks, when these shipments start hitting the Indian shores, and this would in turn exert pressure on domestic steel prices in the fourth quarter of FY 19”, Icra said.
On the raw material side, steelmakers are facing a grim situation. Domestic iron ore prices witnessed a sharp increase of 22 per cent between April and December of FY19. Iron ore prices are expected to ease in the next fiscal following a resolution of the supply crunch in Karnataka arising out of the closure of NMDC's Donimalai mine.
Like iron ore, coking coal prices, too, have hardened in the current fiscal. Issues like port congestion and seasonal weather disruptions in Australia are expected to keep coking coal prices elevated in the near term. Coking coal prices have witnessed upswings while steel prices stay weak. Icra, however, expects the pricing anomaly between steel and coking coal to get corrected going forward.