Crisil Forecasting Bleak Future For Steel Sector

New steel projects will find it increasingly difficult to mop up funds in the current year, the agency has warned.

Crisil's ratings on debt instruments issued by Indian steel companies has shown a severe down-gradation for 1999-00, which the agency has attributed to the high level of debt commitments evident in the steel industry as compared with its earnings.

The vulnerability in the country's steel sector is mainly due to the competitive domestic scene. While globally the industry has moved towards consolidation, the domestic sector has remain stagnant due to its existing fragmented state.

For instance, in European countries, 60 per cent of the total production is controlled by five players whereas India has a large unorganised sector with several small manufacturers.

 

Future threats for the steel industry would arise due to the slowdown of the US economy, weakness in the euro or a devaluation of the Chinese currency. This has been evident during 1999 when the industry experienced reduced prospects for profitable exports due to the weakening of international prices.

Also, there is no proper legislation on dumping issues -- a threat that is likely to mount in the coming months with cheaper imports coming in from the Far East and CIS countries.

The ratings for the sector will improve only if the restructuring and modernisation which is currently undertaken in the industry would result in an improvement in operating efficiencies, says Crisil.

The increase in debt levels in the Indian steel industry during the year has been mainly due to fund requirements utilised to modernise facilities as well as to set up expansion projects, either on their own or through investments in affiliate companies.

Almost all the large steel companies in the country have been involved in critical new initiatives aimed at downsizing, consolidation and focusing on core activities.

Additionally, the companies have experienced severe cost overruns because of low internal accruals and poor equity market sentiment for steel projects. These have in turn been aggravated due to the sharp rupee depreciation as well as time overruns in the projects.