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India Ratings maintains negative outlook on steel sector for FY18

India Ratings maintains negative outlook on steel sector for FY18
The agency has also maintained a negative outlook on its rated steel entities for the next fiscal. Photo by Reuters.
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Maintaining a negative outlook on the steel sector for the next fiscal year (FY18), India Ratings on Thursday said the sector will continue to face operational and financial challenges during the year due to subdued demand of the hot metal and increase in raw material prices.

“Profitability and cash flow are unlikely to improve significantly in FY18 due to continued muted demand, limited pricing power due to global overcapacity, and significant increase in cost of inputs,” it said in a report.

The agency has also maintained a negative outlook on its rated steel entities for the next fiscal in view of their high indebtedness as some of the rated steel producers require significant deleveraging and cash flow generation to maintain their ratings.

“Demand growth will remain muted at 4-5% during FY18, and is likely to be driven by demand growth from key end-user industries such as constructions, capital goods and consumer durables. Increased government spending due to budget push on infrastructure and housing would support demand from the construction sector. Increase in demand for consumer durables is likely to be supported by the expected growth in consumption following better monsoon, increase in salaries under 7th pay commission and lower interest rate,” the rating agency noted.

However, demonetisation is likely to limit the growth in the real estate sector, impacting the demand for steel in real estate in FY18, the agency said. It added that the steel demand growth for FY17 is likely to be 3-3.5% and in line with the 3.3% year-on-year during April-December 2016.

Ravi Uppal, chief executive officer, Jindal Steel and Power Ltd (JSPL) also said in a recent interview to InfraCircle that domestic demand for steel will grow by 5% during the next fiscal, riding on large investments that the government has proposed in infrastructure and housing.

“The steel market has witnessed a lot of volatility in terms of finished products as well as raw materials. We think 2017-18 will be stable in terms of raw material prices, which is not valid at this moment. As far as global demand for steel is concerned, this year we expect the demand for steel to grow by 1-1.5%, especially in developed countries, which consume less steel. China may go down. India and rest of Asia will grow,” Uppal said.

India Ratings said that capacity utilisation for the next fiscal will remain low at around 75%. “Capacity of around 6- 6.5 million tonne (MT) is likely to be added in FY18 following the expected addition of around 9MT – 10MT during FY17. However, production is expected to grow only by 8MT – 10MT per year in FY17 and FY18. Low capacity utilisation is likely to limit the ability of steel producers to pass on the input cost increases, and also the improvement in profit margin during FY18,” it added.

Likely correction in steel price in fourth quarter of the current fiscal and early next fiscal due to softening of input prices regulatory support becomes crucial for the domestic industry.

“The profitability of domestic steel producer is likely to improve from the FY16 levels, but not high enough to significantly improve the liquidity. Cost cutting, significant improvement in efficiencies and improvement in the capacity utilisation are likely strategies to improve interest servicing. Many steel players may need to refinance debt to avoid default,” India Ratings said.

As per provisional figures released by the Joint Plant Committee, India’s consumption of steel during April-December 2016 was at 61.517 MT, 3.3% more than the corresponding period last year.

Also, imports of finished steel during April-December 2016 declined by 37.4% to 5.495 MT. Also, imports of steel in December 2016 stood at 0.761 MT, 23.2% lower than the same month last year.

 

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