The profitability of Indian metallurgists will be reduced by 5 percent

Growth in domestic steel consumption in India is expected to slow to 5-6% in fiscal 2020 from 7.9% in 2019, according to the credit rating agency ICRA. The agency attributes the fall in demand growth to an unprecedented slowdown in economic activity, with India's GDP growth falling to 5% in the first quarter of this fiscal year.

ICRA said it expected significant pressure on metallurgical companies' margins in September due to a sharp drop in steel prices and robust raw material costs. The demand environment is expected to improve slightly in the second half of fiscal 2020 following a likely increase in infrastructure spending.

As a result of the significant steel price adjustment, operating profit margins based on a sample of ICRA steel companies, which account for about 60% of domestic metallurgical capacity, decreased by about 450 basis points year on year in the first quarter of the current fiscal period. Given the challenging operating environment currently prevailing, ICRA estimates that the operating margin of the Indian steel industry will decline to about 18% in 2020 from 23% in the previous fiscal year. This will impair the ability of enterprises to take out loans and repay debts.

The bulk of capacity building projects in the Indian steel industry are being carried out by large integrated steel players who benefit from a stronger balance sheet. In fiscal 2017, the industry operated at a capacity utilization rate of about 84%. With only about 3 million tonnes of new capacity planned in the current fiscal budget, the industry's capacity utilization is also expected to remain at a good 85% this year, despite slower demand growth.

“Demand concerns will continue to support pressure on steel prices, which are currently trading at a discount to import supplies. Domestic hot rolled coil prices fell 13% since March 2019, while domestic rebar prices fell 14% over the same period. Domestic iron ore prices are expected to remain constrained in fiscal 2020, and there is a possibility of a supply shortage in the next fiscal year if the mine auctions are delayed. On the other hand, blast furnace players will benefit in the second half of the year from the sharp correction in coking coal prices in recent months, ”says Jayantha Roy, Senior Vice President and Group Leader, Corporate Ratings, ICRA.

India's steel imports fell 6% in the first four months of this fiscal year. A sharper 23% drop in steel exports and unrelenting imports from Free Trade Agreement (FTA) countries, including Japan and Korea, are likely to make India a net steel importer in the near future. However, physical imports may remain low as Indian steel is currently trading at a significant 16% discount to Chinese imports (hot rolled coil) and an 8% discount to Japanese imports.