Ratings agency ICRA said that the domestic steel consumption growth is expected to decelerate to around 5%-6% in FY2020 as compared to 7.9% in FY2019, on the back of an unprecedented slowdown in economic activity, as reflected by GDP growth tapering down to 5.0% in Q1 FY2020. Consequently, margin outlook for steelmakers has weakened in Q2 due to a sharp fall in steel prices and firm raw material costs, though some recovery is expected in Q3 FY2020. As per ICRA, the demand environment is expected to improve somewhat in the second half of FY2020 following a likely pick-up in infra spending.
Mr Jayanta Roy Senior Vice-President and Group Head Corporate Ratings, ICRA said that “Industry operating environment remains challenging in FY2020 thus far. Our analysis of prevailing trends of 22 companies comprising 60% of industry size indicates that reduced demand and steel prices amidst firm raw material costs have restricted the revenues and operating margins of the industry in Q1FY2020. The decline in steel prices and seasonally weak demand are also likely to keep Q2 financial performance muted for the domestic steelmakers. However, a likely pick-up in infra spending in the second half and softer coking coal prices could benefit steelmakers for the remainder of the year. Profitability may recover somewhat in Q3, with a sharp fall in coking coal prices in August 2019 and expectation of better demand from the construction sector during that quarter.”
Bulk of the domestic steel industry’s ongoing capacity expansion projects are being undertaken by the larger integrated steel players who have the benefit of a stronger balance sheet. In FY2019, the industry operated at a capacity utilizations rate of around 84%. With fresh capacity addition of only around 3 million tonne per annum being planned in the current fiscal, the industry’s capacity utilization rates are expected to remain at a healthy level of 85% in the current year as well, notwithstanding a slower demand growth.
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