The increased costs of coal may hinder the debt reduction strategies of Indian steel manufacturers. If input prices persist at their current levels, the sector's leverage could regress to the levels seen in 2021, according to a report by S&P Global Ratings.
“We no longer think India's leading steel companies will shed debt in the coming fiscal year. Instead, debt should remain at the same level, due to narrower steel spreads that will feed into cash flows,” said Anshuman Bharati, credit analyst at S&P Global Ratings.
The research firm raised its metallurgical coal price assumptions for 2024 to $270 per ton from $220 per ton.
The primary drivers behind this surge are limitations in supply from Australia, heightened tensions in the Red Sea region, and robust demand from India and other markets outside of China. Notably, average metallurgical coal prices experienced a significant 25% increase quarter-on-quarter during the last three months of 2023.
“Our price assumptions are, however, lower than the average price of US$300 per ton in 2023 and current spot price of US$315 per ton. This is because we anticipate supplies from Australia will improve in the second half of 2024 with the opening of several new mines, especially in the states of Queensland and New South Wales,” Bharati added.
In the fiscal year 2025, ending on March 31, 2025, domestic steel prices are poised to receive a boost from heightened demand. This surge in demand is anticipated to stem from escalated infrastructure expenditure, particularly as the deadline for the completion of the National Infrastructure Pipeline in 2025 approaches.
Bharati further said, “India steel prices will strengthen over the next year, in our view, but not enough to match the rises in input costs. As a result, we estimate our adjusted consolidated debt of major steel producers at Indian rupee (INR) 2.1 trillion as of March 31, 2025. This is about INR150 billion higher than our previously anticipated level."
The report further forecasts that the average debt-to-EBITDA ratio of these steel producers will be 2.4x by the end of fiscal 2025. This is a slower pace of improvement from our earlier estimate of 1.9x.
Moreover, if met coal prices remained at spot levels, then leverage would deteriorate to above 3.0x--breaching the 10-year median. That would undo several years of debt improvement in the sector and could derail expansion plans needed to accommodate growing steel demand.
"We believe steel companies would defer the next leg of expansion if industry debt-to-EBITDA exceeds its 10-year median due to elevated met coal prices," he added.
The research firm anticipates that India will add 15 million tons of steel capacity by mid-2024. This will increase its total installed capacity to 170 million ton. It plans to increase the capacity further to 300 million tons by 2030.
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