Moody’s revises Indian steel producers’ outlook to negative

Mumbai: Credit ratings agency Moody’s has revised its outlook for the Indian steel sector to negative, as rising input costs put pressure on the profitability of Asian steel producers.

“We expect steel producers' profitability, as measured by EBITDA per tonne, will decline by around 15% in the 12 months to June 2020," according to Chris Park, associate managing director, Moody's Corporate Finance Group. The prices of iron ore and coking coal, two key steelmaking inputs, have surged by more than 60% and 20%, respectively, in the year to June 2019, and will likely stay high for sometime. At the same time, weak demand in end markets was limiting the ability of producers to pass on these price increases to customers, resulting in narrowing product spreads, the note said.

Narrowing product spreads between steel and input prices reflect producers' limited ability to pass on price increases to buyers when end market demand is soft.

"India's steel demand will remain the strongest in Asia but result in slow-to mid-single digit growth, as weak auto and manufacturing demand offset demand growth in the infrastructure and construction industries," according to Kaustubh Chaubal, vice-president and senior credit officer, Moody's, and co-author of the report.

Indian steelmakers' profitability will decline mainly because of slowing demand growth, in particular from the auto sector, the note said. EBITDA per tonne of Tata Steel's Indian operations will likely decrease by a mid-single-digit percentage over the 12 months to June 2020, it predicted. But at more than $200 per tonne, its profitability will continue to be the highest among rated Asian steel producers.

JSW Steel's EBITDA per tonne will decline by around 13% and remain lower than Tata Steel's Indian operations, largely because of elevated raw material prices and the company's relatively limited backward integration. Nonetheless, the two Indian steel companies will benefit from rising production on the back of continued demand growth. In India, licences to 59 iron ore mines currently under operation will expire by March 2020.

“While our baseline scenario is that most of these licences will be renewed, if they are not, a resulting shortage in iron ore supply would lead to an increase in prices. Tata Steel's Indian operations are insulated from such iron ore supply disruptions because of its backward integration into iron ore production. However, JSW's captive sourcing will account for only 20%-25% of its iron ore requirement by December 2019 and therefore the company is more exposed to a rise in iron ore price,” the note said.

Meanwhile, limited new capacity additions across the Asia region will curb a sharp decline in steel prices, with production rising only in India, where demand is still growing, and flat in China, Korea and Japan. Finally, Moody's expects the increase in US tariffs on steel imports will have a limited direct impact on Asian steel companies because of their modest US sales.