Steel sector growth to slow down to 4% this year: Crisil1 min read . Updated: 26 Sep 2019, 09:32 AM IST
- Sales realisations will shrink 5-6% this fiscal, according to the rating agency
- This will be a drag on the sector’s aggregate operating profit, which is expected to fall 12-13% in fiscal 2020
Mumbai: After a robust 7.5-8% growth in the last two fiscals, the domestic steel industry is expected to witness a mid-cycle slowdown to 4-5% this fiscal, according credit rating agency Crisil. The agency has attributed the growth slowdown to muted construction investment and weak automotive market.
Sales realisations will shrink 5-6% this fiscal, Crisil added. All this will be a drag on the sector’s aggregate operating profit, which is expected to fall 12-13% in fiscal 2020, according to Crisil’s estimates.
In addition to this, large brownfield expansion plans, capacity acquisitions under the National Company Law Tribunal (NCLT) process, and high leverage of global assets will weigh on return ratio in the near to medium term.
Global steel prices have declined 13% in the first eight months of 2019 due to weak demand, unseasonal jump in global inventory levels--up by about 35% through August--and trade tensions. This was despite a whopping 56% run-up in global iron ore prices during the same period, shrinking margins for producers.
Steel prices in India mirrored the trend, falling 10% from ₹42,000 per tonne in January to ₹38,000 per tonne in August 2019. As a result, Indian steel manufacturers’ earnings before interest, tax, depreciation and amortisation (Ebitda) spreads contracted 420 basis points (bps) year-on-year in the first quarter of fiscal 2020. The contraction was more for large non-integrated players, at 470 bps.
Hetal Gandhi, director, Crisil Research, in the note said: “The industry plans to add 28-30 million tonne (mt) steel capacity in the next 5 years, entailing a capital expenditure of ₹1.4-1.5 lakh crore. Of this, nearly three-fourth of capacity will be added by large players apart from the assets being acquired under NCLT by these companies. Falling spreads amidst high leverage will potentially slow down the investment plans in the near term."
For a recovery in global market, domestic demand growth, upcoming iron ore auctions will be key determinants of the sector’s performance in the near term, the report said.
On the iron ore supply front, resumption at Karnataka’s Donimalai mine--that has hit one-fifth of the state’s production--uncertainty around upcoming iron ore auctions in Odisha, which would account for half of the state’s production, and high premiums in the mines recently auctioned in Karnataka would be key determinants of iron ore cost structures and thereby steel players profit spreads in medium term.