Operating margins of domestic steelmakers may contract in FY20: Fitch

  • Steelmakers’ strong performance was a result of relatively strong domestic finished steel consumption growth
  • Fitch expects lower margins may result into some increase in leverage ratios for JSW Steel and Tata Steel in FY20

Mumbai: After reporting robust operating margins in FY19, which allowed Indian steelmakers to maintain a healthy debt profile, margins are expected to contract this fiscal, Fitch Ratings said in a note on Thursday.

"Global steel prices have corrected again in May 2019 in the absence of a resolution in trade disputes between the US and China, after recovering since the start of the year. CRU forecasts further price declines with slower industrial growth and weaker underlying demand for steel in multiple regions. As a result, steel prices will continue to be unable to properly reflect higher-priced iron ore", Fitch said in a report.

"However, we do not anticipate an abrupt squeeze for the sector such as that seen in FY16 with restrained exports from China likely to be a key support for the global steel sector", the report said.

Fitch expects lower margins may result into some increase in leverage ratios for JSW Steel and Tata Steel in FY20. JSW's increase is likely to be higher due to the significant rise in its capital expenditure as capacity expansion and other projects near completion.

JSW Steel Ltd and Tata Steel Ltd reported 28% and 40% increase, respectively, in their earnings before interest, tax, depreciation and amortization (EBITDA) for fiscal 2019.

Fitch said Indian steelmakers’ strong performance was a result of relatively strong domestic finished steel consumption growth of 7.5% (6.8 million tonnes) during FY19. Imports increased by 4.7% (0.4 million tonnes), much slower than what the market had feared last year in the wake of the imposition of steel import tariffs by the US. However, domestic flat-steel prices followed the downward trend in global steel prices as the threshold at which anti-dumping duties kick in are lower.

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