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[Ferro-Alloys.com] Indian domestic steel demand and global market sentiment is likely to improve in the second half, but a weak first half is expected to lead to a 5-6 per cent contraction in realisations for steel makers this fiscal, ratings agency Crisil has said in its latest research report on the sector. 

 

Falling spreads on earnings before interest taxes depreciation and amortization (Ebitda) will weigh on steel sector capex, the report said, adding that the industry is yet to see a recovery in prices despite a run-up in raw material costs. 

 

"Global steel prices dropped 13 per cent in the first eight months of 2019 due to weak demand, unseasonal jump in global inventory levels of upto nearly 35 per cent through August and trade tensions," the report said. This was despite a whopping 56 per cent run-up in global iron ore prices during the same period. 

 

"Steel prices in India mirrored the trend, falling 10 per cent from Rs 42,000 per tonne in January to Rs 38,000 per tonne in August 2019," the report added. 

 

Not surprisingly, Indian steel manufacturers’ earnings before interest, tax, depreciation and amortisation (Ebitda) spreads contracted 420 basis points (bps) on-year in the first quarter of fiscal 2020. The contraction was more for large non-integrated players, at 470 bps. 

 

To add to it, "subdued domestic demand and weak export markets cloud the industry’s prospects in the rest of this fiscal as well," the Crisil report said. After a robust 7.5-8 per cent growth in the previous two fiscals, the domestic steel industry is expected to witness a mid-cycle slowdown at 4-5 per cent this fiscal, given muted construction investments and weak automotive market, the report predicted. 

 

Prasad Koparkar, senior director, CRISIL Research said: “Steel prices have not been able to recover despite a cost push. We therefore believe weak realisations will shear 350-370 bps off the sector’s Ebitda margins for the first half and 200-250 bps for the fiscal as a whole, reversing a three-year climb." 

 

"Large non-integrated players will see their margins shrink more, by 300-350 bps this fiscal, given weak flat steel market and a 3-5 per cent rise in iron ore prices amidst weak realizations,” he added. All this will be a drag on the sector’s aggregate operating profit, which is expected to fall 12-13 per cent in fiscal 2020. 

 

What’s more, 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. 

 

“The industry plans to add 28-30 million tonne (MT) steel capacity in the next 5 years, entailing a capital expenditure of Rs 1.4-1.5 lakh crore. Of this, nearly three-fourth of capacity will be added by large players, apart from assets being acquired under NCLT by these companies. Falling spreads amidst high leverage will potentially slow down the investment plans in the near term,” Hetal Gandhi, Director, CRISIL Research said. 

 

While in the near term the sector shall witness rising leverage, however, support in the form of prevailing anti-dumping duty across steel products (for period of five years) will help avoid the freefall of prices and profit as seen back in fiscal 2016. 

 

Recovery in global market, domestic demand growth, and upcoming iron ore auctions will be key determinants of the sector’s performance in the near term, the report added.  (The Economic Times)