KOLKATA: Domestic steel demand is estimated to contract by more than 20% in FY 2021, resulting in a sequential contraction in operating profit margins across the industry by nearly 300 basis points during the year.
“Weaker margins, along with reduced domestic deliveries are expected to deliver a twin impact on absolute earnings of steelmakers in the current fiscal,” ratings agency ICRANSE -1.86 % said its latest sector report on Monday.
“This would significantly weaken the industry’s credit metrics, with total debt-to-operating profits being likely to increase to an elevated level of around 7.0 times from an estimated 4.3 times in FY2020,” it added.
“This would closely resemble the industry’s performance during FY2017, when it was gradually recovering from the effects of the metals meltdown in FY2016, the report said.
The ICRA note said the silver lining for the blast furnace operators in the absence of domestic demand was exports, the share of which in total finished steel production stood at an all-time high of 28% in April 2020. However, in absolute terms, finished steel exports remained low at 0.43 million tonne (mt) in April 2020 and reported a 25% minth on month (MoM) and 16% year on year (YoY) decline.
Jayanta Roy, senior vice-president ICRA, said: “India’s exports would continue to be directed at the Asian and the Middle Eastern region till the time Europe recovers from the pandemic.”
However, India’s export realisations for hotbroolled coils (HRC) remain much lower, at $405/MT (FOB price, Rs.30,600/MT at current exchange rates) than the domestic realisation of Rs.36,000/MT, resulting in a 15% lower gross contribution on such exports.
Given that the lockdown in India continued in May 2020 and continues to remain in force for some Covid-19 hotspots till June 2020 and the fact that Q2 remains a seasonally weak quarter, domestic steel demand is likely to remain shallow in the first half of FY2021, Roy added. In such a scenario, Indian steelmakers would have to push exports, even though less profitable, to keep operating at somewhat better capacity utilisation rates than what was reported in April 2020, he pointed out.
In terms of domestic production and demand trends, after reporting a meagre 1.4% growth in FY2020, India’s steel consumption growth contracted by a record 87% in April 2020 as the country remained under lockdown during the entire month, following the Covid-19 pandemic. Domestic finished steel production too recorded the largest decline of 82.5% in April. Production trends indicate flat steel production fell by 73% and comprised 69% of the total production while non-flat steel production was down ..