ICRA Upgrades Indian Steel Sector Outlook on Better Demand Prices
Rating agency ICRA in latest report has upgraded Indian steel sector outlook to Stable from Negative, on the back of improving demand and prices. As per an
Rating agency ICRA in latest report has upgraded Indian steel sector outlook to Stable from Negative, on the back of improving demand and prices. As per an ICRA note, the momentum has strengthened further in Q3 FY2021, with the cumulative domestic steel demand in October - November 2020 already surpassing the pre-Covid levels prevailing during the same period of last fiscal. ICRA Senior Vice President & Group Head Corporate Sector Ratings Mr Jayanta Roy said “We are gradually seeing a more broad-based pick up in economic activity with every passing quarter, which makes us believe that the recovery in domestic steel demand would sustain in the near term at least. The revival in demand has been surprising, and the steel industry’s ability to claw back to the pre Covid levels of demand within 6 months of a global pandemic outbreak has been remarkable. We are consequently revising our FY2021 steel demand forecast to a contraction of around 12%, significantly better than our initial forecast of a 23% contraction made in April 2020. The sector outlook is also revised to Stable from Negative.”
With respect to international trends, China’s crude steel production grew at a healthy 5.5% in 10 months of 2020 supported by strong domestic demand, which in turn was aided by rising investments in fixed assets and real estate; and strong automobile sales in the last six months. China’s healthy domestic demand also resulted in a higher de-growth of about 19% in its steel exports during 10 months of 2020 compared to a 7% fall in 2019. Consequently, in October 2020, the World Steel Association has also revised its demand growth forecast for China to 8% for 2020 as against its previous forecast of 1% made in April 2020, resulting in a lower estimated demand de growth of 2.4% for the world compared to the earlier estimate of a decline of 6.4%.
Coming to domestic trends, ICRA notes that the share of top six steel producers in total crude steel production, which remained at about 55% historically, has risen to about 65% in recent months. Also, as against the average industry capacity utilisation of 78% for the period FY 2016-2020, the same for the top six steel producers has now touched a high of 85% in October 2020, while the other steel producers are still operating at capacity utilisation rates of about 65%. These trends indicate the rising dominance of large steel players in the domestic industry and an adverse impact of the pandemic on the business performance of some of the smaller steel producers, which would find it difficult to operate at pre Covid levels in the near term.
In terms of export-import trends, as anticipated by ICRA, steel exports from India have dropped sharply in recent months to touch a monthly level of 0.6 million tonnes as compared to above 1 million tonnes level reported during the large part of H1 of FY2021, as domestic demand regained momentum gradually. Steel imports, on the other hand, remained low in absolute terms and could increase opportunistically driven by arbitrage between domestic and landed prices especially from free trade countries.
Domestic hot-rolled coil prices have been revised upwards multiple times in recent months and are ruling at a multi year high level of INR 49,000 plus per tonne. While domestic HRC prices are currently trading at a premium to landed prices, a buoyant domestic demand and over 25% growth in Chinese HRC export prices in Q3 of FY2021 point to possibilities of further upside in domestic steel prices. However, it is to be noted that steel imports from free trade countries including Japan and Korea attract nil import duty and their prices would in turn act as a ceiling for domestic HRC prices.