To compensate for the low domestic demand, Indian players are looking to cater to export markets. Indian products’ price competitiveness may seem to have improved with lower iron ore prices than international iron ore prices. Chinese steel producers’ cost of production has been going up due to high raw material costs and environmental compliance costs. There seems to be a short-term opportunity for Indian companies to cater to those markets which were earlier catered by China, Japan and Russia. While on the imports side, the anti-dumping duty is likely to protect local players from Chinese imports while imports from free trade zones could pressure domestic prices moderately.
The agency expects the top-line of steel players to bottom out over 1HFY21, due to the lockdown over 1QFY21 and the seasonally weak 2QFY21, with certain levels of normalcy and recovery only over 2HFY22. This is likely to weaken credit metrics with EBITDA declining 20%-30% yoy in FY21. For the next 6-12 months, players may grapple with longer inventory and debtors periods, due to which maintaining liquidity is of prime importance. While most large players have refinanced or secured tie-ups for capex, medium and secondary steel producers could face liquidity stress over FY21 due to the incremental working capital requirement.
The slowdown in the domestic economy is likely to result in demand contracting 10%-15% yoy in FY21 with government-led spending necessary for demand revival. The agency expects steel prices to correct over FY21, with an inventory building-up especially of intermediate steel products with downstream facilities of most primary steel producers being shut during the lockdown. However, there could be certain temporary periods when prices may receive support due to lower production levels limiting supply as the economic activity resumes. Steel players will find some respite though from subdued raw material prices (both iron ore and coking coal). With supply exceeding demand in the seaborne coking coal market, prices are likely to remain low. However, iron ore prices may gradually increase as Odisha iron ore mines gradually ramp-up, given the high auction premiums upon acquisition by new lessee.
The flat products segment, which was already facing headwinds prior to the lockdown, is likely to be more impacted than the long products segment, led by the weak demand conditions in the end-use industries such as automobiles, capital goods and white goods, due to consumers delaying discretionary expenses. Furthermore, with the majority of the capital expenditure over FY19-FY23 being in the flat products segment, the supply surplus is likely to ensure a prolonged recovery in flat products prices. Conversely, the long products segment could see a better demand as accelerated government spending on infrastructure would provide an impetus to the end-use industries.
Key issues such as supply chain disruptions and labour unavailability need to be addressed to revive the steel sector. Labour retention policies of each state would be critical to ensure minimum disruption of manpower availability.