India Ratings and Research (Ind-Ra) has revised its outlook on the steel sector to stable-to-negative from stable for the remainder of FY20 given sluggish steel demand growth expectations owing to mix of structural and cyclical concerns in end-user sectors, primarily auto and real estate construction. Hence, Ind-Ra has revised downwards its FY20 steel demand growth expectations to around 4% from the previous forecast of 7% (FY19: 8%). The outlook also factors in increased import risks especially from Free Trade Agreement (FTA) countries such as Japan and South Korea due to adverse domino impact of the slowing global growth and continuing trade frictions. Furthermore, raw material availability and price risks may escalate in 4QFY20 if the uncertainty over iron ore mine auctions prolongs.
Ind-Ra expects overall steel sales volumes and margins to weaken further in 2QFY20 after industry witnessed margin correction in 4QFY19 and 1QFY20. Steel prices have been continuously softening while raw material cost prices have only seen partial declines, thereby squeezing the gross spreads for steel producers. However, Ind-Ra expects steel demand to recover in 2HFY20, supported by pick-up in government investments, fiscal stimulus measures, improvement in market sentiment and 2HFY19’s lower base. The agency believes limited new capacity additions in FY20 will help balance the demand-supply situation amid sluggish demand in 2HFY20.
Steel producers are likely to see moderation in cash flows from operations as strong margins moderate over FY20 from the highs of FY19. Large integrated players should continue to have adequate liquidity supported by their sound market access and high financial flexibility, despite moderating profitability pressures, ongoing challenges in market liquidity and increased risk perception among investors.