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Ind-Ra revises outlook on steel sector to negative for FY21

28 Feb 2020 Evaluate

India Ratings and Research (Ind-Ra) in its latest report has revised its outlook on the steel sector from 'stable-to-negative' to 'negative' for the next financial year (FY21), given the modest steel demand growth expectations of 5 percent and margin pressures led by iron ore price risks. It also said high iron ore premiums for new mine owners both captive and merchant could shift the cost positions of steel mills. The slowing economic activity as reflected in Ind-Ra's GDP estimates of 5 percent and 5.5 percent for FY20 and FY21, respectively, would continue to affect demand growth in the steel sector and any significant pick-up is unlikely.

Ind-Ra also expects steel demand growth to remain modest, in line with gross factor capital formation of 5.3 per cent in FY21. It also said the Chinese steel demand growth risks amid increased ramifications from the corona virus outbreak could also impact global and domestic steel prices. However, it said some benefits are also expected on softer imported coking coal and international iron ore prices. It added that global steel prices may come at risk, if Chinese steel producers could not reduce production growth in FY21 in line with the reducing demand in housing construction and the slowing Chinese economic growth.

The agency further expects the overall steel margins to remain modest in FY 2020-21, with slight improvements after the industry witnessed EBITDA margins dropping. However, it expects the margins to bottom out in Q4FY20. It also believed that in case the steel demand does not strengthen up by 2HFY21 (second half of FY 2020-22) new capacity additions along with stressed asset ramp-up could put further pressure on the prices and plant capacity utilisation rates. 

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