The outlook for the Indian steel sector has been changed to Positive

Demand for steel in the domestic market declined sequentially by 1.2% in July 2021, when there was a seasonally weak peak of the rainy season; ICRA expects stronger growth in the third quarter.

ICRA Ratings revised its steel sector outlook from Stable to Positive after all major listed steel companies reported their best-ever quarterly results in the first quarter of fiscal 2022 and their profit forecast for the remaining months Fiscal 2022 remains favorable.

The ratings agency said in its most recent report that positive steel-related commodity sentiment emanating from China since fiscal 2Q2021 has helped keep metal prices up for more than four quarters, largely mitigating the impact of the pandemic for large domestic steel producers.

Given strong earnings growth and capex following the pandemic uncertainty, steel companies began to aggressively cut leverage from the second quarter of fiscal 2021. This trend is reflected in the decline in the level of the industry’s consolidated debt. Consolidated industry borrowing is today at its lowest level since March 2012. Taking a closer look at the industry’s consolidated borrowing per metric ton of installed capacity in July 2021, it stood at $ 180 /t, almost halving. from US $ 350 per tonne in November 2008. This suggests that domestic steel companies are now significantly less leveraged than in FY2009, when the last steel supercycle ended.

Developing this question, Mr. Jayantha Roy, Senior Vice President and Head of the ICRA Corporate Sector Ratings Group, said: “After a 7% decline in steel demand last year after the pandemic, we expect domestic consumption to grow by about 12%. % in the current fiscal year, not only due to a low base but also due to better outlooks for several steel-consuming sectors. Steel production growth in fiscal 2022 is likely to be higher by about 14%, helped by the upward trend in net exports of finished steel. Our estimate shows that net exports are expected to increase to about 8 million tonnes (mt) this year from 6 million tonnes in fiscal 2021, as domestic businesses try to increase their export footprint given the opportunity to fill the vacuum left by Chinese factories from – for state restrictions “.

On the supply side, JSW Steel and NMDC are expected to enter the market with 8 million tonnes of new capacity this year, but the same will likely be absorbed by the additional 12 million tonnes of steel consumption expected in fiscal 2022, which will force us to revise the industry’s capacity utilization rate to 78% in FY2022 from 72% in FY2021. At the same time, it is expected that the leading mills will operate at a significantly higher capacity utilization.

In terms of raw materials, primary steel producers are expected to face some pressure on production costs: spot supply of premium marine coking coal from Australia will double in a short span of time in just three months to $ 238 per tonne at the end of August 2021. years from the USA. $ 112 /t in mid-May 2021 amid limited supply and a gradual recovery in steel demand outside of China. This is expected to lead to an increase in steel production costs for domestic mills by about US $ 100 per tonne, which from September 2021 will begin to be reflected in the profit and loss of steel companies producing steel along the blast furnace route.

However, iron ore prices in Odisha began to decline over the past month due to a 28 percent correction in offshore iron ore prices from July 2021, making ore exports less attractive. This, coupled with the return of domestic iron ore production to pre-pandemic levels in the current fiscal year, has resulted in a roughly 20% adjustment in Odisha iron ore prices since mid-July 2021. According to ICRA estimates, this is likely. reduce the cost of steel production by about USD 50-55 per tonne, partially offsetting the increase in costs associated with more expensive purchases of coking coal. However, this additional benefit will only be available in the case of market purchases by steel companies.

“Domestic steel demand declined consistently by 1.2% during the seasonally weak peak of the rainy season in July 2021. Early trends suggest that demand remained weak in August and the steel price hike announced earlier in the month is pulling back later. So

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