ICRA, India Ratings, Moody’s raise alarm on slowing steel sector, revise outlook to negative - Jonathan Cartu Industrial & Residential Real Estate Firm
post-template-default,single,single-post,postid-16772,single-format-standard,qode-quick-links-1.0,ajax_fade,page_not_loaded,,qode-theme-ver-11.2,qode-theme-bridge,wpb-js-composer js-comp-ver-5.2.1,vc_responsive

ICRA, India Ratings, Moody’s raise alarm on slowing steel sector, revise outlook to negative

ICRA, India Ratings, Moody’s raise alarm on slowing steel sector, revise outlook to negative

The wider economic slowdown is not going to spare the domestic steel sector, with three credit rating agencies raising the alarm on falling profitability for steel mills.

Ratings agency ICRA in a report today has said that profit margins for steel companies are expected to get further squeezed between weakening domestic steel consumption, and a weak outlook for global growth amidst escalating trade war related tensions. Over the last four quarters, operating profit margins of the domestic steel industry have been on a slippery ground, declining steadily from 22.6% in Q1 FY2019 to 18.2% in Q1 FY2020. According to the latest ICRA report on the steel sector, this downward trend in profitability is expected to continue in Q2 FY2020 as well.

The Indian economy grew at only 5% in Q1 FY20, the lowest levels in the last six years. With steel demand growth being dependant on GDP growth, domestic steel consumption growth slowed down to 5.7% in April-July of FY20, against much higher growth rates of 7.5% and 7.9%, achieved in FY19 and FY18 respectively. Further, given the slower pace of infrastructure and construction activity during the ongoing monsoon season, and with auto sales continuing to contract in July and August of 2019, early lead indicators for a steel demand uptick in Q2 FY20 remain weak. Official statistics indicate that domestic steel consumption growth weakened from 6.4% in June 2019 to 3.5% in July 2019, and this weakness is expected to continue for the remainder of Q2, the report noted.

Jayanta Roy, Senior Vice-President & Group Head, Corporate Sector Ratings, ICRA, says in the report: “Steel prices have been retreating southwards across most steel-consuming hubs globally, be it the US, the European Union or Asia. We have seen Chinese hot rolled coil (HRC) spot export offers declining by around 13% since the start of FY20. Spot HRC prices by end-August 2019 hovered at around $462/tonne, levels last seen during June 2017, when much of the industry was in distress. Not surprisingly, the steel spreads have witnessed a significant contraction in FY20 thus far compared to FY19. This leads us to believe that in the current fiscal, unless steelmakers are able to supplement weaker margins with higher sale volumes, a decline in industry earnings over the FY19 highs remains likely.”

On Tuesday, India Ratings and Research revised its outlook on the steel sector to stable-to-negative from stable previously for the remainder of FY20. The agency credited the downward revision to sluggish steel demand growth expectations and a mix of structural and cyclical concerns in end-user sectors, primarily auto and real estate construction. India Ratings slashed its growth expectations for the sector to 4% for FY20, from the earlier 7% forecast. (FY19 growth had been 8%.)

India Ratings also pointed to increased import risks, especially from Free Trade Agreement countries such as Japan and South Korea, with domestic consumers substituting local product with cheaper imports. Besides the question on consumption, India Ratings also said that raw material availability and price risks may escalate in 4QFY20 if the uncertainty over iron ore mine auctions prolongs.

Last week, global credit ratings agency Moody’s had revised its outlook for the Indian steel sector to negative, as rising input costs put pressure on the profitability of Asian steel producers. “India’s steel demand will remain the strongest in Asia but result in slow-to mid-single digit growth, as weak auto and manufacturing demand offset demand growth in the infrastructure and construction industries,” according to Kaustubh Chaubal, vice-president and senior credit officer, Moody’s, and co-author of the report.It indicated that even the two top private steel producers in India would see their margins shrink. EBITDA (earnings before interest, tax, depreciation and amortisation) per tonne of Tata Steel’s Indian operations will likely decrease by a mid-single-digit percentage over the 12 months to June 2020, it predicted, while JSW Steel’s EBITDA per tonne will decline by around 13% and remain lower than Tata Steel’s Indian operations, largely because of elevated raw material prices and the company’s relatively limited backward integration. India Ratings also estimated that while the bulk of steel producers are likely to see moderation in cash flows, large integrated players will continue to have adequate liquidity and are likely to fare better under a stressed operating environment.


Domestic Real Estate Cartu Jonathan Real Estate Developer

Source link

No Comments

Post A Comment