India Ratings expects local steel demand to rise 3-5% in FY'15

NEW DELHI: India's steel demand is expected to go up by 3-5 per cent in the next financial year on higher economic growth although margin pressure would continue due to high production costs and limited scope to pass them on to customers.

"Better GDP growth of 5.6 per cent in FY'15 on the back of a revival in industry growth would lead to better steel demand growth next fiscal. It would be in the range of 3-5 per cent, but not above 5 per cent," Ashish Upadhyay, Director (Corporate Ratings) of India Ratings, said here today.

India's steel consumption grew 0.5 per cent during the April-December period of this financial year to 53.78 million tonnes.

India Ratings & Research, a Fitch Group firm, however, maintained the negative outlook for the steel sector for the next financial year due to its weak credit profile.

Upadhyay expects no major hike in prices next fiscal due to overcapacity in the domestic steel industry which will continue to limit prices amid the demand increase. Imports are not a major threat and will prevail at this year's level.

"Indian steel producers' capacity use contracted to below 80 per cent in FY'13. Any increase in the capacity use due to an uptick in demand could be limited by significant new capacities scheduled to start in FY'15," he said.

India currently has about 95 million tonnes of installed steel capacity and 13-15 million tonnes is expected to be added within FY'15.

"Margins of steel producers would continue to be under pressure, given the high cost of production and their limited ability to pass on hikes in costs. The availability of iron ore should improve, limiting hike in costs. Coking coal prices will also range between USD 160-175 a tonne," he said.

India Rating expects the credit profile of steel makers to remain weak next fiscal due to their large debt for working capital and capex coupled with modest EBITDA (earnings before interest, taxes, depreciation, and amortisation) margins.

Steel makers margins have consistently contracted since FY'11, India Ratings said.