Steel demand likely to recover in H2 FY'20: Report

KOLKATA: Domestic steel makers are likely to see a decline in profits in the first quarter of the current financial year owing to headwinds related to liquidity issues, fall in demand led by weakness in automotive sector and higher energy costs, ratings agency ICRA said in its latest sector report. However, it said, steel demand is expected to bounce back in the second half of the year, riding on a construction boom led by higher expenditure on infrastructure.

Steel demand growth moderated to 6.4% in April 2019 from an average of 7.5% in 2018-19. ICRA said that in the ongoing quarter growth is likely to remain lower due to continued weakness in automobile sector and reduced construction activity in the general election period compared to the year ago period which had already seen a contraction from a level of 7.9% in 2017-18. Together with a hike in coking coal prices, “this is likely to affect the financial performance of domestic steelmakers in Q1”, the report said.



“However, construction sector would be at the forefront of demand recovery in the second half of FY2020 on the back of an expected boost to the infrastructure sector. The Union Budget for FY2020 to be presented in July 2019 would provide a guidance towards government thrust to the sector,” ICRA said.

With spot prices of seaborne premium hard coking coal ruling at $200 per tonne, ICRA said it expects higher coking coal prices are likely to keep the profitability of domestic blast furnace operators under pressure in the current quarter.

Jayanta Roy, senior vice-president at ICRA, said: “In the current quarter, we see a further contraction in gross contribution levels of blast furnace operators by around Rs 400-500 per tonne over and above a contraction of Rs 3,000 per tonne in Q4FY2019.”

Steel imports are expected to go down in the coming months as the domestic hot-rolled coil prices are trading at a 6% discount to imported offers. Domestic steel production growth would recover in the second half of the fiscal, reflecting trends in steel consumption, according to the report.

ICRA also said that it expects any meaningful price improvement only in the second half, when spending on infrastructure is likely to gain momentum and the auto sector is expected to rebound on pre-buying ahead of the roll-out of BS-VI emission norms.