Domestic steel industry seeing demand recovery with easing of curbs: Icra

India’s finished steel exports steadily inched up higher from 0.4 million tonne (mt) in April 2020 to 1.6 mt in June 2020
Domestic steel industry is witnessing early green shoots of recovery from Q2 FY21 on the back of easing of mobility restrictions and a gradual improvement in demand environment, rating agency Icra said in its report today.

Due to this, performance of steel mills, especially blast furnace players, is expected to register a healthy rebound in Q2, supported by rising capacity utilisation rates, successive steel prices hikes, and tepid input costs.

Towards the later part of Q2 FY21, the domestic steel industry has already surpassed the average capacity utilisation level of 77 percent, which was prevailing through FY20.

Nonetheless, the overall financial performance for FY21 is likely to remain subdued, given the pandemic related disruptions suffered in the early part of the fiscal.

“The steel industry’s capacity utilisation rates have steadily inched up from the lows of 27 percent in April to 78 percent in August, which suggests that the operating environment is improving. Steelmakers have announced multiple price hikes in recent months, whereas the input costs are likely to trend lower, largely due to tepid seaborne coking coal prices. This would support a recovery in mill margins from the Q1 lows. However, we are likely to see an uneven pace of recovery between the primary and secondary steel producers, with the former managing to increase market share, helping them operate at higher asset utilisation rates than the secondary mills,” the report quoted Jayanta Roy, senior vice-president & group head, corporate sector ratings at Icra as saying.

Given the significant disruption in various steel consuming industries during April and May 2020, domestic steel mills were increasingly tapping export markets to maintain capacity utilisation rates and shore up balance sheet liquidity.

India’s finished steel exports steadily inched up higher from 0.4 million tonne (mt) in April 2020 to 1.6 mt in June 2020, registering a fourfold jump.

Apart from finished steel exports, Indian mills also exported large volumes of semis in the current fiscal. Around 64 percent of India’s semis exports were directed to China, which led to China displacing Vietnam as India’s leading steel export destination in FY2021 thus far.

“For domestic mills, the product basket tailored for the export market is generally less remunerative compared to the domestic market. Consequently, as the domestic demand started to revive gradually from the second quarter, steel mills diverted more and more material to domestic consumers. Not surprisingly, India’s finished steel exports declined sequentially in the months of July and August of 2020.With the share of exports gradually declining, we believe that the profit margins of domestic mills would benefit from a richer product mix from Q2 FY21,” the report quoted Roy as saying.

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