Ind-Ra lowers outlook on steel sector on sluggish demand expectation

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India Ratings and Research (Ind-Ra) has revised its outlook on the steel sector to stable-to-negative from stable for the remainder of FY20 in the wake of a sluggish steel demand growth expectations owing to a mix of structural and cyclical concerns in end-user sectors, primarily auto and real estate construction. 

Ind-Ra has revised downwards its FY20 steel demand growth expectations to around 4 per cent from the previous forecast of 7 per cent. The figure for FY19 was 8 per cent. 

The outlook factors in increased import risks especially from the Free Trade Agreement (FTA) countries such as Japan and South Korea due to adverse domino impact of the slowing global growth and continuing trade frictions. 

Furthermore, Ind-Ra believes that raw material availability and price risks may escalate in 4QFY20 if the uncertainty over iron ore mine auctions prolongs.

According to Ind-Ra, overall steel sales volumes and margins are expected to weaken further in 2QFY20 after the industry witnessed margin correction in 4QFY19 and 1QFY20. 

While steel prices have been on a continuous decline, raw material cost has seen partial declines, thereby squeezing the gross spreads for steel products. 

However, Ind-Ra expects steel demand to recover in 2HFY20, supported by a pick-up in government investments, fiscal stimulus measures, improvement in market sentiment and 2HFY19’s lower base. 

The agency believes limited new capacity additions in FY20 will help balance the demand-supply situation amid sluggish demand in 2HFY20.

Steel producers are likely to see a moderation in cash flows from operations as strong margins moderate over FY20 from the highs of FY19, it said. 

Large integrated players should continue to have adequate liquidity supported by their sound market access and high financial flexibility, despite moderating profitability pressures, ongoing challenges in market liquidity and increased risk perception among investors, Ind-Ra added.

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