Steel demand to contract by over 20 per cent in FY21: ICRA

Domestic steel demand is estimated to contract by more than 20% in FY 2021, resulting in a sequential contraction in operating profit margins across the industry by nearly 300 basis points during the year. “Weaker margins, along with reduced domestic deliveries are expected to deliver a twin impact on absolute earnings of steelmakers in the current fiscal,” ratings agency ICRA said in its latest report.

 “This would significantly weaken the industry’s credit metrics, with total debt-to-operating profits being likely to increase to an elevated level of around 7.0 times from an estimated 4.3 times in FY2020,” it added.

The ICRA note said the positive aspect for the blast furnace operators in the absence of domestic demand was exports, the share of which in total finished steel production stood at an all-time high of 28% in April 2020. However, in absolute terms, finished steel exports remained low at 0.43 million tonne (mt) in April 2020 and reported a 25% month on month (MoM) and 16% year on year (YoY) decline. Jayanta Roy, senior vice-president ICRA, said: “India’s exports would continue to be directed at the Asian and the Middle Eastern region till the time Europe recovers from the pandemic.”

“ Given that the lockdown in India continued in May 2020 and continues to remain in force for some Covid-19 hotspots till June 2020 and the fact that Q2 remains a seasonally weak quarter, domestic steel demand is likely to remain shallow in the first half of FY2021”, Roy added. “In such a scenario, Indian steelmakers would have to push exports, even though less profitable, to keep operating at somewhat better capacity utilization rates than what was reported in April 2020”, he pointed out.

“Production trends indicate flat steel production fell by 73% and comprised 69% of the total production while non-flat steel production was down by 90%, highlighting the greater pain inflicted by the lockdown on the secondary steel producers,” ICRA said.